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On Wednesday 10 February, the Institute’s Director of Advocacy and Voice, Dr Brian Keegan joined Paul Tang, MEP (NL, S&D), Chair of the new European Parliament subcommittee on Tax Matters and Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration to debate the “Future of Corporation Taxation in Europe over the next 10 years.” The event was convened by the Institute of International and European Affairs (IIEA), Brussels. In his comments, Dr Keegan set out his views on Corporation tax from an Irish and small Member State viewpoint. He observed that tax is a constant source of headline news in Europe, something that is not always the case in other parts of the world, and he reflected on the underlying assumption in Europe that the current system is unfair.  Dr Keegan referenced the way in which the Apple case has become a lightning rod of this sense of unfairness in Europe, but he also noted that the world has changed since 2016 when the Commission first issued its findings against Ireland in this case.  The tax point at issue in the Apple case is no longer an issue, according to Keegan, resolved neither by Irish legislation nor by European Commission activity but by changes in US tax law, namely the US Tax Cuts and Jobs Act of 2017. He argued that future history books will note the Apple case as one of the last tests of an old corporation tax system before it became displaced by a new regime involving where companies generate their sales as well as where they generate their value.  That change will present challenges for small countries like Ireland where the capacity of companies to generate profits here is not matched by the size of the domestic Irish market. It is not just the US system which has moved on. The underlying rules of the global corporation tax collection system were created over a century ago. The old ways seem increasingly inappropriate in a world where goods are internationally traded and cross-border services are provided, the latter often without need for any physical movement of either people or goods. Now the concepts of company management and control as factors in deciding where tax is paid (and which helped give rise to the Apple conundrum) are the focal point for the international corporation tax reform agenda led by the OECD. Dr Keegan noted the dampening effect of the COVID-19 pandemic on the OECD negotiating process, but with over 130 countries involved, it has garnered some momentum, and with the Irish Department of Finance estimating that proposed reforms could see the Republic’s corporate tax base shrink by between €800 million and €2 billion, it is a critical reform process for Ireland to be a part of.

Feb 12, 2021
Thought leadership

  Originally posted on Business Post 17 January 2021. Last Friday, the office of the Revenue Commissioners made 2020 statements of account for several hundred thousand taxpayers available via its website. For many workers, this was not good news. Between March 26 and August 31 of last year, 664,500 employees had their wages subsidised under the temporary wage subsidy scheme (TWSS). The PAYE system normally takes whatever taxes are due out of pay packets as wages are paid. However, because of the way the temporary wage subsidy scheme worked, the PAYE system did not capture all of the tax due on subsidised wages. Further, because the collection of tax due on employer benefits was suspended, employees with company cars or subsidised health insurance will also owe tax for 2020. Another cohort, people who were laid off because of the national pandemic response and received the Pandemic Unemployment Payment (PUP), will also face income tax bills. At the height of the lockdown last year, as many as 600,000 people received the PUP. It’s an often overlooked reality that social welfare payments, with very few exceptions, are generally taxable. The PUP, paid at rates higher than the usual unemployment benefit, has left many more individuals with taxes owing for 2020. In short, several hundred thousand workers now owe back tax from last year. This is a paradox because in another document published on the Revenue website earlier this month, the Revenue Commissioners noted income tax receipts of €22.7 billion for 2020. That compares to an income tax result of €22.9 billion published a year ago reflecting the outcome from 2019. How has it happened that in a pandemic year, with businesses closed for extended periods and unemployment numbers surging, national income tax receipts were virtually unaffected yet some people still owe money? This is partly explained by an income tax policy pursued by successive governments irrespective of political hue. While the commitment to the 12.5 per cent corporation tax rate has been consistent, an equally consistent though less obvious policy has been to push more of the income tax burden onto higher earners. In 2020, over 80 per cent of the country’s total income tax and USC was paid by higher income earners, those earning more than €50,000 per annum. Only one in four of the taxpaying population are in this cohort according to the Tax Strategy Group which compiles the options for government in the run up to annual budgets. Figures produced by the Department of Social Protection and the Revenue suggest that it was mostly workers from traditionally lower wage – and thus lower income tax paying – sectors who claimed the PUP or benefitted from the TWSS. Hospitality along with wholesale and retail accounted for the majority of claimants and beneficiaries. While there may be greater demands on expertise and productivity, it appears that higher paying employment does not automatically carry with it a higher degree of risk to job security. This accounts for the strong national income tax receipts. Those who lost their jobs or whose income was subsidised through the temporary wage subsidy scheme – and more recently the employment wage subsidy scheme where tax problems do not arise – were those who were paying relatively low amounts of tax at the standard rate of 20 per cent. In very many cases, it is this same cohort who are now facing tax bills. And this outcome has several implications. Firstly, the government will have to explain that this is tax which is correctly due. That’s a hard ask because the bills will come as a surprise to many. Were the Revenue and the Department of Social Protection sufficiently forthright to the general public about the tax consequences of the subsidies and payments as the schemes were launched? In the vast majority of cases, the tax bills will be relatively small, in the order of hundreds rather than thousands of euro. But few things sting like a tax demand. Secondly, most of the workers affected will not be used to dealing with the Revenue directly, as their affairs are handled by their employers via payroll. Most will, and should, opt for the back tax to be collected on the drip over four years through the PAYE system. This lingering tail of back tax over the next four years will either dilute the benefit of future tax cuts, however unlikely, or accentuate the impact of future tax increases. Thirdly, some cases can only be successfully resolved by the worker filing a return of income, and a universal obligation to file income tax returns is now a real prospect for the future. Up to now the legal obligation to file a return has been largely confined to the self-employed and businesses. Additional bureaucracy may be a lasting legacy of the pandemic. The only saving grace is that the position of everyone, not just the direct beneficiaries of TWSS and PUP, would have been much worse if the subsidies and payments were not introduced. TWSS and PUP supported business activity while bolstering consumer spend. The tax problems they are causing are a by-product of how rapidly they were introduced. That, however, may be cold comfort to those seeing their tax statements of account this week. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Jan 17, 2021
Thought leadership

  Originally posted on Business Post 10 January 2021. Whether despite of or because of the pandemic, 2020 has seen radical changes in the way we expect the business world to behave. There were negative interest rates, but there were also negative oil prices. Contrary to all expectations, Irish property prices did not collapse. And amid the chaos, one particular class of asset, bitcoin, is worth four and a half times more now than a year ago. As I write, one bitcoin is quoted at €33,640. That is, if bitcoin can be regarded as an asset at all. It is one of around 2,000 forms of crypto currency which exist in a computer file to which their owner has access. A record of their validity is distributed across multiple databases on different computer platforms on the web. This so-called blockchain approach ensures that a bitcoin cannot, for instance, be duplicated or used for multiple transactions with multiple vendors. It seems that 2020 was the year when some serious investors got over bitcoin’s twin barriers of intangibility and technological mystique. There are reports that several established funds have begun to regard trading in the cryptocurrency as a component of their investment strategy, just like trading traditional currencies such as the dollar, the euro or sterling. As happens so often in the markets, the decision to legitimise investment in bitcoin has been a self-fulfilling prophecy. Declare an asset to be of value, and it will become so. Bitcoin investments are taxed much like any foreign currency. When you use euro to buy foreign currency, say US dollars, you are acquiring an asset. You can gain or lose on that asset depending on the relative value of euro to dollars when you go to sell it. The same goes for bitcoin. Gains are taxable, losses are allowable to offset future gains. While 2020 was a good year for bitcoin investment, it’s not for the faint-hearted. The value of bitcoin has peaked before in 2017 only to fall back to a mere fraction of its peak a year later. Treating bitcoin as an investment is not what its inventors apparently intended back in 2009. The original white paper which proposed the system set out “a purely peer-to-peer version of electronic cash [that] would allow online payments to be sent directly from one party to another without going through a financial institution”. Bitcoin was supposed to take financial institutions out of the payment loop. Instead it is becoming an asset for financial institutions to trade, yet its point of interest for governments and regulators still derives from its original purpose of facilitating the transfer of value from purchasers to vendors. Where bitcoin really differs from other types of currency is that it dispenses with the need for an independent institution, like a bank or a credit card company, to verify its issue and use. That makes it tricky for the likes of the Revenue Commissioners or the Criminal Assets Bureau to trace, certainly far harder than tracing euro, sterling or dollars which tend to end up somewhere in some bank account to which the police or fiscal authorities can request access. Bitcoin, along with other cryptocurrencies, can be convenient tools for money laundering, blackmail, drug purchases, terrorist financing and bogus investment schemes. Law enforcement agencies may have to think about the ways of tracing bitcoin-derived activity, for example, by tighter regulation of businesses that convert bitcoin to and from the more traditional currencies. It would be incorrect, however, to regard the use of bitcoin and other forms of cryptocurrency as the sole preserve of criminal behaviour. Illegal activity tends not to advertise itself so it is difficult to accurately gauge the extent to which cryptocurrencies have a role. One recent estimate by a US cryptocurrency consultancy Chainalysis puts the share of cryptocurrency in illicit use at less than 2 per cent of the total in circulation. Even if that estimate is on the low side, it does suggest that much of cryptocurrency use is entirely legitimate. Where bitcoin is used for legitimate trading purposes, most of the normal tax rules apply. The Court of Justice of the European Union held some time ago that bitcoin constitutes a currency for Vat purposes. Companies making profits or incurring losses when trading with bitcoin are taxed in the normal way, except that despite the Court of Justice ruling, they cannot make up and submit accounts denominated in bitcoin to the Revenue. The submissions must be in euro or in another traditional currency. The online payments environment has become increasingly sophisticated in the 12 years since bitcoin was invented. Online payment processing and anti-fraud tools such as those offered by PayPal and Stripe are now in widespread use. The EU’s Second Payment Services Directive has resulted in much more mandatory authentication and verification of online payments via financial institutions. Bitcoin now has more competition as a payment method. The events of 2020 may also have changed how bitcoin is seen. It may become less a payment method than an investment. Such a shift in expectation has happened before with that most tangible of assets – gold. It just took a lot longer. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Jan 10, 2021
Thought leadership

  Originally posted on Business Post 20 December 2020. Twice in the past decade, Northern Ireland business has missed out on opportunities for preferential trading arrangements, The first missed opportunity had to do with a reduced rate of corporation tax. After years of political and technical manoeuvring, London consented to the application of a 12.5 per cent rate of corporation tax for companies based in the North, on condition that the Northern Ireland Executive could formulate a balanced budget. The three-year suspension of the executive over the renewable heat incentive scandal, which only ended at the start of this year, put paid to that prospect. Over that same period, international moves to curtail multinational tax planning resulted in a corporation tax and investment bonus for legitimate low-rate regimes. Ireland benefited. Northern Ireland could have, but did not. Then there was Theresa May‘s ill-fated Brexit withdrawal agreement, which contained the so-called backstop provision. The irony here was that the flimsier the ultimate trade deal between Britain and the EU, the greater the backstop advantages would have been for the North in terms of EU single market access. Under Boris Johnson’s leadership, the post-Brexit backstop was replaced by the Northern Ireland protocol. Was opposition to the original backstop arrangements such a good idea, at least from a business perspective? Johnson’s agreement could still offer advantages to businesses based in the North. One of the certainties now surrounding the whole Brexit process is that the protocol will in fact come into operation on January 1. In crude summary, the protocol positions Northern Ireland as a de facto member of both the UK and EU customs territories, and as a member of the EU Vat regime as it applies to goods. This sleight of legislative hand will result in there being no need for controls and checks along the land border on the island of Ireland. In so doing, it achieves its primary objective, thankfully. It also means that Northern businesses will have unique ease of access for goods to both the EU and UK markets. Given that Britain and the EU are going to be separate territories for all trade rules, there will have to be checks and controls on goods somewhere as they move from one territory to another. How these will operate next year became clearer in recent days. The UK tax authorities have published details of how customs requirements on goods travelling between non-EU member Britain and non-EU member Northern Ireland will operate in practice. The new system is based on the notion of some goods transiting between Great Britain and Northern Ireland being “at risk”. British goods or British foreign imports going into Northern Ireland are “at risk” if they end up being consumed somewhere in the EU without EU customs duties being paid. Northern Ireland importers will have to decide whether a product being imported is “at risk” in this sense or not. This judgment call will not be available to all. It can only be made by Northern Ireland businesses which have registered with the British tax authorities under a special scheme to be known as the UK Trader Scheme. That registration must be made before the end of this year, which is a tall order for any business operating in a Covid-blighted environment over the Christmas period. By delegating the primary policing of customs administration to local traders, introducing other rules such as an exemption for smaller industry from some customs requirements, and allowing initial periods of leniency for compliance with new procedures, both the British and the EU authorities are closing one eye to the normal conventions and rules which apply to customs enforcement. In the long term, this attitude can only be sustained if a no tariff trade deal is in place. If things go well on the negotiation front and principles can be surrendered without white flags becoming too obvious, the challenge next week will be the ratification of an agreement text by the British and European parliaments. On the EU front, any trade deal agreed by Michel Barnier, the EU’s chief negotiator, and David Frost, his British counterpart, must be agreed by the heads of state of the 27 member countries and then voted on by the European parliament. This process took place in microcosm last week with the ratification of emergency Brexit land and air transport measures to apply from January 1, but a Brexit trade deal is of a totally different order of magnitude. Elected politicians, with some justification, don’t like being taken for granted or bounced into tight timescales by officials. There are signals that MEPs may become mutinous, and they are already saying that they will not vote on a Brexit deal before the end of the year unless an agreement is struck by this evening. Next week, the preferential trading status for Northern Ireland which the protocol delivers will not be in the hands of politicians there, but in the gift of MPs in Westminster and MEPs in Brussels. After the missed opportunities of a low corporation tax rate and single market access under May’s backstop, it may be third time lucky for Northern Ireland business. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Dec 20, 2020
Thought leadership

  Originally posted on Business Post 14 December 2020.  As the Brexit clock ticks down, and bizarre discussions about sausages and the like fill the airwaves, you would be forgiven for thinking that Britain is still a nation of shopkeepers. It is not, nor has it been for some considerable time. According to a 2019 briefing provided by the House of Commons library, Britain has enjoyed a trade surplus in services every year since 1981. Over the same period, it ran a trade deficit in goods every year. The services sector covers a wide range of activities. There's the obvious stuff, like legal, accountancy and financial services, along with the important but perhaps less prominent service sectors such as higher education, construction, transport and tourism. The money earned from every tourist that visits Britain counts as an export of services. All these activities account for some 80 per cent of Britain’s economic output. Pre-pandemic, the EU was also Britain's largest export market for services. The main reason perhaps that services have not achieved such prominence in the Brexit debate is that the EU's approach to trade in services is not nearly as cohesive as its approach to trade in goods. The EU has a common policy of customs controls and inspections applying to goods coming in from outside its borders, no matter which member country is the destination. This is not true for services, where future restrictions on service provision will be much more based on the local law and practice of the destination country. The lack of a common approach across EU member countries does not mean that there won’t be barriers to trade in services as there will be for trade in goods. Many of the automatic entitlements critical to successful cross-border trade in services will be deleted or removed altogether for British businesses after the transition period ends. This dilution of entitlement is a certainty, irrespective of the status of current negotiations. Currently, any British service provider has an automatic right to establish an office in any EU country. That automatic right will be gone after January 1, 2021. Restrictions on freedom of movement of people will reduce the availability of qualified workers for the British services industry. It will be a particular challenge for that sector to hire lower-skilled and thus lower-waged employees, because restrictions on entry to work in Britain being applied to all EU nationals (except Irish nationals) are tied to a salary expectation of £25,600. More qualified British workers may find it difficult to establish their credentials in EU markets, because their rights to automatic mutual recognition of qualifications and accreditation will be eroded. When the EU protections and entitlements are removed, EU member countries can find any number of ways to make life difficult for British service exporters should they so wish. The no-deal transitional measures for transport and aviation published last week by the European Commission are relieving measures for a six-month period in 2021. The very need for them is a stark illustration of what could happen when recognition within the EU of licences, permits and authorisations of British carriers cease. They are intended, in the Commission’s words, to avoid “serious disruptions including in respect of public order”. All of this, of course, presumes that EU businesses won't want to avail of British established services next year and beyond. That is unlikely to be the case. Britain runs a trade surplus in services because British industry is good at services. Deal or no deal, that fact is not going to change. The problem in the longer run for British industry may not be about demand for services, but rather about its capacity to supply them. Businesses operating in countries such as the US and Canada, where the labour market is choked from visa restrictions on immigrants, must wonder at the British willingness to take itself out of a pool of skilled workers. Future skills shortages may not just be confined to the trade in services, but will spill over into trade in goods, because increasingly it is difficult to separate the two. Trade in modern commodities brings with it a tail of services to enhance the product, from guarantees and warranties, to R&D and design know-how, to logistics and fulfilment. Europe will be a poorer place because of restricted access to British services. Ireland is among both the top ten export markets and the top ten import markets for British trade in services. Unlike the imminent damage to the trade in goods due to customs and standards requirements, the impact of the fall-off in the trade in services is likely to be more drawn out. As the Brexit negotiation pantomime draws to a conclusion, the story up to now has been one of trade. But the legacy will be felt most within the services sector. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Dec 13, 2020
Thought leadership

  Originally posted on Business Post 6 December 2020.  The exchequer figures published last week confirmed that, as a nation, we are spending vast sums to deal with the consequences of the pandemic. We have spent €10.5 billion more than was planned for in 2020. The bulk of this overspend, by a considerable distance, was not in the health budget but in social protection, dealing with the fallout from work stoppages and redundancies. Not as much tax materialised as was expected either, but lurking in the background is tax of some €2 billion, deferred from this year and not showing in the exchequer returns but still due from Irish industry. Not only that, the income tax yield from the self-employed normally shows in November. That wasn’t the case this year, because the tax payment date for most self-employed people was in effect pushed out by a month. Money usually due to be paid in November is not due this year until later this week. During the Great Recession, tax receipts from the self-employed fell off a cliff by about two-thirds. Because the tax yield from the self-employed reflects the activity of the professional services sector along with many tradespeople and smaller indigenous businesses, it is a real bellwether of the state of the SME sector. We probably won’t know their tax figures, and thus by extension their profitability, until January next. That information will be a real indicator of the resilience of the Irish economy outside our very large multinational and public sectors. The postponement of tax collection across all businesses has been a characteristic of the government response to the pandemic. Since March, businesses have generally been permitted to defer tax payments initially without paying any interest, and later on (depending on the timing) at a preferential rate of 3 per cent until the Covid-19 tax debt is repaid in full. This opportunity for deferral of tax payments runs counter to the traditional wisdom that in business, whoever else you owe money to, you shouldn’t owe it to the Revenue Commissioners. For a start, interest on unpaid tax debt normally runs to as much as 10 per cent per annum. Unlike other interest payments, interest on revenue debt is itself not allowable for tax purposes, so for a self-employed person the de facto rate is closer to 15 per cent. The Revenue possesses a particularly sophisticated debt collection mechanism, supported by techniques such as notices of attachment which ensure that a taxpayer’s debtors pay the Revenue instead. Supporting business through the pandemic by deferring the collection of tax debt, a technique known as tax warehousing, makes sense on several levels. First of all, it allows the government to get money into struggling businesses quickly by the simple expedient of not taking it from them in the first place. Secondly, it has saved the Revenue a lot of effort which might otherwise be misplaced. Why chase struggling businesses for cash which they might not have, when it might be easier to recover more after the worst throes of the pandemic have abated? Last month Joe Howley, the Revenue’s Collector General, wrote to 100,000 businesses to remind them of the opportunities of tax debt warehousing. This was, no doubt, primarily motivated by a desire to support business through a lockdown. It may have been prompted by the findings of a recent survey conducted by the Department of Finance which suggested that only 60 per cent of SMEs were aware of tax debt warehousing. The mailshot also has a pragmatic edge. Warehousing offers the exchequer a better chance of tax collection in the medium term as prospects improve post-pandemic. Generally, businesses have been reluctant to get into debt during the pandemic, not wanting to substitute a liquidity crisis for a future debt crisis. Optimism for a better 2021 has to be tempered by Brexit uncertainty and the knowledge that, trade deal or not, trade with Britain will be hampered following the expiry of the transition period next month. This optimism should be tempered further by the knowledge that the estimated €2 billion or more of warehoused tax debt will ultimately have to be settled. There is no need for businesses availing of the tax warehousing facility to panic, but they do need to start thinking about how the debt will be repaid or refinanced. It is clear from the November exchequer returns that, insofar as possible, Irish business has been doing the right thing throughout the pandemic. Tax yields may be down, but it is evident that many businesses kept paying their way as best they could during 2020. There is now a reasonable expectation of some upturn during 2021 which, in turn, will lift the national finances. The business resilience shown during 2020 deserves some reward. It might start with the government helping to refinance, or even forgive, some of the €2 billion in warehoused tax debt. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Dec 06, 2020

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