US tax reform is still likely, but there’s work to do on the detail.

US tax proposals have run into the sort of roadblock that only the US system can produce, with differences between both the House and Senate having the potential to delay changes. At the time of going to press, it is difficult to predict what compromise will be reached and what elements of the respective reform packages will be dropped. Or indeed, what might be added.

From Ireland’s perspective, the general view is that our relatively low tax rate in Europe will continue to make us an attractive location for US groups to do business. It is also worth noting that when you include state and local taxes, the US corporate tax rate will still be double the Irish rate.

The biggest danger to Ireland in the immediate aftermath of the US election was the so called “border adjustment tax”, which would heavily penalise Irish companies selling into the US. Due to significant lobbying, this element of the reform package was dropped. However, a potentially lower tax rate for US exporters has emerged in the new proposals. This is probably the key element to look out for as the haggling continues.

EU not letting go on various fronts

Outside the US, the EU’s drive for changes to the taxation of digital companies continues. In short, the EU would like to see greater direct taxation in the jurisdiction where consumption occurs as opposed to where the product or service originates. To most people, taxation at point of consumption looks like VAT – but not in the eyes of the EU.

It is difficult to see how the EU’s digital tax proposals would sit comfortably with the OECD’s BEPS proposals, which place much emphasis on the link between value creation activities and taxable profits. Reconciling this with the EU proposals looks difficult.

As the use of tax havens seems to be at the heart of EU concerns, in my view the EU proposals around the digital economy should be put on hold until the OCED BEPS package has been developed properly and tested over a period of time. If concern remains that tax avoidance in the digital context has not been sufficiently addressed, further measures can be considered at that point.

The EU hasn’t given up on its tax consolidation plans either, with the CCCTB proposals still very much alive. CCCTB seeks to attribute profits based on sales, employees and assets, which would impact negatively on small countries such as Ireland. Again, it is difficult to see the rationale for CCCTB if the OECD’s BEPS plans are endorsed and implemented by member states. However, the EU hasn’t shown any signs of letting this one drop.

The changing pace of much EU tax reform depends on who holds the presidency. With low-tax Bulgaria taking over in January, don’t expect to see much movement on CCCTB in the first half of next year.

Ireland’s reputation still strong

The Panama papers – and more recently, the Paradise equivalent – have further projected tax planning into the general domain. There is increasing pressure on governments to be seen to be doing their part in tackling tax avoidance.

In Ireland, attention moved recently to the so called “Single Malt” structure, which involves an Irish incorporated but Maltese tax resident company. Such a structure is not unique to Ireland, with many developed countries including our nearest neighbour having a clause in their tax treaties that the place of effective management determines tax residence, not the place of incorporation.

In theory, as both the Double Irish and Single Malt do not involve the avoidance of Irish tax per se, they shouldn’t be our problem. However, the adverse coverage surrounding the Double Irish structure had an impact on our reputation and the general view is that we made the right call in amending our tax residence rules. Maintaining our reputation was, and is, key.

The Finance Minister has said he will look at the revised rules and whether they are sufficiently robust in light of more recent coverage. There are good arguments that no changes are required to our existing rules, which are consistent with other developed countries. Whether the tax rules in certain other jurisdictions are appropriate is a matter for another authority to determine, such as the EU or OCED. Ireland cannot realistically be expected to oversee the tax rules of its treaty partners.

In summary, the uncertainty continues. Unfortunately, on many fronts, it doesn’t look like that uncertainty is going to be resolved any time soon. 

For businesses operating across borders, accurately predicting tax costs in cash flow projections beyond the immediate period remains precarious.

Peter Vale is Tax Partner at Grant Thornton.