Brexit, the current US President, and many other factors threaten to impact upon global supply chains and procurement sourcing options and business growth in general. One factor, that is hugely influential in the location of international business operations, is the range of tax environments available to businesses. Where once, tax arbitrage was tolerated, the dominance of agile technology companies that can move jurisdiction with relative ease and the exponential growth of island paradises acting as so-called tax havens has brought corporation tax systems to the forefront of policy agendas across the world. This week, as budget 2018 approaches, we examine the potential impacts of these moves on business growth and the economy from an Irish perspective and what they might mean for Ireland over the next 12 to 18 months.
There is an international move towards trying to obtain consensus on changes to the global taxation system. In the past week, France has proposed changes in the EU to the taxation of technology companies in the absence of progress at the OECD level. While these are just proposals at this point, they form part of a movement towards consensus-driven international tax reform and this has implications for business growth and the global economy. The major technology companies, financial institutions, and pharmaceutical companies are in the crosshairs of tax authorities for how they book profits away from the countries in which the profits are generated. While tax law may suggest otherwise, a consumer in France purchasing a product in France may reasonably expect the taxes on that purchase to remain in France. Ireland plays a controversial role in subverting this “everyman assumption” given the strong US multinational corporate presence in Ireland. The presence of such entities from the US and other jurisdictions may intensify after Brexit. It is likely that the focus on tax reform will only continue to intensify also.
Corporation Tax – tackling an image problem
There are differing public opinions on the system for taxing corporate profits in Ireland – both at home and abroad. Whatever your stance on this, Ireland has an image problem (fairly or unfairly) and it is likely that the Irish government will take further preemptive steps to rectify perceived faults in its system. For years, Ireland’s 12.5% rate of tax on corporate profits has been used successfully as a mechanism to entice foreign direct investment into the country which has fueled business growth and economic growth. Along with Ireland’s skilled workforce, EU membership, its status as an English speaking country and a multitude of other factors, the low rate of corporation tax has led to Ireland being named the best country for high-value FDI for six consecutive years. Many of the world’s largest multinational corporations have located major operational hubs in Ireland.
Changes within the EU Council of State (the arrival of President Macron), action by Commissioner Vesteger of the European Commission (the Apple tax case), cases on our tax system before the European Court of Justice and ongoing discussion in the European Parliament and Commission around tax competencies have combined to provoke action. In parallel, the role that tax havens in British Overseas Territories such as the Cayman Islands and the Isle of Man might play following ‘Brexit’ and Donald Trump’s efforts to entice American companies back to their home shores are further factors stimulating action.
The Irish Minister for Finance, Pascal Donohoe, has released what has been dubbed a ‘roadmap’ of actions his government intends to take to counter allegations that Ireland operates a “beggar thy neighbour” tax haven model. What makes the task more complex is defining what needs to be done to demonstrate meaningful reform without damaging the local economic model and business growth. For instance, it is unclear at a granular level how the current system is flawed when compared to more opaque models like France. As a result, it is also unclear how drastic any actions taken have to be to constitute substantive systematic change (thereby dampening criticisms).
Tax conduits and tax havens – what is the difference?
On the one hand, for example, a report by the Corpnet academic project based out of Amsterdam and partially funded by the European Research Council under the EU Horizon 2020 research and innovation programme contends Ireland is a conduit rather than a sink (i.e. not a tax haven). The report places emphasis on where the money that passes through the Irish corporation tax system (a conduit) ends up (the sinks). The study which gathered information from over 98 million firms and 71 million ownership relations, suggests a standardised international system where taxes on corporate profits are paid in the jurisdiction where the profits are made would result in more efficient outcomes, “If profits would be accounted where the economic activity takes place, multinationals would pay at least US $500–650 billion more on taxes.”
In contrast to the Corpnet report, many actors continue to criticise the Irish position on corporate taxation as providing “overgenerous” tax provisions that undermine the tax bases and rates of business growth in other OECD countries and drive market dysfunctionality. Other reports suggest the magnitude of tax evasion and avoidance occurring has international ramifications and should be treated seriously. One particular piece of research labels Ireland the ‘biggest tax haven in the world’ and provides evidence of foreign multinationals channeling in excess of $106bn of corporate profits through Ireland in 2015 alone. Many states like Ireland feel compelled to get ahead of this tidal wave of (often justified) criticism.
While Donohoe and the Irish Department of Finance do not propose changes to the 12.5% corporation tax rate in Ireland, they have commissioned expert reports into the system and have commenced consultations with industry on possible changes that could be made to it. Incorporating the lessons offered by reports such as the Corpnet study, as well as other international academic advice on corporation tax unrelated to Ireland, it seems likely that Donohoe will prioritise consultation on and co-operation over all else when drafting his proposals for change (he wants any new rules to be the same across Europe when big changes are made). As financial systems are interconnected globally, local changes will have limited impact and enforceability. The net must move across the board at the time.
Harmonised standards and tax transparency
The situation is not as dire as some proclaim – not only is Ireland one of only 23 jurisdictions in the world that is fully compliant with newly established international best practice for Tax Transparency and Exchange of Information but it has also implemented tax changes that were recommended to comply with the OECD’s 2015 BEPS (Base Erosion and Proft Shifting) targets. While this is positive, some of the changes made simply removed the most reputationally damaging tax avoidance schemes (e.g. the infamous double-Irish) so a cascade of positivity is unlikely to flow Ireland’s way.
As long as media stories like the Apple tax/state aid case drag on and EU leaders continue to criticise vetoes over tax policy, existential risks to the system present. This is because doubts remain, not just about the efficiency of the Irish way of taxing multinational corporations, but also the perceived fairness of the process. While Ireland is developing new alliances in the EU to stave off ferocious, persistent and in many ways justified criticism from countries like France, failure to reform what can be reformed (loopholes) will simply mean questions about the Irish corporation tax model will linger. Where there is uncertainty, business growth tends to slow. Some of the charges made against Ireland have the ring of truth, some do not. In a dispute, however, there are winners and losers and the first casualty often tends to be the truth.
As the Anglo-Irish writer G.B. Shaw once wrote: “A government that robs Peter to pay Paul can always depend on the support of Paul.”
Time, it appears, for a Pauline conversion.