Alignment Is Key To Success Of Pillar Two
With growing indications that America will reject new OECD rules, while China and India have yet to make provision for them, Irish Tax Institute president Tom Reynolds tells John Kinsella that Ireland needs to simplify its tax code to remain competitive
The OECD Pillar Two Global Anti-Base Erosion rules are supposed to level the playing field for taxation of corporates around the world. The problem is that many major economies are not yet playing ball, and tax practitioners see issues ahead for large multinationals operating from Ireland.
International tax is a very complicated subject, and Tom Reynolds, president of the Irish
Tax Institute, has a very good understanding of what’s at stake for Irish companies and their advisers. Born in Carrickon-Shannon, Co. Leitrim, Reynolds has worked in senior tax roles in multinational manufacturing industries for the last 28 years.
He is currently vice-president of Tax, M&A and Business Structuring at Schneider Electric, a global specialist in energy management and automation. He previously worked for Kellogg, where he was director of Global Tax Projects, and Kerry Group, where he was Head of Tax.
The Institute and other stakeholders have been in close consultation with the Department of Finance and Revenue on the legislation to give effect to the Pillar Two directive. But with updated guidance and clarification still coming from the OECD, there are many moving parts.
“Most worrying for Ireland are the growing indications that the US will reject the OECD reforms,” Reynolds
explains. “Given the large number of US multinationals headquartered here, it is critical that any additional tax paid by these companies, under Ireland’s qualified domestic top-up tax mechanism, can qualify as a creditable tax for US tax purposes.”
Reynolds anticipates that the cost of complying with Pillar Two will be significant, and the Institute wants a phased introduction of the rules and forbearance from Revenue as they bed down.
“Hundreds of new data points from across the HR and accounting functions will have to be extracted and interrogated by businesses to comply with the reporting requirements,” he says. “So it’s important that transition arrangements recently recommended by the OECD to simplify the process and reduce compliance burdens are fully adopted by Revenue.”
For many years, the Institute has been urging that Ireland should move to a territorial system of taxation that allows a participation exemption for the foreign earnings of large multinationals based here. Ireland is the only country in the EU that doesn’t offera dividend exemption.
In September, ahead of Budget 2024, finance minister Michael McGrath announced that legislation for a participation exemption for foreign dividends of companies based in Ireland will not be published until Finance Act 2024, to come into effect in January 2025. As the Pillar Two rules take effect from January 2024, the delay will add complication to the implementation of Pillar Two here.
According to Reynolds: “Some countries, including China and India, have yet to make provisions in their tax systems to accommodate the new global rules. With large economies like these still not aligned, we are in very
uncertain waters, and tax disputes and Revenue audits across the globe are inevitable. That’s bad for business and it’s also bad for governments.”
Reynolds is also of the view that implementation of Pillar Two strengthens the case for a wholesale simplification of Ireland’s corporate tax code. “In a world where competition on rate is no longer an option, a strong focus on tax simplification and reducing compliance complexity would greatly enhance Ireland’s ability to offer tax certainty and consistency to domestic and multinational businesses,” he says.
Tax complexity annoys business but it generates work for tax professionals. Reynolds qualified as a Chartered Tax Adviser in 1992 and he holds an MBA from the University of Ulster. In his roles with Kerry Group, Kellogg and Schneider, Reynolds has travelled the world and learned how central tax is to corporate strategy.
“When you are in practice, you give advice and you don’t see it from the start to implementation to the end result,” says Reynolds. “In industry, when you are doing a transaction you are involved from the pre-offer to the closing to the integration. Tax is part of the strategy of the business. If you are entering a new market or acquiring or disposing of a company, or if you’re setting up a transfer pricing policy, you need to have tax aligned with the strategic intent of the business.
“And that’s where you get to understand the business in a lot more ways. Within that, you work very closely with the other business functions, so you effectively become a trusted adviser.”
On domestic tax policy, Reynolds welcomes the Budget 2024 reforms relating to the R&D tax credit, angel investors, the EII scheme and the film tax credit. However, the ITI president is disappointed that the Capital Gains Tax rate of 33% was not reduced, and he would like the ambit of the R&D tax credit expanded to include process improvement that reduces carbon emissions.
For the tax profession, Reynolds anticipates that with more real-time reporting, the importance of the compliance function will diminish. “From an industry perspective, tax is an interesting career,” he remarks. “You are exposed to all levels of the business and work closely with senior management.
“There is going to be a huge level of work to be done with Pillar Two, which will keep tax professionals busy. With the shift to the more strategic adviser approach, it’s a great opportunity for anybody who is considering a career in tax.”
‘Tax is part of the strategy of the business’