Lost in a lack of Translation

Sep 10, 2018

Sunday Business Post, 9 September 2018
This week saw the publication of two major tax policy documents.  

The first of these, published by the OECD on Wednesday morning is a review of tax policies in 38 countries.  Its findings are available in eight different languages.  

The second, from our own Minister for Finance, is a corporation tax roadmap.  So far it is only available in English.  An Irish version may become available at some stage.  It is this report however that needs publication in eight languages. 

Billed as a roadmap to outline future changes to the Irish corporation tax regime, it is also a chronicle of the journey already travelled.  It lists the various international initiatives to nullify cross-border tax planning by multinational corporations, and Ireland's role in quenching those opportunities.  As such it is an exercise in national reputation building; don't just look at what we plan to do, look at what we have already done.  

Despite the suggestions in commentaries ranging from pub debates to the New York Times musings of economist Paul Krugman, countries do not sit on their hands when it comes to taxing the multinational companies that operate within their shores.  The challenge is in applying tax accurately and fairly to cross border transactions.  Revenue authorities wrestle with an out of date international tax system, designed in colonial times to ensure that corporate profits could be taxed in the capital of the Empire rather than where the business operated from.  They have been hampered by the ability of organisations to pick and choose from tax systems across borders.  Many modern businesses makes their profits not from harvesting crops or digging materials out of the ground but from harvesting data and scientific digging to create know-how.  

So what kind of tax planning is being targeted?  Unlike an individual taxpayer, a company can act as a member of a group of companies under common ownership, or have branches in many different countries.  It can sell its goods to its own subsidiaries or branches in other countries, structuring prices so that the most profit is made in low tax countries and the least profit is made in high tax countries.  This practice is known as transfer pricing.  Transfer pricing has long been a target in the fight against international tax planning.  

Another avoidance strategy is known as a hybrid.  As a general rule, if the company makes a payment and is granted a tax deduction in one country, the payment it has made should be taxable in the country in which the payment is received.  Hybrid instruments can create a mismatch in this cross-border treatment, to the detriment of the exchequers of both countries concerned.  Some companies establish trading operations in a foreign country with a more benign tax environment, even though they might have no particular commercial reason for doing so.  Such foreign adventures, known as Controlled Foreign Companies, also feature as a target in the roadmap.

 

None of these targets were identified out of the blue.  Almost a decade ago the G20 economies, decided that something needed to be done to counter cross-border tax planning.  That political concern led to a report from the OECD which became known as BEPS – a strategy to counter tax Base Erosion and Profit Shifting.  Many of the principles established in BEPS have since been codified into EU law.  A large element of the current Irish roadmap outlines how and when EU law will be transposed into Irish law. 

Some of the BEPS initiatives have already resulted in corporate restructuring which in turn has contributed to an increase in corporation tax receipts in this country.  It's too early to say if the continued curbing of multinational tax planning via BEPS will continue to result in significant increases to the tax yield.  That is mainly because the world's largest economy, the US, has been carrying out some tax reforms of its own.  The impact of the 2017 US Tax Cuts and Jobs Act is still being felt.  In some instances regulations continue to be issued from the US Treasury Department to clarify the operation of some of the more labyrinthine provisions of the act.  

Although the main achievements in corporation tax terms of the US Tax Cuts and Jobs Act is to bring down the headline corporation tax rate in the states from 35% to 21%, there were also significant anti-evasion and anti-deferral measures.  These bring more profits into the charge to US corporation tax, but the corporation tax well isn’t bottomless.  Other jurisdictions where multinationals have activities are bound to lose out. 

Amid all this change, international reputation is more important than ever in attracting foreign investment.  Companies need to know that they are not operating in a regime which can result in confiscatory levels of taxation on cross border transactions, and therefore need the assurance of an environment where all the internationally accepted rules are the norm.  While multinational corporations can choose this degree of comfort, smaller indigenous operations don't have the same choice.  

For that reason, indigenous Irish business may well look at the Minister’s roadmap with some alarm.  The current document does not rule out the extension of transfer pricing rules to smaller indigenous industry which is usually disregarded by revenue authorities for reasons of scale.  That mightn't matter so much if it wasn't for the two tier Irish tax system which taxes most corporate profits at 12.5%, but reserves a special 25% rate for passive income such as rental and investment income plus an additional 20% tax reserved for family run companies and professional service companies.  Keeping on the right side of transfer pricing rules where income streams are taxed at different rates and on different types of corporate taxpayers may prove quite a challenge. 

Those concerns aside, the corporation tax roadmap by and large constitutes a proportionate response to the obligations placed on this country by virtue of our OECD and EU membership.  But even if the roadmap was available in eight languages, I'm not sure if it would fix the charges of a poor tax reputation which our competitors are so happy to level at us.  Irish corporate tax policy is the dog that has been given a bad name.  It will take more than this roadmap to fix that problem.

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