A haven within a haven

Jan 29, 2018
Sunday Business Post, 28 January 2018

There is always one isn’t there?  One begrudger, one individual with the awkward question.  This week, for the Taoiseach in the European Parliament, the begrudger was Green MEP Philippe Lamberts from Belgium.  He was the one using the “tax haven” expression.

The irony was clearly lost on the MEP.  He is a democratically elected representative to a bloc of nations which relies for its very existence on taxation policy.  No country can become a member of the EU without first agreeing to adapt tax policies which are protectionist. 

There is quite a long list of conditions a country must meet before it can join the EU, but close to the top of this list is a willingness to implement a VAT system using the EU rules.  A country must surrender its control over how its consumers are taxed as part of the price of EU membership.  Key to the success of this system is how they are taxed, not how much.  That is why VAT rates are allowed to vary widely across the EU member states.  What is not allowed to individual countries is the freedom to categorise the goods and services on which VAT is charged. 

Instrument

VAT also works as an instrument for securing the EU borders.  EU countries are not allowed to penalise imports and exports of goods and services among themselves, but they must demand upfront payments of VAT on most goods imported from so-called third countries – that is- any country which is not a member of the EU.  While there are terms and conditions and workarounds this upfront payment requirement makes for a significant cash flow cost for many importers.  Typically they will have to pay an extra 20% or more to the local taxman when importing goods from outside the EU. 

Post Brexit, this aspect of the VAT system will have a knock-on effect for many EU countries importing goods from the UK.  It’s a consequence of Brexit which has only just begun to dawn on the UK political system.  Last week the UK Parliament’s Treasury committee got very bothered about the impact on future UK trade of this particular “unknown known”.  It has demanded reports and analysis from HMRC, the UK Revenue authority, on the likely extent of this further cost of Brexit. 

The EU also relies for its coherence on customs, a common obligation shared across EU member states, to preserve the integrity of the trade borders.  Goods from outside the EU must be penalised with tariffs quotas and declarations, goods within the Customs union must not.  Like VAT, this requirement has broader policy consequences. 

CETA, the much vaunted trade agreement between Canada and the EU, insists on all parties having tight borders and customs controls and one of its advantages is having “simplified” rules for determining where goods came from in the first place.  As a model of a modern and comprehensive free trade agreement, CETA confirms a precondition for any serious trade deal.  The participants must be able to manage their borders.

Conspiracy Theory

The rigours of EU VAT and customs law exists to ensure that the economic policies of member states are preserved - that is why most countries joined in the first place.  Whether it’s tourism or agriculture or manufacture or information and communication technologies, EU tax policy conspires to ensure that those industries in the territories of the EU member states are favoured.  Does that make the EU itself a tax haven?

Irish corporation tax policy has since the 1950s been about attracting corporate investment from beyond our own shores primarily towards job creation.  As Stephen Kinsella put it in these pages last week, the best social programme for poverty alleviation in the world is a job.  In recent years we have progressively aligned our corporation tax system with all of the important European and international norms, except for the rate.  Does that make Ireland a tax haven?  Or worse, are we a corporation tax haven within the EU’s very own VAT and customs tax haven?

Perspective

It all depends on your perspective.  I suspect much of the EU institutional support for Ireland’s position in the first phase of the Brexit talks derives not just from the kind of fellow feeling that the Taoiseach managed to elicit from most of the EU parliamentarians this week.  It also stems from the more pragmatic recognition of Ireland’s critical role in policing future borders between the UK and the EU post Brexit (be they invisible, frictionless, virtual or non-existent). 

If the EU wants us to ensure that its tax policies, designed to favour EU industry, are preserved, should it not return the compliment and allow us to preserve our own domestic tax policies?  Why should it be driving forward proposals like the Common Consolidated Corporate Tax Base (which would move tax yields from smaller markets to bigger markets) or the so-called Equalisation Levy on digital companies (again which favours countries with bigger markets)?  If a country is aligned with the general rules of engagement, the particular tax rates should not matter just as they don’t for VAT.

There are questions we can ask back to the EU in response to the tax haven charge levelled at us in the EU parliament this week.  With Brexit negotiations for Phase 2 due to get in to full swing there might never be a better chance to ask them.

Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland