A world of opportunity?

 

While CCCTB and some of the proposed US tax changes have been around in some shape or form for a number of years, it is in the last three years that we have seen the most significant developments in the international tax landscape. Driving forces behind these developments include political momentum and governments responding to public disquiet at the tax practices of large multinationals. We now see actions, not just rhetoric, resulting in the OECD’s BEPS project.

The BEPS project

The BEPS project, led by the OCED, has as its objective the creation of a new set of global tax rules to combat perceived tax avoidance. A key BEPS objective is to align taxable profits with real economic activity.

The OECD published its final BEPS report in October 2015. While there are aspects of BEPS that require more work in 2016 and 2017, the final proposed landscape is becoming clearer. Substance will drive the location of taxable profits and the exchange of information between tax authorities will improve significantly. The ability to avoid tax in such a climate will be more difficult.

What’s less clear is whether the new landscape will be the result of the BEPS project or the culmination of unilateral changes taken by governments around the world under the backdrop of a new BEPS mindset.

It would be more efficient if the changes were kept under the one roof, which is the objective of the BEPS project. Anything less will simply create more anomalies, more loopholes and more uncertainty. The OECD is very aware of this risk and is keen to maintain the current BEPS momentum so that countries continue to have faith in the ability of BEPS to deliver.

The OECD has already achieved certain results through the BEPS project. Country-by-Country Reporting (CbCR) has already been adopted by many countries, including Ireland.

Unquestionably, some of the changes introduced by Ireland in recent years are the result of BEPS including the abolition of the so-called ‘Double Irish’ structure. Ireland has been involved in all stages of the BEPS process. With its focus on substance, there is a genuine belief that BEPS can further increase Ireland’s attractiveness for foreign direct investment.

A bad Apple?

At the time of writing, we are awaiting the EU’s decision in the Apple case. This case was brought against Ireland by the EU as a result of an alleged breach of state aid rules.

It is not unreasonable to conclude that there is a political element to the Apple case. It is very possible that the EU will find against Ireland and that we will be obliged to fight the case through the European courts.

A prolonged legal case will cast a spotlight on Ireland, however, and could impact our reputation overseas. Given that our reputation is now very strong, such attention would be unwelcome – particularly as companies increasingly consider the reputation of a jurisdiction when assessing investment decisions.

CCCTB proposals

The EU’s CCCTB proposals extend far beyond BEPS. If implemented, they would see the allocation of taxable profits driven by factors such as the location of customers, employees and assets. CCCTB would likely see profits diverted away from small economies such as Ireland and significantly dilute the benefit of our 12.5% tax rate.

The good news is that several countries remain against the CCCTB proposals and at this point, the likelihood of CCCTB implementation is low to remote. In the view of many people, the BEPS proposals should be allowed develop before any effort is made to push through CCCTB.

Anti-BEPS Directive

The EU is also pushing ahead with plans for a directive to implement certain BEPS recommendations this year. Such a directive would require unanimous adoption across the EU by virtue of the veto option that all countries have over corporate tax matters. If implemented, it could potentially add additional costs to EU countries and impact on EU competitiveness.

This directive, the Apple case and CCCTB are examples of the EU flexing its muscles in a battle that has seen it sidelined by the success of the OECD’s BEPS project.

US developments

The US tends to be vocal about other tax regimes while failing to tackle flaws within its own corporate tax system, which has the highest tax rates in the developed world. Notwithstanding some changes to the inversion rules, there is little evidence to suggest any significant change in its stance. This should be positive for Ireland.

The Knowledge Development Box

The recently-introduced Knowledge Development Box (KDB) offers a 6.25% tax rate to companies that carry out R&D activities in Ireland. While the KDB has its drawbacks, particularly as it doesn’t work well for groups that outsource much of their R&D to group companies outside Ireland, it does add to Ireland’s attractiveness as a place to house profitable R&D activities.

The KDB also enhances our reputation with both the EU and OECD as it is fully compliant with the ‘modified nexus’ approach. While this means that it doesn’t work as well as some other competing regimes, it has the benefit of making us more attractive to groups that are keen to be associated with regimes with strong reputations.

There is recent evidence to suggest that groups are looking to “cleanse” their structures and move away from offshore traditional havens to onshore locations such as Ireland.

Conclusion

We are living in a time of great change in the corporate tax world. In my view, the opportunities for Ireland outweigh the dangers and the focus on real substance can be a positive for further international investment here.

Undoubtedly, others will seek to replicate elements of our successful tax regime but if we remain nimble, we can stay ahead of the game.

Peter Vale is Tax Partner at Grant Thornton.