Common corporate tax plans are bigger than Brexit - and may not suit us
It's all go in Europe. We've seen anti-avoidance directives, mandatory disclosure proposals, the pitch for the taxation of digital transactions in Tallinn - and the Common Consolidated Corporate Tax Base (CCCTB). Economist Seamus Coffey said this last one was bigger than Brexit for corporate tax purposes.
The CCCTB currently requires unanimity to become law. European Commission president Jean-Claude Juncker's State of the Union Address 2017 suggested that moving to qualified majority voting in certain tax areas can be done "if all heads of state or government agree". Finance Minister Paschal Donohoe has said our Government would resist such a move, and one can see why.
Many countries have raised legal concerns about the common tax base, which dates back to a paper in 2001. Cash matters, but so does the rule of law. But it's still being discussed at EU level.
The European Commission recently explained a carrot in the proposal. In August, it published a working paper assessing R&D provisions under a common corporate tax base, and said the common base presents "a unique opportunity" to "massively increase support for business innovation". So why are we not signing up? Simple - it's bigger than Brexit.
The CCCTB has two steps: Step one is a tax rulebook containing the proposed R&D regime among other rules for all EU member states. Step two requires consolidating taxable profits using that book for corporate groups operating across borders, and allocating those profits across the EU using various criteria.
Ireland's R&D regime has been described as "best in class". It's arguably kilometres ahead of the EU proposal. Under our rules, the taxpayer company can claim a tax credit comprising 25pc of the R&D expenditure concerned. However, where the R&D expenditure is tax-deductible, then our law generally brings about a potential reduction in cash tax payable of up to 37pc, being the 25pc credit added to an effective 12pc reduction in tax for the related costs; the latter arising when computing the company's taxable profits.
The EU proposal suggests a full deduction for the R&D expenditure, with an extra 50pc of such costs (with certain exceptions) incurred during that year. Where the R&D costs exceed €20m, the company deducts 25pc of the excess. In addition, certain start-up companies may deduct an extra 100pc of their R&D up to €20m. Take a well-established company incurring R&D costs of €30m. Under the EU proposal, it could deduct, including the various 50pc and 25pc super-deductions, an amount of up to €42.5m in computing its taxable profits. This means the reduction in cash tax would be almost €5.3m. Not too shabby. Our version comprises a possible deduction of the full €30m in computing taxable profits and an additional tax credit of 25pc of that figure, resulting in a cash tax reduction of almost €11m.
That's just one element of the EU's proposed common tax rulebook. Ireland, along with other countries, has responded with a "non merci" to the European Commission, arguing it contravenes EU law itself. And that's before you get into the detail of its R&D carrot, which is arguably more stick to our law. The question then is, why would Ireland move to such a regime?
The recent Tax Strategy Group (TSG) papers were published in advance of Budget 2018 and noted that the purpose of the R&D tax credit is to encourage companies to undertake R&D activity in Ireland, supporting jobs and investment here. It's working. In 2015, 1,534 companies availed of the credit, with a total exchequer cost of €708m.
The TSG notes that in October 2016, the Department published an economic evaluation of the R&D credit, which found "60pc of the R&D undertaken by companies is due to the credit". Ireland's credit also has a repayable element which the EU version doesn't, allowing companies to request a refund if their R&D claim is greater than their tax liability. The TSG notes that the introduction of the repayable element coincided with a substantial increase in the number of companies availing of the tax credit.
Because of human audacity, curiosity and tenacity, R&D will happen. JFK famously said "We set sail on this new sea because there is new knowledge to be gained, and new rights to be won". The R&D credit may not make it happen, but it will be a factor in determining "where" it happens - and we want it to happen here. There are improvements that can be made to the credit, but CCCTB isn't one of them. Neither is giving up our veto on tax matters. One size just doesn't fit all, particularly when we, as a small open economy, punch above our weight in the first place.
Bruce Lee, pictured, once said "Adapt what is useful, reject what is useless, and add what is specifically your own". So, to end on a positive note on the EU proposal, it does suggest an "Allowance for Growth and Investment" to deal with the position where interest on debt can be tax-deductible, but profit distributions cannot.
According to the common rulebook, companies could be given the allowance where certain increases in equity would be deductible from the taxable base subject to certain conditions. Former finance minister Michael Noonan noted earlier this year that this element of the CCCTB proposal "makes an interesting case for giving tax relief for equity investment in a business, which is something which should be examined further".
We are now firmly in pre-Budget mode. So adopting a rhetorical approach again and taking Lee's advice, should we not just adapt the AGI to our law, continue to reject the CCCTB and add to the R&D credit?
Tom Maguire is a tax partner in Deloitte
Sunday Indo Business