Monday 25 September 2017

Is EU putting our 12.5pc tax rate under siege? It's sure starting to look that way

Joe Tynan, head of tax at PwC
Joe Tynan, head of tax at PwC
Dan White

Dan White

Is Ireland's 12.5pc tax rate under siege? Tough new international rules from the EU and the OECD, along with political changes in the US and the UK, are threatening to gut the low-tax regime, on which a quarter of all private-sector jobs in this country depend.

On Tuesday, the EU Commission rolled out a revised version of its Common Consolidated Corporate Tax Base proposals. The new CCCTB will, if adopted, result in simpler corporate tax rules in Europe, while at the same time cutting down on tax avoidance by multinationals, according to EU Taxation Commissioner Pierre Moscovici.

With the new CCCTB, the Commission aims to do two things. Firstly, it seeks to create a common European tax base. This is basically an agreed common set of rules as to how companies in each of the 28 EU member countries calculate their taxes, which expenses are tax-deductible and which are not.

Secondly, the Commission hopes that the CCCTB will lead to the consolidation of European corporate taxes with companies' taxes being apportioned to different countries by a pre-agreed formula, which would take their sales, tangible assets and workforce in each country into account.

This would be achieved by all companies, starting with those whose annual sales exceed €750m, filing one EU tax return, which would be available to the tax authorities of every EU member country. This would be reinforced by the mandatory sharing of tax rulings between member countries.

Coming less than three months after its ruling in the Apple case, where the Commission decided that the tech giant had under-paid its Irish taxes by up to €13bn and that two tax rulings by the Revenue Commissioners amounted to illegal state aid, one wouldn't have to be completely paranoid to wonder if the EU was targeting Ireland's 12.5pc corporate tax regime.

That's not how they see things in Brussels. Commission sources point to other developments such as last year's base erosion and profit-shifting (BEPS) rules from the OECD and the recent Lux Leaks and Panama Papers, as evidence that there is now a momentum behind the CCCTB proposals.

They also point out that setting corporate tax rates remains the responsibility of member countries.

"CCCTB has nothing to do with rates. It is a sovereign right to set rates. It is not within our competence."

While Commission sources may stress that the CCCTB has nothing to do with tax rates, others see things differently.

"If both parts of the CCCTB [the common tax base and consolidation] go through then it will be a very large revenue grab by the large countries. That can only be to the detriment of Ireland", says Joe Tynan, head of tax at accountants PWC.

He is sceptical of the distinction being drawn between these two parts arguing that, if we agree to the first [a common tax base] it is difficult to disagree with the second [consolidation].

"A common tax base forces countries to give up sovereignty. It means that there can be no competition using fiscal policies for investment. For a country that depends as much on foreign direct investment as Ireland that would not be a good thing".

If Tynan is correct then our 12.5pc tax rate is under pressure. CCCTB follows up on the October 2015 BEPS rules from the OECD.

The BEPS rules oblige multinationals to file a tax return with every country in which they operate.

They also cracked down on transfer pricing, where companies maximise profits in low-tax countries such as Ireland and minimise them in high-tax countries such as the United States (which has a 35pc corporate tax rate) or France (34pc).

However, it isn't only moves against multinational tax avoidance by organisations such as the EU or the OECD that should have us in this country worried.

There is also clear evidence that the climate of opinion has changed. Both of the major party candidates in next month's US presidential election have promised to crack down on multinational tax avoidance.

Meanwhile, the UK has reportedly threatened to halve its corporate tax rate to 10pc if it doesn't get the Brexit deal it wants from the EU. Not only would this be significantly lower than the Irish rate but a post-Brexit UK could also ignore the EU's state aid and CCCTB rules.

This is a clear and present danger to Ireland. There are almost 175,000 people directly employed by IDA-supported companies with as many more working in supplier companies. That's 350,000 jobs, almost a quarter of all private sector employment.

The good news is that all EU member counties must agree to tax decisions. While the Commission is optimistic about the securing agreement on a common tax base, even it accepts that getting a deal on tax consolidation will be far more difficult.

And Ireland won't be the only with objections. We have been here before. In 2011 the last version of the CCCTB ran into the sands with some of the large car-exporting countries realised that they would be among the losers.

We in this country must hope that history repeats itself.

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