What does a European common tax base mean for Ireland?
Published 02/06/2015 | 02:30
The European Commission is to propose a mandatory common corporate tax base next month as part of a wide-ranging clampdown on corporate tax avoidance.
Put simply, a common tax base seeks to harmonise the way companies calculate taxable profits across Europe.
For many years in Europe there has been talk of both a "common" and a "consolidated" tax base. Most likely driven by the recent 'Lux Leaks' scandal, the notion of a common tax base across Europe has been given a new lease of life.
On its own, the common tax base part of the proposal poses little threat to Ireland. We already operate a highly transparent regime, with our headline tax rate close to the effective tax rate for companies operating here.
However, any plan to move from a common tax base to a consolidated tax base across Europe poses much greater risk for Ireland. A consolidated tax base means that a group would calculate profits in the EU on a consolidated basis and then allocate taxable profits to each country using a set of defined criteria. The key drivers of how taxable profits would be allocated include capital, labour and sales.
The benefits of our low rate would be lost as a small amount of taxable profits would be allocated here, with the bulk of the profits allocated to larger countries.
Many of the issues that an EU common tax base seeks to address will be dealt with through the OECD's BEPS project, which aims to tackle tax avoidance on a global basis. It is possible that scepticism over the ultimate success of the BEPS project is behind the recent EU drive towards a common tax base.
If the BEPS project is successful, it is likely that some elements of the EU's proposals will be set aside. However there are elements of the consolidated tax base proposals that go well beyond the BEPS agenda and have the potential to seriously erode the Irish tax base. In my view, the consolidated tax base proposals in their current format have very little likelihood of ever being implemented.
Whilst Ireland has limited ability to alter the direction of discussions, we retain a veto over any changes, as in the absence of unanimity, tax changes cannot become law. Thus what we need to do is to ensure that our regime remains competitive in terms of ability to attract and retain foreign investment. We have to expect that other countries will do likewise.
An additional part of our tax offering will be the Knowledge Development Box (KDB), due to be operational from 1 January 2016. Offering a low tax rate (likely circa 5pc), a fit for purpose KDB will complete the suite of IP related tax reliefs and maintain the rationale for choosing Ireland as a place to do business.
Peter Vale is a Tax Partner at Grant Thornton.
Grant Thornton Ireland is hosting the annual Grant Thornton International Global Tax Conference in Dublin this week which will look at how a new global tax landscape is taking shape and what it might look like in 2020.