Brexit, the current US President, and many other factors threaten global supply chains and procurement sourcing options. One factor, that is hugely influential in the location of businesses is the range of tax environments available to businesses. The new breed of company is changing the degree to which tax arbitrage is tolerated. Agile technology companies can move jurisdiction with relative ease compared to the manufacturing giants of the 20th century. Their size, scale, and contribution to taxes is nowhere near the levels paid by their antecedents. Aggravating factors include the exponential growth of island paradises that act as tax havens. These companies and tax havens have brought corporation tax systems to the forefront of policy agendas across the world. This week, we examine calls for changes in the corporation tax system in Ireland and what they might mean.
Corporation Tax – tackling an image problem
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. This has implications for business growth and the global economy. The way major companies book profits away from the countries in which the profits are generated has led to widespread investigations by national tax authorities.
While tax law may suggest otherwise, a consumer in France purchasing a product in France may reasonably expect that the taxes on that purchase remain in France. Ireland plays a controversial role in subverting this “everyman assumption” due to the heavy presence of US multinationals in Ireland. The presence of such entities from the US and other jurisdictions may further intensify after Brexit. All trends indicate that the focus on tax reform will continue to intensify also.
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. 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 successfully enticed foreign direct investment. Along with 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 that will address allegations that Ireland operates a “beggar thy neighbour” tax model. What makes this complex is defining what needs to be done to demonstrate meaningful reform without damaging the economic model. For instance, it is unclear 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.
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 focuses on where the money that passes through the Irish tax system (a conduit) ends up (the sinks). The study which examined data from 98 million firms, shows that standardised international systems are more efficient. It states that: “If profits are taxe where the transaction takes place, multinationals would pay $500–650 billion more on taxes.”
Perception can be reality
In contrast to the Corpnet report, many actors continue to criticise the Irish position on corporate taxation. The charge is that Ireland provides “overgenerous” tax provisions that undermine taxes and business growth in other OECD countries. There are international consequences arising from the sheer scale of tax avoidance and evasion. 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.
The Irish Department of Finance is unlikely to change the 12.5% corporation tax rate in Ireland. It has however commissioned expert reports into the system on the changes that it could make. Incorporating the lessons offered by reports such as the Corpnet study, Ireland will prioritise consultation over all else. Ireland wants any new rules to be the same for everyone. Changes that are not universally applicable means arbitrage can continue.
Harmonised standards and tax transparency
The situation is not as dire as some proclaim. Ireland introduced changes to meet new tax transparency rules. and is one of only 23 jurisdictions that has achieved this. It has also implemented recommend tax changes that 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 tax avoidance schemes that were most egregious. A cascade of positivity, therefore, is unlikely to flow Ireland’s way.
Derisking the system
Risks to the system will persist as long as cases like the Apple tax state aid one remain unresolved. Doubts remain about the perceived fairness of both the system and the process. Even as Ireland builds new EU alliances to stave off criticism, a lack of reform limits their strength. The system needs new, universal rules so that certainty can be provided to companies and investment decisions can proceed. Some of the charges made against Ireland have the ring of truth, some do not. In a dispute, however, there are always 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 for a Pauline conversion?
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