Tuesday 19 September 2017

IMF says we're doing well but highlights Brexit's 'far-reaching' challenges

The IMF regards Brexit as the
The IMF regards Brexit as the "most pressing and far-reaching challenge" for us. Stock image: PA

Tom Maguire

They (the IMF) came, they saw, they talked tax and they issued their press release. They spoke of the external risks of Brexit, US and EU tax proposals or as I call them 'BUE'. There was good news in that, in their view, the medium-term outlook remains positive, growth is robust and broad-based and unemployment is at levels "not seen in almost a decade". However (isn't there always a "however") they said "the challenge" is to translate this into a "new foundation for sustainable and inclusive growth". So watch the BUE.

The IMF regards Brexit as the "most pressing and far-reaching challenge" for us. You can see their point given the already slowing export growth to the UK. Much has been said and written on the possibility of tariffs being imposed on trade with the UK. But what about business within Ireland itself?

For example, say you have a group of Irish companies with a UK resident parent company all going about their business. Provided tax law conditions are met (eg the relevant group companies are EU resident) then the Irish group companies can transfer assets among themselves without capital gains tax applying. The tax doesn't kick in until, for example, the company holding the acquired asset (the host) leaves the group with the asset. I call this the 'Kane effect' after John Hurt's character in the movie 'Alien', pictured. On leaving the group, the deferred capital gain bursts out and becomes taxable. Until then it sits dormant in the host company like the extra-terrestrial in Hurt's host. When the UK leaves the EU then this tax group is broken bringing about an instant 'Kane effect'. Transferring assets between group companies is not infrequent so this may require legislative amendment. We have time but like other tax law, it may require fixing to avoid a 'Kane effect' when Brexit happens.

The release notes that discussion of reforms in the US and the EU contribute to uncertainty given the "sizeable role of multinationals in the economy". This increases the need for a broad base and "continuing efforts to reinforce the dynamism of the domestic economy". President Trump wants to reduce the corporate tax rate to 15pc and introduce a tax rate reduction for the repatriation of earnings. After our recent international tax event, my partner Joan O'Connor noted that future investment in the US pharma and medtech sectors here could be put on hold as a result. However, the IT sector might not be under the same threat as it runs significant auxiliary services which requires multiple locations.

The Border Adjustment Tax (BAT) was not mentioned specifically by the IMF (or indeed in President Trump's tax plan) but it was part of the previous debates. It would have a negative effect on our US exports given that it would deny US deductions for them making them more costly there. Many argue it won't see the light of day and the US retail sector continues to lobby against it.

No specific EU proposals were mentioned by the IMF. However you'd have to think that they were getting at the Common Consolidated Corporate Tax Base (CCCTB). This effectively takes profits from each member country and allocates them around Europe for tax purposes based on sales by destination, assets and employees by location. Even without the second 'C' this would be detrimental to our economy and tax regime for both FDI and indigenous industry operating across borders. This is because countries operate tax systems appropriate to their economies and as we know not all have the same needs.

Ibec has estimated a total cost per year of €4bn. Denmark, Malta, the Netherlands, Sweden and the UK have said, like us, that it is contrary to EU law and have told the Commission so. Given all of these negatives, as I've previously written, shouldn't the EU Commission just let it go?

The absence of specifically identified proposals for the US and the EU must be contrasted with the IMF specifically mentioning our "Help-to-Buy" scheme. The IMF refers to the mismatch between demand and the "lagged supply following the real estate bust" and welcomes the planned review of the Help-to-Buy scheme given it "may add to demand pressures". It points out: "Ensuring affordable housing is crucial for the well-being of the Irish population and important to economic competitiveness." I've previously written in this newspaper that increasing rental supply of houses is a critical part of our economic competitiveness and that potential landlords seeking to acquire new properties for rental purposes could be disadvantaged by the scheme. The counterbalancing suggestion was an income tax credit for VAT incurred on property acquisitions. Maybe the IMF reads the Sunday Independent!

On efforts to reinforce the domestic economy, the IMF suggests expansion of government support for SME driven R&D including direct funding measures. It's well known that our R&D credit regime is up there with the best of them but it could be improved and it's to be hoped that the IMF's suggestion could be acted upon.

We have previously suggested various measures including arrangements whereby individuals could lend money to SMEs with the market rate interest received being taxed at the standard rate of income tax (20pc). The IMF suggests a review of tax expenditures and to prioritise the use of limited fiscal space. Therefore choices may have to be made at the Department of Finance regarding any tax suggestions.

Arguably, all of the above urges a form of healthy paranoia on BUE. Andrew Grove, former CEO of Intel wrote a book on management theory 'Only the Paranoid Survive'. I would concur.

  • Tom Maguire is a tax partner in Deloitte

Sunday Indo Business

Also in Business