Just came across a note about Irish Tax and Customs (Cain agus Custaim hEireann, to Gaelic tax lawyers) adjusting the value threshold to qualify for a tax exemption on the transfer of farmland to young farmers.
While the legal issue relates the EU’s State Aid rules, and while the rule is about attracting young people to farming, it got me thinking about the OECD’s pending Pillar One proposals for dealing with the disruption that digital functions has caused to the international tax system.
Specifically, it seems to me that, just as the Irish are groping in the dark for ways to draw young people to rural areas, we are groping in the dark for rules to deal effectively with digital aspects of the profit allocation problem. To the extent that is so, we should stop pretending that Pillar One – either as proposed or as mangled to induce the US to join the game – has any chance of being defensible on grounds of principle.
I refer here not to the compromises required to achieve sufficient buy-in by all the stakeholders. Rather, I am referring to (what I believe to be) the fact that few if any of the stakeholders in the international tax debate over digitalization acknowledge how little they– or anyone else -- knows about how and to what extent digital functions create value. Not knowing could prove costly, to both multinationals and national governments
There is probably little downside to the Irish government experimenting -- with a farmland transfer tax exemption here and an agriculture school tuition subsidy there -- to see what works in drawing people to rural areas. In other words, while it is doubtful that setting the transfer tax exemption for farmland at €15,000 is going to yield meaningfully different results than if it were set at €20,000, the cost of the experiment is low. More to the point, to the Irish government, the cost of acting based on insufficient information is low.
While the Irish tax authorities may not have explicitly reasoned through the question as described above, they perhaps understood the point intuitively.
In contrast, consider the possible, unforeseeable, unintended second and third order costs of, say, taxing Amazon’s profits from online sales in Germany differently than the profits earned by those of the 100,00-plus on-line retailers active today in Germany whose revenue numbers fall under the Pillar One threshold. Choosing to differentiate e-commerce retailers in that fashion does not, and cannot, reflect a judgment -- explicit, intuited or otherwise -- that the cost of making that choice is acceptably low. In fact, it is unacceptably high.
What to do instead?
Cultivate information. Experiment. For a period of time, such as three years, allow e-commerce retailers to pick one of a menu of two or three, or perhaps four, methodologies for taxing online commerce. Although there are many possible approaches, an example of a menu might be (i) digital services tax, or (ii) a formulary approach, or (iii) digital service tax for the first €100,000 (or €10,000 or €1,000,000) of per-country sales and a formulary approach for the excess. Alternatively, states could allow firms to choose between two or three alternative formulary approaches.
And then watch how e-commerce retailers behave, that is, watch the pattern of their choice of tax methodologies (not only as a whole, but also by size, by product category, and so forth). Watch also, to the extent possible, what changes they make in their business operations. After the three years, policymakers -- and politicians -- will know a great deal more about what multi-nationals, that is, the guys who actually pay for the digital stuff, think about value creation. That’s when a more permanent set of rules can be negotiated and finalized. Less guessing. Better long term outcome.
And if I am wrong, perhaps I should consider a career in farming.
Hashtags: #pillarone #digitaltax #internationaltax #OECD #digitalization #DST #unifiedapproach #substantialdigitalpresence #apple
David Borinsky
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