It’s not what you pay, it’s where that you pay it

Dec 18, 2017

Sunday Business Post, 17 December 2017

The last few days have seen a fundamental change in the approach to how much multinational companies should contribute in the form of corporation taxes.  Up to now, the tenor of the debate officially at least has been about fair share.  No longer.

The debate on US tax reform has, if nothing else, burst some fake bubbles of concern about tax fairness for multinationals, held together by the soft soap of tax equity, and inflated by the need to make contributions to support the society in which they operate.  The US tax reform bill, which now looks like it will be passed in the first year of the Trump presidency, will unashamedly bring tax revenues “back home” to the States. 

Sucking Revenues

While the headlines are all about cutting rates and adding €1.5 trillion to the US Federal deficit, there is much less talk about how the measures could suck tax revenues from countries outside the US and spit them into the coffers of Uncle Sam.  On Monday last, the U.S. Treasury predicted that its tax policies would result in additional tax collected thanks to economic growth.  That commensurate growth in taxes collected would eclipse the €1.5 trillion over a ten-year period.

It’s easy to be sceptical about economic forecasts, particularly if the evidence for them doesn’t extend beyond a one page statement.  However these bullish predictions received perhaps unwitting support from the finance ministers of five EU countries.  As reported on the same day the finance ministers of the UK, Germany, France, Italy and Spain (the five largest EU economies) wrote a joint letter to US Treasury Secretary Steven Mnuchin to outline their concerns about some of the proposed US tax proposals.

These European fiscal grandees told the Treasury Secretary that while the establishment of a modern, competitive and robust tax system is one of the essential pillars of a state’s sovereignty, it had to be done in such a way as not to contravene any international obligations, specifically the taxation agreements which already exist between the US and other territories.  It’s wise counsel, though the same countries don’t follow it in their all too frequent attacks on Irish tax legislation and policy.  Such is the lot of a small country.

Tax Bonanza

I haven’t seen the response from the US Treasury Secretary.  If there was one I suspect it would have been suitably diplomatic, but he would surely also have read between the lines of the European complaint.  It’s arguable that the finance ministers are not really exercised about international conventions or agreements.  Instead they are just worried that the US tax reforms will draw money out of the tax take from companies in their own jurisdictions.  That concern gives credence to the US claims of a future tax bonanza following tax reform.

I’m not sure that anyone can predict with any degree of reliability the effect of major tax reform over a ten-year period.  While the direct effect of a tax change is fairly predictable in the short term – a reduction of X percent on a tax rate will cost Y euros a year – longer term predictions are more suspect.  That’s because there is behavioural impact as well as an economic impact.  Business taxpayers tend to rearrange their affairs to accommodate and adjust to new tax regimes. 

Grounds for Concern

Given these uncertainties, have the European Finance Ministers grounds to be concerned?  In their letter they identified three potential outcomes in the US proposals with cross-border reach - an excise tax on some foreign (that is, non-US) sales, limiting US tax deductions for some types of payments to foreign subsidiaries, and a special tax on foreign royalty payments.  On the principle that every additional dollar in taxes a multinational pays in the US can mean a euro less paid in the EU, and vice versa, US tax reform will cost European exchequers.

Nevertheless, there is some hypocrisy on the part of the Europeans.  That US proposal on excise tax resembles in all but name the “equalisation levy” currently promoted by some of the same Finance ministers which would tax the gross receipts from online cross-border trade, irrespective of where a company is located.  Why is it OK for the EU to try and tax companies where their markets are located, but not OK for the US to do the same thing? 

The only way to reconcile these conflicting approaches is to recognise that for all the political talk about reforming the tax regime for multinationals on both sides of the Atlantic, the real concern is not how much multinationals pay, but where they pay it.  “Our share” has replaced “fair share” as the political imperative. 

The US position is now more coherent than the European position.  As the US Treasury Secretary himself put it, changes to US law “will also make American businesses more competitive so that workers will have access to more, better-paying jobs.”  The link between corporate tax policy and job creation seems to have been lost in European tax policy.  For the larger EU countries, tax competition is not about jobs for their citizens – it is merely about winning a bigger share of taxes from the corporate sector.

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