If we build the right system of corporate taxation in Ireland, they will come
Last Tuesday represented the end of the Department of Finance's public consultation period regarding our corporate tax system. It was a self-created opportunity to stand back and determine its good and not-so-good aspects in terms of certainty of application and competiveness. So what can we do for FDI? What about the next "Aghaidh leabhar"? Where will it come from? What can we do to make this happen?
In the 1989 movie Field of Dreams Kevin Costner hears a solitary voice in a vast field whisper "if you build it they will come". We did and they did. We built the IFSC and we became a global force in financial services. We reduced our corporate tax rate and many countries now seek to emulate it; just look at what British Prime Minister Theresa May and US President Donald Trump want to do. But we're not done - our system is a work in progress. Let's start with the home-grown sector.
Right now deposit interest rates are low. The Deposit Interest Retention Tax (DIRT) rate is 39pc and will decrease to 33pc by 2020. That would then make it the same as the rate for capital gains tax, and that in itself is too high if we want to secure additional investment. Why not bring about a tax at the standard rate on returns on investments made by individuals in startup companies with potentially higher yields?
Some will say that this will benefit those who have such money available on deposit, and that may be the case. But Myron Scholes, who shared the Nobel Prize for economics, once wrote that success is achieved when the tax rules subsidise activities that benefit society as a whole more than they benefit the individuals engaging in the activities. You can see his point. If that tax-efficient investment helped a startup that would not have got off the ground in the first place then is that not the very definition of success?
As much as we argue - and still do- against the introduction of the Common Consolidated Corporate Tax Base (CCCTB) it did suggest the introduction of a notional equity deduction for companies, a good thing. I know mentioning CCCTB and "good" in the same sentence is the very essence of controversy. However, I'm only talking about one element here and Finance Minister Michael Noonan has said it's worth looking into.
This proposal allows a deduction for a percentage of equity increases in a company while taxing by the same percentage when equity drops. A substantial proportion of Irish domestic small and medium enterprises have little debt, so it's appropriate that companies which are predominately equity financed are provided with similar reliefs afforded to those who are more heavily leveraged.
We have a startup company relief in tax law but why not introduce a refundable startup company credit? This would be a more relevant relief for startups dealing with the commercial difficulties (which to a large extent revolve around cash flow) they typically face. Consideration could be given to following the UK's example in its recent proposed reforms regarding utilising company losses. These changes allow British companies significant flexibility on how current year reliefs are set against various profits ensuring cash remains driving the business forward.
Moving on to international tax and FDI. The OECD and EU have suggested changes be made to countries' tax laws internationally. We've agreed to implement these changes and rightly so given they maintain our reputation all over the world. However, within the proposed changes there are options and a country can choose the more attractive options over lesser ones depending on its economic and social needs. So choosing wisely is key.
For example, Ireland has over 70 tax treaties with countries around the globe and in June of this year we'll sign another one (the OECD's multilateral instrument) which will amend all the others instantly. Various options are possible within that instrument and one relates to the existence of taxable presences (the legal term being "permanent establishments") in a country. If this option was chosen then taxable presences could show up where they hadn't before. That sounds great but not all countries are taking this option, for example we know the UK isn't going down this route, so going that way would mean we would be suddenly less attractive than the UK in a post-Brexit world and any other country that chooses similarly.
The EU has brought about an anti-tax avoidance directive which we've agreed to legislate for and it contains various options, so choosing wisely there is equally important. From an international tax perspective we continue to meet our obligations. However, from an FDI perspective we should not seek to implement what may be perceived as a best-in-class regime if it puts us as at the back of the class in terms of attractiveness compared to our competitors.
By international standards the Irish provisions allowing interest deductions on a company's borrowings and relief for foreign tax deducted on income are overly complex. They make Ireland a much less attractive jurisdiction for investing in companies, both foreign and domestic. At a time when Ireland is faced with competition from Paris, Frankfurt and Luxembourg looking to 'win' high-value financial services business post-Brexit, it's critical that such measures be addressed to ensure Ireland is a highly-attractive location for companies who want to rebase their EMEA or global operations. April 4 was an opportunity to craft our future. We've met and continue to meet our international tax obligations. Now is the time to ask not what we can do for international tax compliance but what national tax can do for us. We've done it before. We can do it again. We will do it again. Is feidir linn.
Tom Maguire is a tax partner in Deloitte
Sunday Indo Business