Plans to harmonise corporation tax set to bring little in way of harmony

EU changes to corporation tax and governance of the eurozone could hit Ireland hard as Brexit bites, writes Colm McCarthy

IRELAND’S agenda with the European Union is getting complicated. After five years of strong recovery, the country’s economic prospects are exposed to developments in EU policy under three headings. There will be profound effects from Brexit about efforts to harmonise corporation tax and about future governance of the eurozone. And the next slowdown, whenever it comes, will see government burdened with heavy debts, with little headroom to let the budget deficit take the strain.

European Council president Donald Tusk’s remarks in Dublin last Thursday have yielded a UK response which promises no prospect of a benign outcome. The Taoiseach mentioned the corporation tax threat explicitly in his press conference with Tusk, where the latter’s comments on Brexit stole the headlines. The tax issue was also highlighted by OECD chief Angel Gurria who visited to launch his organisation’s report on Ireland. And last Wednesday finance minister Paschal Donohoe released a joint statement on eurozone reform with a group of his opposite numbers from the smaller EU members in northern Europe.

The European Council meets a fortnight hence to consider progress in achieving a withdrawal agreement, including a post-Brexit transition deal. It may conclude that there has been no progress at all since their tentative verdict of ‘sufficient progress’ in December. The EU-27 have established from the outset that three boxes must be ticked in order to achieve an orderly UK exit; citizens’ rights, in particular the fate of EU citizens in the UK and Brits abroad; the financial settlement or divorce bill; and the Irish border. The UK government has established, and continues to insist upon, a series of ‘red lines’ which prevent progress on these issues and preclude the attainment of Theresa May’s ‘frictionless trade’ with the EU after Brexit day, a year away. Nothing of any importance has been achieved since the ‘sufficient progress’ fudge in December.

Donald Tusk believes that current UK policy cannot deliver an open border in Ireland. He also made it clear that the UK approach would not facilitate access to the EU market for the London financial services industry. Only a Canada-style deal, focused on trade in goods rather than services, would be possible. He warned the UK that backsliding on commitments already embraced would endanger the negotiations. Within a few hours the UK’s chancellor, Philip Hammond, insisted in London that the UK’s approach was in everyone’s interests, ignoring again the inconvenient reality that Europe has ruled it out consistently and from the beginning.

To complete this dialogue of the deaf, Boris Johnson, the foreign secretary, addressed a group of Daily Telegraph subscribers the same evening, assuring a receptive audience that Brexit would be a “triumphant success”, that “no deal is better than a bad deal” and that there would be “minimal controls” (not no controls) on the Irish border. The prime minister’s office again declined the opportunity to slap down Boris. Tusk and his EU colleagues have been grading a transition-year project, with reserves of patience running low.

Ireland has placed a business-friendly corporation tax regime at the centre of its economic strategy for decades. This has consisted of a deliberately low tax rate, but also of arrangements, not necessarily intended, which facilitate tax avoidance by multinationals based here. Routing profits through Ireland (and some other EU jurisdictions) cuts tax bills and comes at the expense of the tax authorities in the home country of the multinational concerned. For Ireland, this means that whatever tax is being dodged is essentially American tax, since most multinationals here are American. Regardless, the French and German governments are pushing a harmonisation, at EU level, of tax on multinationals and have pointedly targeted Ireland’s tax autonomy.

The Irish Government objects that this issue cannot usefully be addressed unilaterally at the EU level but needs a new worldwide redefinition of the corporate tax base. The losers from corporate tax avoidance in Ireland are not the French and German tax authorities: there are very few French or German firms in Ireland. The Franco-German pressure is for some version of a turnover tax for the big American tech firms on their European sales and there is a fundamental issue to be settled. Is this about a new tax base or a reform of the profits tax? While our European partners have been supportive on Brexit, they have been bullying (remember Sarkozy?) and incoherent, compared to the OECD’s more thoughtful proposals, on corporate tax.

The third exposure to European policymakers concerns the reform of the eurozone. Every country which abolished its currency and adopted the euro, as Ireland did in 1999, was making an act of faith in the initial design and subsequent management of the system. While domestic policy failures have rightly been blamed for Ireland’s deep economic downturn, the damage was exacerbated by design flaws in the common currency’s construction and arbitrary impositions, by the ECB in particular, on individual member states in the management of the subsequent crisis. Since it is not a practical option for a eurozone country in trouble to depart the common currency, the rectification of system flaws and better crisis management are vital issues for Ireland.

Last Tuesday, a position paper on eurozone reform was released jointly by eight EU members: Denmark, Estonia, Finland, Latvia, Lithuania, Ireland, the Netherlands and Sweden. Aside from location in northern Europe, this group is hardly a plausible popular front on eurozone reform and the kneejerk welcome afforded the initiative by Irish commentators is thoughtless. Neither Denmark nor Sweden are even members of the currency bloc, Denmark having insisted on a formal opt-out and Sweden, without one, having adroitly retained its independent currency. Back in the dark days when the indebted countries, including Ireland from late 2010, were struggling to meet the onerous terms set by official lenders, both Finland and the Netherlands lined up with the hard-line creditor group headed by Germany.

The Finnish EU commissioner from 2009 to 2014, in charge of Economic and Monetary Affairs, was Olli Rehn, who supported the ECB line against Ireland’s interests. This country’s only champion in the troika was the out-numbered IMF: there was no support from Finland or the Netherlands in the darkest days.

The imposition of billions in pay-offs to unguaranteed bondholders in Anglo and other bust banks by Jean-Claude Trichet’s ECB, with EU Commission acquiescence, in 2010 and again early in 2011, threatened the political viability of the recovery programme. Leo Varadkar and Paschal Donohoe were government ministers from March 2011 onwards and both will recall the support of the IMF and the contrasting belligerence of Ireland’s European saviours.

This is important because one of the ambitions of French and German politicians is the establishment of a European Monetary Fund as part of the eurozone reforms. In some variants this would remove access to the IMF for eurozone countries facing a liquidity crunch, always possible for countries which have given up their own currency in the 1999 Act of Faith.

If Irish experience is any guide, the small and heavily indebted eurozone members should battle to preserve their status as full members of the IMF. Ireland has interests in eurozone reform distinct from some of its new best friends in Paschal Donohoe’s unlikely northern alliance.

‘For Ireland, whatever tax is being dodged is essentially American tax’