Business Irish

Saturday 20 January 2018

EU tax harmoniations plans tie common sense reforms to moves that could sink State finances

Analysis

The message is clear: we cannot afford what the EU are trying to sell. Stock picture
The message is clear: we cannot afford what the EU are trying to sell. Stock picture

Peter Reilly

Seamus Coffey, an economist and lecturer from UCC, is now the face of Irish taxation and he has had a pretty hectic few days!

On Wednesday Mr Coffey appeared before the Budgetary Oversight Committee in his new role as Chair of the Irish Fiscal Advisory Council which followed hot on the heels of the much anticipated 'Coffey Report' that focused on Ireland's tax code.

Both his appearance before the Committee and his detailed report give plenty of food for thought on the future of Ireland's corporate tax code and the ever present threats to our complete sovereignty on tax matters.

A €4bn adjustment, as put forward by Coffey as the potential revenue loss that would stem from EU tax harmonisation, moves the tax policy conversation quickly from a theoretical matter to a budgetary one.

The CCCTB is effectively two separate proposals that have been pulled together. The first relates to EU countries coming to an agreement on appropriate rules that would mean that the tax base of a company would be the same irrespective of whether it was situated in Ireland or, say, France.

The theory here is generally sound as a common set of rules would reduce the compliance burden on companies, however it would restrict the ability of countries to make specific tweaks necessary to help achieve their current economic goals.

The second part to the proposal though is where the real issue lies.

The consolidation suggested by the EU commission would lead to a change in the way tax revenues have thus far been allocated as it would focus on apportioning these revenues based upon the size of the various markets in which a product/service is sold rather on the value chain which led to the creation of the product/service.

Clearly Ireland would draw the short straw in this regard.

It is timely therefore that Mr Coffey has put this in context and has stated, in his view, that this threat is a bigger risk to the Irish economy than Brexit.

The message is clear: we cannot afford what the EU are trying to sell.

It is for this reason that we can potentially be somewhat relaxed about CCCTB, in that no government, irrespective of their political leanings could make a decision to move forward with a proposal which, over time could put the country's public finances in such a precarious position.

However the threats unfortunately do not start and end with the CCCTB. In the last few days the EU has stated its desire to address the taxation of the digital economy.

European Commission President Jean-Claude Junker has suggested that for this proposal countries should not be afforded a veto.

Would this not represent a blatant infringement on sovereignty? Crucially the OECD have weighed in and suggested that the EU would be best served to wait until they finish their work on this difficult area - too many cooks, etc.

The problem though is that the EU are not generally minded to heed advice from the OECD, especially at a time when the power struggle on tax matters between Paris and Brussels has never been greater. It is clear, however, that tax rules have struggled to keep pace with the digital revolution, but blunt means of taxation such as a turnover tax will lead to inequitable results. Why should a software provider's delivery method (ie, via download rather than via a physical disc) impact its tax bill?

I am not suggesting that the solution is obvious or easy but rushed law often leads to bad results. No problem however is insurmountable and it is incumbent on those impacted (including Ireland and the large digital MNCs) to lead the charge on devising the best way forward, or else proposals like the EU's won't go away and countries will eventually take unilateral action of their own.

So where does this leave Ireland?

In a time of unprecedented international tax policy reform the Coffey report both serves as a demonstration that Ireland's corporate tax code is sustainable, fair and transparent, but it also acts as a blueprint for future modernisation and reform.

Certainty today, possibly more so than low tax rates, is a key component contributing to investment decisions and if Ireland uses the Coffey report as a road map it should reap the benefits in terms of increased investment being placed here on the back of a stable and sensible regime.

Peter Reilly is a tax policy leader at PwC

Irish Independent

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