Monday 24 October 2016

New OECD global tax proposals target corporation tax avoidance

Colm Kelpie and Sarah Collins

Published 05/10/2015 | 13:28


Finance Minister Michael Noonan has voiced concern that new global rules to prevent multinational corporations from avoiding tax will be tightened up once the EU gets its hands on them.

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The European Commission says it will implement the recommendations published today by the Organisation for Economic Co-operation and Development (OECD), which suggest ways to close legal loopholes that allow multinational companies to route their profits through tax havens.

Mr Noonan said he was “very much in favour” of the OECD’s recommendations, and warned the EU off beefing them up beyond “minimum standards”.

“We will be very interested in ensuring that what has been decided at the OECD is the policy and that there are not bells and whistles that work against our interest added on by the European Commission,” Mr Noonan told reporters at a meeting of eurozone foreign ministers in Luxembourg today.

Mr Noonan said Ireland’s views had been taken into account in the talks leading up to the OECD report and that they would work to Ireland’s advantage. “We’re not a tax haven,” he said. "We never have been involved in any kind of tax malpractice. Sometimes international tax planners used Ireland - for example, in the so-called double Irish but the double Irish wasn’t an Irish policy.”

The Commission has been drafting tax legislation in parallel to the Paris-based OECD, to ensure EU countries - and especially the 19 countries sharing the euro - are abiding by the same rules. EU economy and tax chief Pierre Moscovici said yesterday that he would “ensure that these measures are implemented consistently and coherently, to ensure a level playing field for all businesses and countries involved”.

Mr Noonan said he would be insisting that corporate tax rates remain a national competence, and that any changes to EU tax law should be put to a unanimous vote, as is currently the case.

The OECD’s recommendations would see companies providing more detail on where they do business and where they pay tax, known as country-by-country reporting, and recommend governments adopt common standards on preferential tax rates for intellectual property.

Mr Noonan welcomed the new rules, saying they would encourage foreign investors to flock to Ireland. “We came out rather well,” he said. “We’re very happy with the country-by-country reporting. We think it’ll serve to encourage foreign and direct investment into Ireland.”

Ireland will adopt the OECD standards on country-by-country reporting and intellectual property in the upcoming finance bill, which is due out soon.

Pascal Saint-Amans dismissed any suggestions that the move could cost Ireland multinational jobs, and decribed claims by some big companies that the move is creating uncertainty for business as "bullshitting".

Tight government finances and media reports on the tax structuring used by some global companies have spurred significant public anger in Europe and the United States in recent years over tax avoidance.

The final report from the Paris-based OECD on how to tackle global corporate tax avoidance has been published today.

Mr Saint-Amans, the OECD official spearheading the project, said Ireland can gain from this. 

“This might impact the schemes where you don’t have much substance, meaning that Ireland might not lose much,” he told the Irish Independent.

“Because you kill the zero tax schemes, with no activity located in Bermuda and some flows channelled through Ireland, that means the companies will now be paying more attention to the real competition among countries.

“When you have a choice between 40pc in the US, zero percent in Bermuda, and 12.5pc in Ireland, you go for zero in Bermuda. But now do you go for 40pc in the US or 12.5pc in Ireland.

“You will lose the reputational risk, and I think you need to move away from that, and now the rules of the game has changed, and you can cope with that as you have started doing.”

In 2012, the OECD was asked by governments to look at changing outdated tax rules that allow multinational companies to pay almost no tax on their profits in many jurisdictions, resulting in its so-called Base Erosion and Profit Shifting (Beps) project.

The OECD said a conservative estimate of the amount of untaxed money moved by companies into tax havens was $100 billion to $240 billion annually.

Tax advisers agreed that the measures - which had been debated over the past year - could force many companies to restructure their operations and rethink how they fund themselves.

The recommendations are likely to be important for Ireland given the heavy reliance placed on multinationals here.

Ireland has already moved to close one such tax loophole by phasing out the so-called Double Irish.

However, plans for its replacement, the Knowledge Development Box, essentially a patent box,  are expected to be rolled out in Budget 2016.

Mr Saint-Amans said the OECD is “not a big fan of patent boxes which are not great in terms of fostering innovation”.

However he said countries are free to have patent boxes, as long as these boxes do not trigger unfair tax competition.

And he said it wasn’t the case that the Beps project would cost Ireland multinational jobs.

“Not the case. The only industry that may lose some jobs is the tax avoidance industry. Do we think that they create value, I doubt it,” he said.

Technology giants are seen as the most adept at exploiting loopholes, but drug makers, medical device groups, banks, fast food groups and retailers all commonly use contrived arrangements to legally cut their tax bills.

Most corporate tax avoidance hinges on transactions between affiliated companies, which reduce the taxable profit in a country where customers or production facilities are based and boost profits in low tax jurisdictions where the company has little real presence.

The OECD plans to target the main ways this is believed to be done.

The final package of BEPS measures includes 15 recommendations including new minimum standards on country-by-country reporting, which for the first time will give tax administrations a global picture of the operations of multinational enterprises.

JObs Minister Richard Bruton said that in the long term, the measures will be good for Ireland.

"Ireland has a low rate transparent system and IDA insist on substance for any companies that it supports and I think those are the three pillars that supports our offering and I think Beps is about moving all international systems to a more transparaent, clear system," he told the Irish Independent.

Kevin McLoughlin, head of tax at EY Ireland, said the Beps package includes recommendations for  “potentially dramatic changes in international tax laws and treaties.”

“We expect Ireland to legislate for the introduction of a BEPS complaint Knowledge Development Box, which Ireland expects to be most competitive, and country by country reporting in the forthcoming Finance Bill."

“For businesses, the pace, volume and complexity of tax change create uncertainty and increased risk of tax disputes. The BEPS recommendations also include significant new tax compliance obligations. Companies will need to invest in their tax function - both people and technology - to ensure they have the resources to meet these new demands”.

Peter Reilly, PwC BEPS policy leader, said the increased transparency requirements will add an additional layer of compliance burden on companies and will provide tax authorities with greater ammunition to query certain tax structures.

“However, the further guidance on the 'arm’s length' principle will mean that companies with real substance will be able to robustly defend the returns they make. As a country attracting investment based on real substance, real activity and real jobs,  the new rules have the potential to be positive for Ireland,” he said.

Ian Talbot, Chambers Ireland chief executive, said implementation of the reforms will provide some certainty for multinationals.

“Ireland is well positioned to turns these proposed reforms into an opportunity. The report’s recommendations reaffirm the legitimacy and transparency of Ireland’s corporate tax structures and outline a roadmap for a multilateral corporate tax system,” he said.

“Ireland has been proactive in ensuring that our corporate tax structures adapt to meet the highest international standards.”

Oxfam said the move should mark the start, not the end of global tax reform.

Oxfam Ireland Chief Executive Jim Clarken said many of the recommendations in the BEPS action plan don’t go far enough.

“We need a second generation of reforms that genuinely creates an international tax system which works in the interests of the majority – not the few. Otherwise this package of measures will not prevent another Lux Leaks type scandal and will not stop multinational companies cheating poor countries out of billions of euro in taxes – money which is desperately needed to tackle poverty and inequality,” he said


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