Business Irish

Friday 22 March 2019

Paschal's delicate EU tax balancing act is only going to get harder still

Digital tax looks to be essentially dead in the water, but further moves towards integration are afoot

Juggling act: Paschal Donohoe is trying to satisfy the interests of Ireland and the EU. Photo: Mark Condren
Juggling act: Paschal Donohoe is trying to satisfy the interests of Ireland and the EU. Photo: Mark Condren
Gavin McLoughlin

Gavin McLoughlin

The great political issue of the day is whether the world's population believes in globalisation, in sufficient numbers, such that the current system can be kept on the road.

The answer is by no means clear.

In the US, President Donald Trump shot to power by railing against the loss of American jobs to other countries and promised economic protectionism to stem the tide.

In the UK, the vote for Brexit was fuelled by concerns about EU countries having a say in Britain's affairs and by free movement rules that focused much of the 2016 referendum campaign on the issue of immigration.

Ireland is different, so far. Most people would probably agree our experience of globalisation has been, on the whole, positive.

People's ability to move and trade across borders has helped this country become a hub for the world's multinationals.

Consensus: A watered-down digital tax may soon be back on European Parliament’s agenda. Photo: REUTERS
Consensus: A watered-down digital tax may soon be back on European Parliament’s agenda. Photo: REUTERS

EU membership has seen vast sums of development capital flow into the country, helping to boost infrastructure.

But after decades of these benefits, perhaps now we are beginning to feel the downside of globalisation.

Ireland's corporation tax regime is consistently cited as a key pillar of our FDI-friendly jurisdiction. The comparatively low headline rate of 12.5pc is both an incentive to firms to come here and a symbol that the country is business-friendly.

But our wider tax regime has also proved remarkably useful for big multinationals looking to pay essentially no tax at all.

Protection: Trump’s base got behind his ‘America First’ agenda. Photo: REUTERS
Protection: Trump’s base got behind his ‘America First’ agenda. Photo: REUTERS

It is arguably a public company's duty to its shareholders to pay as little tax as is legally possible.

But what is legal, what is ethical, and what is socially and politically tolerable may all be different things.

That's especially true when those casting an envious eye on multinationals' low tax profits aren't just PAYE workers and others in the so-called squeezed middle, but also French President Emmanuel Macron and many of those working the EU machinery in Brussels.

EU moves on corporation tax reform have been giving Irish finance ministers headaches for years.

Target: France’s Macron has his eye on multinationals’ low tax profits. Photo: REUTERS
Target: France’s Macron has his eye on multinationals’ low tax profits. Photo: REUTERS

And despite a successful year on this front in 2018, Paschal Donohoe will face more challenges next year and well beyond.

Traditionally the consensus has been that it's not fair for a company to be taxed in multiple countries on the same income or capital.

But when companies have activities in multiple countries, a question arises as to what amount of tax should be paid in each of those countries.

One school of thought might be that the tax should be paid where the company is based. This is how the Irish corporation tax system works, with Irish tax being charged on the worldwide profits of an Irish company. This is called a residential system.

Another is called a territorial system, where the tax is paid in the same country as the income is generated.

Brexit has been a galvanising issue for the UK. Photo: Bloomberg
Brexit has been a galvanising issue for the UK. Photo: Bloomberg

And these territorial principles underpin one of the big reform efforts that has been underway at EU level - the so-called digital tax. Miffed at low tax paid by hugely profitable tech companies, the EU Commission wants long-term reform. But as that is a couple of years away at least, the Commission came up with a temporary solution that would tax big tech companies' revenues.

Only revenues from certain activities were to be included, but an important part of the plan was that the levy would apply across multiple EU member states. Each country would be entitled to tax the company, once revenues were generated from users in that particular member state.

But to get the proposal over the line, the Commission needed unanimity, meaning Ireland had a veto.

Why might Ireland want to have vetoed the tax though?

First, there's a natural sensitivity about European interference in our corporate tax regime, given the criticism of the 12.5pc tax rate over the years. But there's a more straightforward reason too - it would cost us money.

Revenue officials told the Oireachtas Finance Committee in May that the move could hit the Exchequer to the tune of €160m. That's because digital tax paid could be offset against corporation tax. In other words, companies would pay less tax here if they're paying more tax elsewhere in Europe.

Luckily for Ireland, we weren't the only country unconvinced by the plan and it looks dead in its original form.

But there's no sign of France, Brussels or others who see the current system as unfair backing off.

Why would they? After the votes for Brexit and Trump, political leaders everywhere are becoming super-sensitive to the public mood, especially when it's about a system where there's an obvious disconnect between those who feel they pay for everything and big business that picks up the profits. A watered-down digital tax is already back on the European agenda. The idea is to plough ahead with an online levy but only on advertising revenue.

Ireland's position has been that the best place for reforms to take place is at the Organisation for Economic Co-operation and Development (OECD), a 36-member international group, with many EU countries as members.

But big non-EU economies like Japan and the US are also involved, meaning any solutions agreed can be more properly described as international.

For Ireland, the OECD is reassuringly slow-moving, but that glacial speed is a major factor behind the simultaneous push for reform at EU level.

Besides, if the OECD ultimately takes a similar tack to the EU, on digital tax, Ireland might find itself in for a bumpy ride.

However, digital tax might only be the tip of the iceberg. A more serious issue for Ireland would be a so-called common consolidated corporate tax base (CCCTB) coming into force across Europe.

That's an EU proposal for calculating every company's tax bill based on the same rules, regardless of where they are in Europe.

The 12.5pc corporation tax rate would remain the same here, but the rules for assessing what profits the rate is levied on would be set in Brussels.

Irish Fiscal Advisory Council chairman Seamus Coffey has said that if this policy were introduced it could be worse than Brexit for the Irish economy.

Corporation tax receipts are soaring here, and any impact on those would be huge for the economy. In addition, Ireland's attractiveness as a location for FDI would be hit by the CCCTB. What's the point in coming to Ireland for low taxes if we can't offer you that any more, because the EU is determining what profits are taxable?

The CCCTB is a very complex proposal and, as with the digital tax, Ireland has a veto on it. But in an era when our closest EU partner is leaving the bloc, and new alliances need to be formed to achieve our interests at EU level, wielding a veto is a difficult thing to do.

Paschal Donohoe has a delicate balancing act to carry out. On one hand we don't want to be seen as recalcitrant or obstructionist towards legitimate reform, but on the other we don't want to lessen the amount of FDI coming into our economy either.

Almost three years ago this country put on a big, colourful celebration of the 1916 Rising. Clearly we value independence, but no movement for our equivalent of Brexit has taken hold in a serious way here.

That's probably a reflection of the economic damage such a move would cause, but one wonders just how far along the path of European or global integration Irish people would be willing to go.

Being part of the club involves a complicated interplay of give and take, as the British are belatedly realising.

Will Irish people really be happy to have major decisions about our tax regime made in Brussels, or at the OECD in Paris? If European momentum is maintained we're going to find out. Maybe then we'll see some of the divisions that have emerged over globalisation in other parts of the world emerge here.

Irish Independent

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