Wrong strategy on tax regime change can hurt investment
Enterprise Minister Richard Bruton has a very difficult balancing act to perform when making a statement on Ireland's tax strategy.
On the one hand he needs to maintain our reputation internationally as having an open and transparent tax regime. On the other hand he needs to ensure that that same regime remains attractive for foreign investors, given its importance to the domestic economy.
We know for certain that there will be significant reform to the international tax system in the coming years, through the work of the OECD and others. In many ways, this removes the pressure for Ireland to make unilateral changes as we can legitimately wait until the make-up of the global tax landscape becomes clearer, while actively participating in the debate as it unfolds.
Indeed there is a significant risk for Ireland in making changes to our tax regime now if it leaves us in a comparatively weak position vis à vis our main competitors.
I recall the case of the maker of a high performance hiking boot going bust due to customers never needing to replace the boot. While reputation is important, being applauded by the EU or OECD for taking pre-emptive action will count for little if it coincides with a dip in domestic economic activity due to a substantial decrease in foreign direct investment.
Ultimately, global developments, many of them politically driven, will mean that changes are required to our tax system. When the dust settles, it is very likely that the new tax climate will place a strong emphasis on substance, which puts Ireland in a strong position to benefit from future investment decisions given the strong supply of skilled labour here, amongst many other positive non-tax factors.
We need to make sure that our tax regime is competitive within the new parameters so that Ireland remains attractive to both existing and new foreign investors. In practical terms, this is likely to mean making improvements to existing reliefs for intellectual property and R&D activities. It is also likely to mean tweaks to current tax breaks aimed at foreign individuals coming to Ireland to work; existing reliefs lag behind our competitors.
There are many non-tax factors that have contributed hugely to our success in attracting foreign investment in recent years. We need to make sure that new tax policies do not result in potential investors ignoring these positive attributes and instead choosing a more tax-friendly jurisdiction.
Some of the coverage regarding "inversions", or US companies moving their headquarters away from the US, has been misleading. A group cannot just move its headquarters to Ireland and magically move all of its taxable profits here the next day. Arm's length transfer pricing rules simply do not allow that to happen.
The main driver of these inversions is the tax system in the US, which has the highest corporate tax rate in the developed world. It is the quite penal aspects of the US tax code that have driven many US groups out of the US - a point that has been made by many large US businesses.
Interestingly, the UK experienced a similar exit of UK companies some years ago, many to Ireland. The UK Treasury responded with changes to the UK tax regime, which subsequently saw many of the groups return to the UK.
These are interesting times in the tax world. Ireland needs to tread very carefully as a misplaced step could have long-term negative consequences for future foreign investment here.
Any announcement in the October Budget in this regard will be significant.
Peter Vale is tax partner at Grant Thornton.