Com­mon cor­po­rate tax plans are big­ger than Brexit — and may not suit us

Sunday Independent (Ireland) - Business & Appointments - - FRONT PAGE -

IT’S all go in Europe. We’ve seen anti-avoid­ance di­rec­tives, manda­tory dis­clo­sure pro­pos­als, the pitch for the tax­a­tion of dig­i­tal trans­ac­tions in Tallinn — and the Com­mon Con­sol­i­dated Cor­po­rate Tax Base (CCCTB). Econ­o­mist Sea­mus Cof­fey said this last one was big­ger than Brexit for cor­po­rate tax pur­poses.

The CCCTB cur­rently re­quires una­nim­ity to be­come law. Euro­pean Com­mis­sion pres­i­dent Jean-claude Juncker’s State of the Union Ad­dress 2017 sug­gested that mov­ing to qual­i­fied ma­jor­ity vot­ing in cer­tain tax ar­eas can be done “if all heads of state or gov­ern­ment agree”. Fi­nance Min­is­ter Paschal Dono­hoe has said our Gov­ern­ment would re­sist such a move, and one can see why.

Many coun­tries have raised le­gal con­cerns about the com­mon tax base, which dates back to a pa­per in 2001. Cash mat­ters, but so does the rule of law. But it’s still be­ing dis­cussed at EU level.

The Euro­pean Com­mis­sion re­cently ex­plained a car­rot in the pro­posal. In Au­gust, it pub­lished a work­ing pa­per as­sess­ing R&D pro­vi­sions un­der a com­mon cor­po­rate tax base, and said the com­mon base presents “a unique op­por­tu­nity” to “mas­sively in­crease sup­port for busi­ness in­no­va­tion”. So why are we not sign­ing up? Sim­ple — it’s big­ger than Brexit.

The CCCTB has two steps: Step one is a tax rule­book con­tain­ing the pro­posed R&D regime among other rules for all EU mem­ber states. Step two re­quires con­sol­i­dat­ing tax­able prof­its us­ing that book for cor­po­rate groups op­er­at­ing across bor­ders, and al­lo­cat­ing those prof­its across the EU us­ing var­i­ous cri­te­ria.

Ire­land’s R&D regime has been de­scribed as “best in class”. It’s ar­guably kilo­me­tres ahead of the EU pro­posal. Un­der our rules, the tax­payer com­pany can claim a tax credit com­pris­ing 25pc of the R&D ex­pen­di­ture con­cerned. How­ever, where the R&D ex­pen­di­ture is tax-de­ductible, then our law gen­er­ally brings about a po­ten­tial re­duc­tion in cash tax payable of up to 37pc, be­ing the 25pc credit added to an ef­fec­tive 12pc re­duc­tion in tax for the re­lated costs; the lat­ter aris­ing when com­put­ing the com­pany’s tax­able prof­its.

The EU pro­posal sug­gests a full de­duc­tion for the R&D ex­pen­di­ture, with an ex­tra 50pc of such costs (with cer­tain ex­cep­tions) in­curred dur­ing that year. Where the R&D costs ex­ceed €20m, the com­pany deducts 25pc of the ex­cess. In ad­di­tion, cer­tain start-up com­pa­nies may deduct an ex­tra 100pc of their R&D up to €20m. Take a well-es­tab­lished com­pany in­cur­ring R&D costs of €30m. Un­der the EU pro­posal, it could deduct, in­clud­ing the var­i­ous 50pc and 25pc su­per-de­duc­tions, an amount of up to €42.5m in com­put­ing its tax­able prof­its. This means the re­duc­tion in cash tax would be al­most €5.3m. Not too shabby. Our ver­sion com­prises a pos­si­ble de­duc­tion of the full €30m in com­put­ing tax­able prof­its and an ad­di­tional tax credit of 25pc of that fig­ure, re­sult­ing in a cash tax re­duc­tion of al­most €11m.

That’s just one el­e­ment of the EU’S pro­posed com­mon tax rule­book. Ire­land, along with other coun­tries, has re­sponded with a “non merci” to the Euro­pean Com­mis­sion, ar­gu­ing it con­tra­venes EU law it­self. And that’s be­fore you get into the de­tail of its R&D car­rot, which is ar­guably more stick to our law. The ques­tion then is, why would Ire­land move to such a regime?

The re­cent Tax Strat­egy Group (TSG) pa­pers were pub­lished in ad­vance of Bud­get 2018 and noted that the pur­pose of the R&D tax credit is to en­cour­age com­pa­nies to un­der­take R&D ac­tiv­ity in Ire­land, sup­port­ing jobs and in­vest­ment here. It’s work­ing. In 2015, 1,534 com­pa­nies availed of the credit, with a to­tal ex­che­quer cost of €708m.

The TSG notes that in Oc­to­ber 2016, the Depart­ment pub­lished an eco­nomic eval­u­a­tion of the R&D credit, which found “60pc of the R&D un­der­taken by com­pa­nies is due to the credit”. Ire­land’s credit also has a re­payable el­e­ment which the EU ver­sion doesn’t, al­low­ing com­pa­nies to re­quest a re­fund if their R&D claim is greater than their tax li­a­bil­ity. The TSG notes that the in­tro­duc­tion of the re­payable el­e­ment co­in­cided with a sub­stan­tial in­crease in the num­ber of com­pa­nies avail­ing of the tax credit.

Be­cause of hu­man au­dac­ity, cu­rios­ity and tenac­ity, R&D will hap­pen. JFK fa­mously said “We set sail on this new sea be­cause there is new knowl­edge to be gained, and new rights to be won”. The R&D credit may not make it hap­pen, but it will be a fac­tor in de­ter­min­ing “where” it hap­pens — and we want it to hap­pen here. There are im­prove­ments that can be made to the credit, but CCCTB isn’t one of them. Nei­ther is giv­ing up our veto on tax mat­ters. One size just doesn’t fit all, par­tic­u­larly when we, as a small open econ­omy, punch above our weight in the first place.

Bruce Lee, pic­tured, once said “Adapt what is use­ful, re­ject what is use­less, and add what is specif­i­cally your own”. So, to end on a pos­i­tive note on the EU pro­posal, it does sug­gest an “Al­lowance for Growth and In­vest­ment” to deal with the po­si­tion where in­ter­est on debt can be tax-de­ductible, but profit dis­tri­bu­tions can­not.

Ac­cord­ing to the com­mon rule­book, com­pa­nies could be given the al­lowance where cer­tain in­creases in eq­uity would be de­ductible from the tax­able base sub­ject to cer­tain con­di­tions. For­mer fi­nance min­is­ter Michael Noo­nan noted ear­lier this year that this el­e­ment of the CCCTB pro­posal “makes an in­ter­est­ing case for giv­ing tax re­lief for eq­uity in­vest­ment in a busi­ness, which is some­thing which should be ex­am­ined fur­ther”.

We are now firmly in pre-bud­get mode. So adopt­ing a rhetor­i­cal ap­proach again and tak­ing Lee’s ad­vice, should we not just adapt the AGI to our law, con­tinue to re­ject the CCCTB and add to the R&D credit? Tom Maguire is a tax part­ner in Deloitte

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