It’s what we do that defines us a country, despite clouds looming on the tax horizon
THE OECD recently published its economic forecast summary for Ireland, saying that economic activity is projected to remain robust but to ease gradually. It notes the Government should remain committed to improving the fiscal position and be ready to ease the fiscal stance to mitigate the impact of potential future events. It also said that changes in the international tax regime could affect FDI decisions by multinationals, posing “a significant risk for Ireland”. The Taoiseach made a similar point at the recent Future Jobs Summit.
The OECD also argues that property prices may increase more strongly than projected, which would further boost construction activity in the near term but “may lay the foundation for another boom-and-bust cycle” if associated with another surge in credit growth.
Finance Minister Paschal Donohoe made similar comments on the international tax front in a recent speech to Chartered Accountants Ireland.
He explained that “corporation tax, and global tax reform, remains very high on the international political agenda” and that “the international tax landscape is continuing to change and the key question remains as to how this can be achieved in the safest way possible”.
His view was that this was “best achieved by global consensus at the OECD”. He went on to say that “changes must be designed for the long term. For a situation whereby the call for quick fixes in this area are met is a cause for concern”. You can see his point.
The international tax threat will always be with us unless we ensure that we compete appropriately. By “compete” you’ll know I really mean “win” as competing and losing costs us euro.
The OECD and the EU are suggesting changes to countries’ tax laws which we will have to put through.
To be clear, we are. However, it’s the “how” and not the “why” we do that that matters. The devil will always be in the detail and while we have to amend our law in line with these proposals we don’t have to give them the gold-star treatment. When I was in school, the pupils with the gold stars had it good in the classroom but not so great in the schoolyard which was our real world back then.
Don’t get me wrong, we always adhere to the rule of law.
For example, this year’s Finance Bill, which has now passed through Dail Eireann, brought about provisions for Controlled Foreign Companies (CFC) which effectively allows us to tax other countries’ money where Ts and Cs are met. We’ve had to do that because the EU’s Anti-Tax Avoidance Directive (ATAD) said so. However, other countries have such rules while offering the quid pro quo of not taxing foreign dividends received by companies in those countries where other Ts and Cs are met.
We’ll tax such foreign dividends even with these new-fangled CFC rules. OK we’ll give a credit for foreign tax on those dividends but that’s a whole heap of complexity or hoops which taxpayer companies will have to jump through here and in the end may still give rise to an Irish tax charge. Simplicity eats complexity for breakfast and can cost us euro.
To be fair there will be a public consultation on this issue next year but in the meantime, hoop-jumping is required.
We have also brought about an ‘exit tax’ to solidify the 12.5pc rate applying on latent gains inbuilt in assets where, among other events, a company moves its centre of management to a location outside Ireland.
We already had one of these but this new-fangled version was brought in a year ahead of schedule so nobody can say we’re not doing our bit for the International Tax environment.
Coming back to the OECD and their point on property prices, in my last column I argued how tax could help out.
The Indecon report’s review of the Help to Buy scheme explains that house price inflation for properties qualifying for HTB are influenced by overall buildcost inflation and other supply/demand factors.
One of our biggest tax expenditures, the R&D credit, which will be subject to review next year, boosted that sector significantly. I suggested doing something similar for building and site costs to reduce housebuilding prices — with the quid pro quo being that getting this credit would be subject to savings being passed to the first-time buyer as insurance against price inflation.
It’s almost as if the OECD was hinting toward reading this column.
On a similar note, it’s really good to know the Taoiseach reads this column.
It’s reported that at a recent Future Jobs Summit he said that the Government will, over the next couple of years, have to examine taxes like Capital Gains Tax (CGT) as its rate was perhaps now reducing the frequency of turnover in assets and was having a negative effect.
I’ve been saying that in this column for some time now.
For example, I’ve previously written here about the Tax Strategy Group’s (TSG) Budget 2019 papers.
The TSG is a government think tank chaired by the Department of Finance with its membership comprising senior persons from a number of Civil Service offices. The TSG said as part of its Budget 2019 capital taxes document that absent “behavioural change” a 1pc reduction in the CGT rate would lessen the tax yield by about €34m annually. However, behaviours will of course change when tax goes down.
High CGT rates can lead to people holding assets too long which can stifle economic growth by blocking the beneficial shifting of resources from lower to higher-value uses.
It would seem the Taoiseach noted that point. This can hurt small startup companies because investors may have a reduced incentive to sell investments in favour of newer companies’ offerings. Christian Bale in the lead role in Batman Begins (2005) said: “It’s not who I am underneath but what I do that defines me.”
One only has to look at where we are post-financial crisis. We did and so we are defined. We got this.
Taoiseach Leo Varadkar at the Aviva Stadium recently for the Future Jobs summit