Ireland - Digital economy (BEPS) implications for Irish taxpayers 

March 27: The OECD earlier this week released a draft discussion of its report on tax challenges of the digital economy.

Now, the question posed in Ireland is: What could the proposals outlined in the report mean for businesses in Ireland?

The OECD report is the product of work undertaken as part of Action Plan 1 under the OECD’s Base Erosion and Profit Shifting (BEPS) Plan. It claims to seek to address the question of whether the framework of today’s international tax rules is “fit for purpose” when applied to business conducted in the digital economy.

Achieving international agreement will not be straightforward, and there is little evidence of consensus on how to address the digital economy.

  • The position of some countries is that digital commerce must be taxed in the country of residence of the customer because the product is transformed when the customer uses it.
  • Other countries take the position that digitisation is ubiquitous and that it would not make sense to create special rules for particular industries.

It is arguable that the current draft does not make an especially convincing case for special rules for the digital economy.

Effect on business in Ireland

The ultimate impact of the proposals is uncertain. In combination, these measures could result in more businesses with centralised or remote sales functions triggering a taxable presence in consumer markets.

In circumstances when groups already have a local business presence, they may result in a greater attribution of profits under transfer pricing principles to the activities conducted in those markets. Those operations that have the greatest “on the ground” substance in Ireland are least likely to see an erosion of their Irish corporation tax profits base particularly when key functions and activities which drive value in their business can be seen to be performed in Ireland.

Ireland is actively participating in the various actions under the BEPS Plan. As an economy with a heavy weight of participation in global flows in the “digital economy,” these interlocking developments are of central importance to Ireland.

Read a March 2014 report prepared by the KPMG member firm in Ireland: Tax Challenges of the Digital Economy – Potential Implications for Ireland

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