The EU is ask­ing ques­tions about tax sovereignty — but the clue is in the ti­tle

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

TAX sovereignty means one coun­try ef­fec­tively say­ing to an­other coun­try: what’s yours is yours and what’s mine is mine, okay. I’ve al­ways said “con­sul­ta­tion with us de­creases con­ster­na­tion amongst us” — and the EU Com­mis­sion is now con­sult­ing and ques­tion­ing tax sovereignty.

Just be­fore Christ­mas, the EU Com­mis­sion pub­lished a ‘tax roadmap’ in re­la­tion to de­ci­sion mak­ing in tax mat­ters. The pro­posal would ex­plore how EU de­ci­sion-mak­ing on cer­tain tax is­sues could be ‘stream­lined’ by re­mov­ing the need for unan­i­mous agree­ment by all coun­tries. These mat­ters would in­stead be de­cided by a weighted sys­tem (qual­i­fied ma­jor­ity vot­ing) where mea­sures can be car­ried if sup­ported by a min­i­mum num­ber of EU coun­tries.

We could re­sist cer­tain pro­pos­als in the past be­cause of this una­nim­ity cri­te­rion, so is this EU pro­posal along the lines of the late Chris Cor­nell’s lyrics to 007’s Casino Royale (2006) sound­track “if you think you’ve won then you never saw me change the game that we have been play­ing”? Ex­cept this isn’t a game.

We pub­lished a cor­po­ra­tion tax roadmap last year which says what was go­ing to hap­pen out­lin­ing var­i­ous pub­lic con­sul­ta­tions, etc whereas the EU re­gard what might hap­pen as a roadmap by ques­tion­ing tax una­nim­ity’s ef­fec­tive­ness ie tax­a­tion re­mains within the com­pe­tence of in­di­vid­ual mem­ber states and una­nim­ity is needed be­fore any tax changes can be agreed at EU level.

Ire­land’s po­si­tion has al­ways been clear — we do not sup­port tax har­mon­i­sa­tion that un­der­mines a mem­ber state’s abil­ity to set its own tax rate and to de­ter­mine its own tax base. We have, how­ever, shown we are will­ing to agree EU tax di­rec­tives that seek to im­ple­ment agreed in­ter­na­tional best prac­tice in a con­sis­tent man­ner across the EU. This re­mains Ire­land’s po­si­tion.”

The CCCTB has been around since the start of this cen­tury and it hasn’t gone away. Noth­ing dies at the EU, it merely hov­ers.

The threat to Ire­land on this mat­ter is sig­nif­i­cant with Sea­mus Cof­fey (econ­o­mist and head of the Fis­cal Ad­vi­sory Coun­cil) pre­vi­ously giv­ing the view that it could be big­ger than Brexit. Why? Be­cause it al­lo­cates prof­its to coun­tries on a quan­ti­ta­tive rather than a qual­i­ta­tive ba­sis, be­ing sales by des­ti­na­tion, labour and as­sets by lo­ca­tion, which al­most ig­nores what hap­pens back home.

Ire­land is a small open econ­omy so you re­ally don’t need to do the ‘for­mu­lary ap­por­tion­ment’ maths to con­clude that prof­its, and hence tax rev­enue, would be al­lo­cated away from Ire­land.

Dono­hoe said that we have agreed and en­acted EU tax di­rec­tives that seek to im­ple­ment agreed in­ter­na­tional best prac­tice in a con­sis­tent man­ner across the EU, eg we’ve signed up to the EU Anti-tax Avoid­ance Di­rec­tive (ATAD) some of which we im­ple­mented in the most re­cent Fi­nance Act. Why ‘some’ bits and not oth­ers? We al­ready had some bits of the ATAD in our law and some oth­ers don’t have to be im­ple­mented un­til later years but we even went ahead of sched­ule by en­act­ing an exit tax be­fore we had to. So it can’t be said that we’re not do­ing our bit.

The ATAD’S Con­trolled For­eign Com­pa­nies (CFC) rules ef­fec­tively al­lows us to tax other coun­tries’ money with terms and con­di­tions based on the prin­ci­ples en­shrined in the Treaty for the Func­tion­ing of the EU.

The Euro­pean Court of Jus­tice has said in con­nec­tion with CFC rules that re­liev­ing pro­vi­sions in the treaty can’t be re­lied upon where the tax­payer en­gages in “wholly ar­ti­fi­cial ar­range­ments” and that’s fair enough.

But if we stop there for a mo­ment, then this means that if a tax­payer is car­ry­ing on gen­uine ac­tiv­ity in an­other coun­try then we, or other coun­tries, can’t reach out and pull those prof­its back home and tax them here; what’s yours is yours etc. Gen­uine­ness of ac­tiv­ity is the key here.

The Com­mis­sion says in its roadmap that the his­tor­i­cal jus­ti­fi­ca­tion of una­nim­ity has been that it was “the only way to guar­an­tee na­tional sovereignty over tax mat­ters”, which makes sense based on what the court has al­ready said. The Com­mis­sion con­tin­ues: “Re­al­ity, how­ever, turned out to be more com­plex. Sub­se­quent case law [of the Euro­pean Court of Jus­tice] has shown that the Treaty free­doms and prin­ci­ple of non-dis­crim­i­na­tion cre­ate lim­its on na­tional sovereignty in tax­a­tion. … As a re­sult, mem­ber states are in­creas­ingly con­strained in their ca­pac­ity to raise rev­enues to fi­nance ex­pen­di­tures pro­grammes in line with their na­tional pref­er­ences.”

But stick­ing with the CFC ex­am­ple for a mo­ment, then whether Ire­land (or an­other coun­try) wants to tax a CFC’S prof­its then that is de­ter­mined by the gen­uine­ness of those prof­its in that coun­try. If they’re not gen­uine, then EU law won’t pro­tect them and then the coun­tries con­cerned can tax them on a what’s re­ally mine is mine ba­sis. So why move from a gen­uine what’s mine is mine ba­sis to a what’s mine can be yours ba­sis of tax­a­tion?

This de­bate will con­tinue and our view on this has been clearly ar­tic­u­lated in the Dail by the min­is­ter.

The roadmap con­sul­ta­tion ends on Jan­uary 17. The game may be for chang­ing but surely not on our watch. Tom Maguire is a tax part­ner in Deloitte

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