Ire­land must stay ahead of cor­po­rate tax re­form game

The Irish Times - Business - - FRONT PAGE - Cliff Tay­lor

For years, the tax­a­tion of big in­ter­na­tional com­pa­nies was some­thing of a game. Big multi­na­tion­als – mainly from the United States – ex­ploited gaps and dif­fer­ences be­tween ju­ris­dic­tions to slash their bills, of­ten pay­ing de­risory amounts on prof­its earned out­side the US. The big com­pa­nies had huge lob­by­ing power at home and were de­liv­er­ing jobs and eco­nomic ac­tiv­ity abroad. No one was in a rush to change the rules.

The eco­nomic crash changed ev­ery­thing. Sud­denly govern­ment ex­che­quers were scram­bling for cash. The “Hol­ly­wood moment” was Ap­ple’s ap­pear­ance be­fore a US se­nate com­mit­tee in May 2013, when its ex­tra­or­di­nary sys­tem of tax avoid­ance, in­volv­ing Ir­ish sub­sidiaries, was ex­posed.

The loop­holes have started to close grad­u­ally in re­cent years through a mind-numb­ingly com­plex pro­gramme of in­ter­na­tional re­form – gen­er­ally led by the OECD – the fi­nal di­rec­tion of which re­mains some­what un­cer­tain. The re­port on Ire­land’s cor­po­ra­tion tax sys­tem by econ­o­mist Séa­mus Cof­fey, which was com­mis­sioned by the Depart­ment of Fi­nance and has just been pub­lished, is an at­tempt to keep Ire­land in line with th­ese moves on re­form.

It is likely to spark change here, in­clud­ing im­por­tant moves on tax write-offs on in­tel­lec­tual prop­erty that could come in the bud­get. This is im­por­tant, par­tic­u­larly in the light of the Euro­pean Com­mis­sion rul­ing that Ap­ple owed Ire­land more than €13 bil­lion plus in­ter­est in un­paid tax, a con­clu­sion that is now the sub­ject of an ap­peal by both the com­pany and the Ir­ish Govern­ment.

This put an un­wel­come fo­cus on Ire­land, which we will be fight­ing this case for years. The Cof­fey re­port was sought by Min­is­ter and In­de­pen­dent TD Kather­ine Zap­pone in the light of the Ap­ple rul­ing and will re­new de­bate about how we tax multi­na­tion­als.

The Cof­fey re­port looks at how Ire­land should re­spond to the in­ter­na­tional wave of re­form. Re­cent de­vel­op­ments have shown that the bat­tle for multi­na­tional tax rev­enues – as well as in­vest­ment – re­mains fierce. So how we re­spond to the in­ter­na­tional moves, par­tic­u­larly those led by the OECD, is im­por­tant. Ire­land needs to strike a bal­ance be­tween at­tract­ing in­ward in­vest­ment and not al­low­ing com­pa­nies to man­u­fac­ture new ways to avoid pay­ing tax.

Re­mem­ber, too, that the big com­pa­nies are also un­der pres­sure to be seen to play by the rules. Ac­cord­ing to Fear­gal O’Rourke, man­ag­ing part­ner of PwC, if we want to main­tain our at­trac­tive­ness to for­eign di­rect in­vest­ment, it is now es­sen­tial that no­body can crit­i­cise us in re­la­tion to the re­form pro­gramme be­ing led by the OECD.

Many of the key points of the re­port are sur­rounded by the ex­tra­or­di­nary com­plex­ity of in­ter­na­tional tax, re­plete with acronyms and jar­gon. A close read­ing is re­quired to pull out the key changes it rec­om­mends.

Cof­fey calls for ac­tion on a range of fronts. Th­ese in­clude bring­ing in new rules on manda­tory dis­clo­sure of cross-bor­der tax ar­range­ments and up­dat­ing Ir­ish leg­is­la­tion on trans­fer pric­ing, which is the way com­pa­nies ac­count for goods and ser­vices sold from one part of the com­pany to an­other. There will be con­tro­versy here about a call for trans­fer pric­ing rules to be ex­tended to SMEs. Brian Kee­gan of Char­tered Ac­coun­tants Ire­land warned that it would “merely in­crease the bur­den of pa­per­work with­out sig­nif­i­cantly en­hanc­ing the in­tegrity of the sys­tem”.

A key part of the re­port deals with in­tel­lec­tual prop­erty – the brain power used to in­vent, de­sign and mar­ket prod­ucts. Charges re­lated to the use of in­tel­lec­tual prop­erty are a key way multi­na­tion­als re­duce their re­ported prof­its in coun­tries

Com­pa­nies are mov­ing IP as­sets pre­vi­ously held in tax havens to coun­tries such as Ire­land

such as Ire­land. The re­port rec­om­mends that a cap be reim­posed on the amount of cap­i­tal al­lowances – tax write-downs – a com­pany can claim re­lat­ing to its in­tel­lec­tual prop­erty as­sets. For­mer min­is­ter for fi­nance Michael Noonan re­moved the cap in 2014 , the same year he an­nounced the abo­li­tion of the con­tro­ver­sial dou­ble Ir­ish tax re­lief.

His suc­ces­sor, Paschal Dono­hoe, looks set to reim­pose it, slow­ing the rate at which com­pa­nies can claim tax re­lief in re­la­tion to in­tel­lec­tual prop­erty. This is im­por­tant at a time when some com­pa­nies are mov­ing IP as­sets pre­vi­ously held in tax havens to coun­tries such as Ire­land in re­sponse to in­ter­na­tional crit­i­cism of their use of offshore havens.

Chris­tian Aid, which has cam­paigned on the cor­po­rate tax is­sue, said its fig­ures showed that the re­moval of the cap could have led to a cut of more than €3 bil­lion in tax in 2015 alone, pre­sum­ing all the tax ben­e­fit could be taken in one year. The size of the as­sets means that most com­pa­nies would write them off over a much longer pe­riod, but there are cer­tainly big sums in­volved.

The likely reim­po­si­tion of the cap on how quickly such write-offs can hap­pen would limit the up-front tax ad­van­tage com­pa­nies can take, though they would still be able to claim the full amount over a pe­riod of years.

Dono­hoe would be well ad­vised to move quickly on at least some of the re­port’s rec­om­men­da­tions. As the in­evitable move to change the way big com­pa­nies are taxed rolls on, and the fall-out from the Ap­ple rul­ing per­sists, we need to en­sure we stay ahead of the re­form game.

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