Tuesday 25 June 2019

Dan O'Brien: 'As Brexit gets all the attention, changes are afoot further afield'

Ireland has become too dependent on profit tax revenues. A move last week may bring the day of reckoning closer

Jose Angel Gurria. Photo: Eric Piermont/AFP/Getty Images
Jose Angel Gurria. Photo: Eric Piermont/AFP/Getty Images
Dan O'Brien

Dan O'Brien

All states have interests in the wider world. They pursue those interests in a range of ways: from exercising whatever power they have to persuading others to want what they want. Democracies, unlike non-democracies, must also consider their values in deciding how they act in the world. When interests and values clash, governments in democracies can be in a very difficult position.

Ireland has long been in that position on corporation tax. A comparatively low rate of tax on profits, and a cast-iron guarantee that it will never be hiked, has been central in making Ireland a hub in the transatlantic economy. But the tax regime for business here has led to frequent charges - abroad and at home - that Ireland is a tax haven for megacorporations.

It has been a particular bone of contention with some European partner countries. The constant raising of the issue in one guise or another by France, Germany and the European Commission has led to something approaching paranoia in Ireland on the subject.

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But the chances of changes taking place at EU level that would transform Ireland's corporation tax regime have always been greatly exaggerated. Every one of the more than two dozen EU member countries wields a veto when it comes to collective action on tax. If Ireland had been forced to wield that veto again and again over the years there would be reason to believe that sooner or later a government would find that it could no longer resist holding out against the wishes of all the others. But this has never happened. It hasn't happened because there are always plenty of other countries who see downsides for their economies of EU-level changes. This was to be seen - yet again - recently when a proposal for a new EU-wide tax on increasingly unpopular technology companies generated multi-country opposition.

Despite all the focus on Europe posing a threat to Ireland's profit tax regime, the real risk has always come not from the east, but from across the Atlantic to the west. Changes in the positions of the US government or US companies have always had the potential to cause the biggest problems for Ireland.

A radical change to the US tax regime a year ago raised concerns that the incentives for American companies to invest abroad would change. Despite the fact that the legislation was explicitly designed to encourage US companies to invest more at home and less abroad, there has been no sign to date that the flow of American capital into Ireland has slowed.

So far, so good from an Irish perspective. But last week something potentially very significant emerged at the Organisation for Economic Co-operation and Development (OECD), a think tank best known for its wide-ranging research on economic and policy matters.

The official leading the technical work on finding ways to curb tax avoidance by globalised companies, Pascal Saint-Amans, was quoted in the Financial Times as saying that the US position had undergone "a fundamental change". The change he was referring to was one that strikes fear into the hearts of the people who run Ireland's public finances.

Before looking at the issue and what's at stake, some context is needed.

Big companies have always employed legions of accountants and lawyers to find ways to minimise their tax bills. As more and more companies have come to operate in multiple jurisdictions over recent decades, the focus of tax professionals has moved to exploiting entirely legal loopholes at the interface of national tax systems.

The Irish authorities have closed many of these loopholes in recent years, in part because of a desire to reduce reputational damage, but also because playing by international rules is an Irish value in and of itself. The Government has committed itself to helping improve these international rules so that the opportunities for tax avoidance are narrowed.

Then last week, the OECD group working on these rules came out with new proposals. These have similarities to measures Ireland has fought tooth and nail against at EU level. Most centrally, they would see a shift in taxing companies based on where they operate to where their sales are recorded. According to reports, other big global players support the proposals, such as China, Brazil and India. But the US, still the world's most powerful country by a distance, is the country that counts. If it puts its weight behind such a profound change in global taxation, then it is very likely to happen.

For once, Irish paranoia on tax may be justified. The head of the OECD is Jose Angel Gurria, a bureaucratic entrepreneur with boundless energy. He has worked to make his organisation the brains trust of the G20, a grouping of the world's largest economies which has become the most important global forum on international economic affairs. When he spoke at an event at Davos with Finance Minister Paschal Donohoe 10 days ago he criticised "sweetheart deals" given to companies such as Apple. It seemed odd at the time that an operator as wily as Gurria would embarrass his fellow panellist in that way. His comments make more sense following the new OECD plans that emerged last week.

If the OECD discussions are now going in the direction of profoundly changing how globalised companies are taxed, Ireland won't be able to do much about it. Unlike at EU level, there are no vetoes in the OECD's bases erosion and profit-shifting (BEPS) process. While it is formally driven by consensus, if the big countries from across the world line up behind the proposal, then it will be a done deal whether the small countries like it or not.

For Ireland, the main effect would be on the public finances.

Despite the closing of the loopholes, which has likely led to less cash flowing through Ireland for tax avoidance purposes, profit tax revenues have exploded, growing by 150pc over the past half decade or so. Last year revenues topped €10bn. Ireland's overall public finances are now more dependent on profit tax revenues than almost any other country.

Nobody expected this to happen, least of all the Government and the mandarins of the Department of Finance. If the cash had been treated as a windfall there would be much less cause for concern. But none of these windfall revenues have been saved. They have all been spent. If they had been spent on one-off projects like rural broadband or a children's hospital it would be one thing. But they haves gone on spending lines, such as public sector pay, which are locked in as far into the future as one can see.

Ireland faces many big risks over which it has little or no control. That it has added to those risks by becoming dependent on revenues which may vanish is depressing.

In an accompanying column in the Business section of this newspaper and online, Dan O'Brien looks at changes to the wider international environment for small countries and how these changes could affect Ireland in the long run

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