News

  Originally posted on Business Post 25 April 2021. Flawed as it is, the protocol plays a big role in volumes of trade on the island of Ireland which are very much in the North’s favour International agreements can be negotiated, revised, suspended or perhaps ignored. They are rarely sandpapered. Yet that was what Boris Johnson, the British prime minister, suggested was required for the Northern Ireland protocol last week. The protocol has become the cause of dissent not just between London and Brussels, but also between Dublin and Belfast, despite its potential to offer lasting benefits to Northern Irish industry. Because it establishes the North as a special zone for trade in goods with the remaining EU 27 countries, the protocol undoubtedly creates complexity. Nevertheless, the prime minister’s comments almost four months into the operation of the new rules reflect none of the urgency seen, say, in his reaction to a proposed European Super League including six English Premier League clubs. Clearly, some European challenges demand more rapid responses than others. It wasn’t clear from Johnson’s statement exactly what bits of the protocol he wanted to have sanded down. Economic success is neither made nor broken by trade complexities for chilled meats or garden plants. These are the preferred examples used by some British and Northern Irish politicians when describing their unease with the east-west checking required by the protocol. Despite these political qualms, many aspects of business and trade are normalising, as importers and exporters on both islands get more used to the vagaries of the protocol. The level of Vat and customs queries arising has dwindled in recent weeks as traders come to terms with the dual nature of the Northern customs zone. The volume of official bulletins from British government departments to address aspects of protocol operation has similarly dwindled, as the key messages have been getting through. There are still problems, though. One particular area is the treatment of “at-risk” goods. These are goods coming to the North from Britain which might be at risk – the “risk” here is to the customs duty – of onward transmission into Ireland or into the wider EU. Under the protocol, customs duty is charged on such goods and then reimbursed, when it can be shown that the goods in question ultimately remained or were consumed in the North. For many traders, this will have cashflow implications, not helped by the fact that the system to reimburse the duties isn’t ready yet. The health certification of food, livestock and plants is a difficult process already. It will become even more problematic as new EU regulations expand the number of food products which require certificates. For once, this has nothing to do with Brexit, but dates back to an agreement made in early 2016, when the UK was still a full EU member. The regulations apply not just to British food exports but to many processed foodstuffs coming into the EU from any so-called third country. Neither the customs nor the health certification rules are impenetrable. The recurring problems relate to how they are being applied. It’s not the protocol itself that needs to be smoothed with sandpaper, but rather the customs and checking processes that make it work. These processes have to be adaptable to changes like the new EU health certificates, but also to whatever checks on imports Britain may wish to apply in future as its own customs regime takes full effect. Not all regulation is driven by Brussels. Despite the current headaches, the business response on this island has been extraordinary, as is borne out by last week’s figures from the Central Statistics Office for the first two months of the year. Ireland’s imports from Britain for the first two months of 2021 more than halved compared with imports during January and February 2020. Exports from Ireland to Britain were also down, but much less so – by about 12 per cent. However, the picture of trade in goods between the North and South of this island could not be more different. Exports from Ireland to the North were up by more than 25 per cent in the first two months of the year. The volumes imported into Ireland from the North were up by more than 50 per cent. These figures are, of course, skewed by pre-Brexit stockpiling towards the end of last year and changed patterns of trade because of the pandemic. Yet these factors on their own cannot explain the extent to which trade between Ireland and the North showed a dramatic improvement. The operation of the protocol, flawed as it may be, is surely a contributing factor to volumes of trade on the island of Ireland which are very much in the North’s favour. No amount of trade statistics can allay the concerns in certain areas of the community in the North which have resulted in political bickering and violent civil disturbances in recent weeks. However, and perhaps oddly, these trade statistics give validity to Johnson’s ambition to sand the protocol. There are indeed areas of its operation that do need to be smoothed out, but the early evidence suggests that it is worth making the effort. The protocol is already succeeding in keeping a hard border off the island of Ireland. It also seems to be facilitating the North’s trade even in its current rough-hewn state. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

  Originally posted on Business Post 18 April 2021. A move to tax those who’ve done well financially during the pandemic has been mooted, but there are good reasons not to touch it.  ‘Solidarity taxes are not a particularly new idea. Germany introduced one some 30 years ago to help fund the costs of reunification, while a 2.1 per cent surtax was introduced in Japan to help repair the damage from the 2011 earthquake’ When the International Monetary Fund proposed earlier this month that a “recovery contribution” could be levied on businesses and individuals that had fared disproportionately well during the pandemic, an idea which might otherwise have been buried in 100 pages of dry economic commentary got its day in the sun. Some commentators described the notion as politically progressive, if difficult to implement. Joe O‘Brien, the Green Party Minister of State, wrote to Paschal Donohoe, his colleague in government and the Minister for Finance, wondering if the idea might have some traction here. It has been reported that Donohoe’s response didn’t favour going outside the current OECD business tax plans, but suggesting a referral of the matter to the promised Commission on Taxation and Welfare. Solidarity taxes are not a particularly new idea. Germany introduced one some 30 years ago to help fund the costs of reunification with the GDR, while a 2.1 per cent surtax was introduced in Japan to help repair the calamitous damage from the 2011 earthquake. Perhaps a one-off or temporary Covid-19 solidarity levy is an idea whose time has come? Were such a levy to be introduced in this country, the key issue might be not how it could be applied, but to whom it might be applied. Last week, the latest stability update was published. This is an ongoing element of the EU compliance cycle which involves a formal presentation to Brussels of the government’s estimate of the health of the economy. Despite the chaos and suffering of the pandemic, we stand relatively well in comparison with many of our EU neighbours. The relative strength of the economy has been signalled all along by the monthly exchequer tax receipts, which have remained surprisingly high since the first lockdown. Each month, we have neither a sample nor a survey, but an actual tally of payments of income tax to the exchequer, the vast bulk of which are made through the PAYE system. These give a reliable indication not only of the numbers of people employed and the stability of their earnings, but also of the capacity of employers to pay wages and the PAYE and PRSI collected from those pay packets. Last month, those income tax receipts were actually up on the corresponding period in the previous year. This income tax increase seems contrary to what could reasonably be expected, given the 600,000 people who are now unemployed. After the tragic number of deaths and the number of people falling sick, the unemployment figure may be the most arresting measurement of the damage from the pandemic. Yet many have retained their jobs in the manufacturing and services sectors throughout the lockdowns, often with the help of the government‘s employment wage subsidy scheme. Not only that, but almost 450,000 of those out of work are receiving the pandemic unemployment payment (PUP). Businesses, too, have the benefit of supports like the Covid-19 restrictions support scheme (CRSS), along with the wage subsidies and tax deferrals, which may skew direct comparisons with other years. Tax receipts are being made more stable due to the government’s pandemic supports. Perhaps a better piece of advice from the same IMF document that proposed a recovery contribution was its reminder for governments to “do what it takes, but keep the receipts”. That involves providing whatever cash supports are appropriate to get businesses and individuals alike through the lockdowns while keeping a careful tally. This is what the current coalition government has, in effect, been doing this past year. Our costly economic supports all come with terms and conditions, and with a price tag for those availing of them. PUP payments made in 2020 are being taxed over the next four years while payments made in 2021 are (by and large) being taxed in real time. Subsidised wages are not tax-exempt either. Taxes like Vat and PAYE may have been deferred but they have not been forgiven, and a bill for €2 billion or so will fall due across those businesses which availed of the deferrals. The very useful CRSS, which helps businesses maintain closed premises, will be recouped from a restriction of income and corporation tax reliefs into the future. These clawbacks won’t fully cover the cost of all the supports being provided, but from this standpoint at least, it’s legitimate to argue that contributions to the recovery are already falling due in this country. A better way of fostering solidarity than any new tax is for people and businesses to opt for local services and suppliers, if at all possible. Proposals for some kind of new or additional recovery contribution on those who had fared reasonably well during the pandemic are backward-looking, at a time when we need to be looking forward. The pandemic supports of 2020 and 2021 are already bolstering the tax yield and will have to be paid back – at least in part – by those who received them over the coming months and years. That is why there is no justification for a recovery contribution in this country.   Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

  Originally posted on Business Post 11 April 2021. Britain is belatedly tightening up its corporate governance, but Ireland plays by the EU’s rules and ought to act accordingly  While at various times over the past few months, hospitals, financial institutions, sports bodies and even a charity have featured in the headlines here for failures or alleged failures in financial or corporate governance, the British have also had their fair share of high-profile company missteps. The likes of Carillion, BHS and Patisserie Valerie were part of a continual cycle of high-profile corporate failures resulting in what has been described as a “palpable” crisis in public trust. This has ultimately led to the British government’s publication last month of a white paper entitled Restoring Trust in Audit and Corporate Governance. According to its foreword by Kwasi Kwarteng, the British business minister, the plan is to help companies “build back stronger and better equipped to face tomorrow's challenges and enable the UK to remain a premier global centre for investment”. Post-Brexit, Britain has already lost ground in financial services and exports of goods, so this white paper reflects more than a newfound concern over corporate failures. It is not surprising that the British government will look for competitive advantage anywhere it can get it. Corporate failures do more than just damage the employees, creditors and shareholders who are directly involved. According to research published earlier this year by Edelman, the global consultancy, businesses are now more trusted than governments in 18 of the 27 countries they surveyed. Not only that, businesses are generally seen as being more competent than the governments of the countries in which they operate. Whichever way you choose to view results like these, they bear out that trust is essential for a healthy business and therefore a healthy investment environment. The white paper is a distillation of at least three previous reviews commissioned by British governments. Those reviews mainly concerned the work and conduct of the auditors of companies, and of the government institutions which regulate those auditors. The current paper goes some distance further in its examination of the roles of both directors and shareholders in corporate failures. The emphasis is on larger companies initially but it is clear that the medium-term intention is for the suggested measures to extend down the pecking order of corporate size. The proposals recognise that shareholders do not have much to do in terms of the day-to-day running of the businesses they own, but that does not absolve them from all responsibilities towards the way those companies operate. Shareholders should have a chance to approve the audit policies of the companies they own. They should also be allowed to propose areas of emphasis in the audit if they believe that particular issues or activities within the company need to be scrutinised. Government regulators are to be given additional powers of investigation, not only over the accountancy firms which carry out audits but also over the companies which are audited. The role and function of auditing firms will receive a significant shakeup under the proposals, but it is the ideas concerning the conduct of company directors which perhaps reflect the newest thinking by the British authorities. There are to be new sanctions for individual directors who are found wanting when it comes to the proper governance of a company. After all, as the white paper puts it, it is company directors who have primary responsibility for fraud prevention and detection. Boards of directors have collective responsibility. This collegiate responsibility for directors suggests that the free ride for non-executive directors will come to an end, if there ever was one. This is heavy duty stuff. It is made all the more serious by a widespread expectation that this white paper is not merely a consultation paper, but rather an expression of intent on the part of the British authorities. It contains almost 100 specific consultation questions, but it is understood that any responses will serve to fine-tune rather than modify the thrust of the proposals. All this has consequences for commerce on the island of Ireland. Up to now, Irish financial and corporate governance has largely been dictated by the pattern of British rules and norms. Financial and company legislation and regulations more often than not originated in the UK, and were then sprayed green for implementation in Ireland. The proposed new British regime would be intrusive, which is not necessarily a bad thing. It would also be costly and burdensome for many businesses, which is undoubtedly a bad thing if no benefits flow from it. Post-Brexit, it should not automatically follow that Ireland takes the British lead on corporate regulation. Going it alone, as the British economy is already finding, comes at a cost. The Irish economy is not going it alone because it operates within the EU framework. Our patterns of accountability, regulation and corporate governance will in the future come more from the European institutions than from British institutions. There is plenty of evidence that we need to tighten up our regulatory regimes to ensure that individuals are held accountable. While this is the direction the British are taking, the appropriate solution for Ireland may not be simply to follow the British example. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

  Originally posted on Business Post 4 April 2021. A democratic left-leaning president can always be expected to favour big spending programmes, but has anyone ever been as big a spender as US president Joe Biden? After committing $1.9 trillion to pandemic responses, he now proposes to commit a further $2 trillion to infrastructure spend. This marks a radical shift in economic approach between Biden and his predecessor. Donald Trump seemed to view economic growth as being primarily private sector-driven. Biden, on the other hand, is betting on a public expenditure programme. A trillion here, a trillion there, and suddenly you're talking real money. Even for an economy as vast as that of the US, expenditure in the trillions of dollars cannot be sustained by standard taxation or borrowing. Additional tax has to be found somewhere. In line with his election promises, Biden is looking to raise it from the corporate sector, with a shake-up of the tax code and a headline-grabbing hike in corporation tax from 21 per cent to 28 per cent. Any mention of changes to US corporation tax policy tends to cause a flurry among the commentariat here, many of whom seem to regard Ireland's attraction as a destination for US investment as being purely tax-driven. However, Biden‘s proposed reforms are all about how much money is collected by Uncle Sam. The US already has many counterbalancing measures in its tax code to reduce the attractiveness of offshore tax planning by American-headquartered companies. Since 2017, there have been restrictions on tax breaks for foreign expenditure. Intangible assets like patents, held overseas by US corporations, are deemed to generate taxable income in the US. The key to assessing how Ireland will fare as a destination for US foreign direct investment following these reforms is the extent to which Irish corporation tax paid by a US subsidiary reduces the overall tax bill of its US headquarters. At the moment, most (if not all) corporation tax paid in Ireland by a US subsidiary is available to offset against the ultimate US tax bill. There is insufficient detail available yet on the proposals to know if that will continue. Another factor is whether or not these US changes will prejudice how Irish tax rules operate when compared with the tax regimes of competitor countries in Europe, in the Far East and in Latin America. That didn’t happen with the 2017 changes, and hopefully it won’t happen this time either. More broadly, the proposals could well reinforce the position of the US as the ultimate arbiter of cross-border tax policy. There is ongoing OECD work towards reforming the tax landscape for multinationals in the digital sector like Google, Amazon and Facebook. This will involve shifting the taxability of digital services away from the countries where the services are provided, and into the countries where the market exists for those services. As the homeland for most of the tech giants, the US has the most to lose from such a policy shift, and needs to have compensating measures. A minimum effective rate of corporation tax worldwide is also on the OECD agenda. This is a concept the US is far more comfortable with. The Biden administration may be stealing a march by enhancing its own existing models of restricting foreign deductions and claiming the earnings of overseas subsidiaries for additional tax in the US. Will any of this come to pass? US tax reform has traditionally moved at a glacial pace. There were no significant developments in US tax policy between 1985 and Trump’s Tax Cuts and Jobs Act of 2017. Yet the current proposals may be landing at a good time. First of all, if only because of the pandemic response and the obvious need for infrastructure investment in the US, it's hard to argue with a move to increase taxes on companies. After all, companies don’t vote. Secondly, the Democrats currently have a (tenuous) grip on both houses of Congress, which is essential for any fiscal legislation to pass. The main proposal requiring House of Representatives and Senate approval would be hiking the tax rate up to 28 per cent. Thirdly, it seems that many of the plans involve strengthening measures that are already in place to tighten the offshore regime. It’s always easier to work with what’s already there, rather than try to invent new taxes. Ireland has used tax policy to good effect in promoting industrial policy for more than half a century, but tax is not the only driver of foreign direct investment. Speaking at a US-Ireland Economic Roundtable virtual event last week, Congressman Richard Neal pointed towards the Irish education system and the stability of the political system as components for a successful foreign investment regime. That observation has particular significance because all US tax law has to be passed by the House Ways and Means Committee, which Neal chairs. Irish corporation tax policy on its own may no longer be the investment attraction it once was, but as long as it does not become a handicap we can still compete very well. In the years ahead, the Irish policy imperative should be to secure the corporation tax yields that we already have. Joe Biden's America is not the only country that needs to be able to spend on pandemic responses and infrastructure. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

  Originally posted on Business Post 28 March 2021. The announcement from Intel last week that it is to create a further 1,600 jobs in Leixlip in Co Kildare, adding to its existing workforce of 5,000, was particularly welcome in a week where our unemployment rate was touching 25 per cent. Admittedly, that figure is augmented by the number of people receiving the pandemic unemployment payment, and it is reasonable to expect that the numbers will fall sharply as the economy reopens. An ESRI study published last week, however, suggests that the benefits of the reopening may well take longer to be felt than earlier estimates had predicted. The longer a lockdown persists, the less likely it is that some businesses will be able to bounce back quickly. This can be for a variety of reasons, such as staff moving on or premises deteriorating. Firms without an online presence may suffer from having fallen out of customers’ minds because of a long absence from the market. Losing even click-and-collect activity means that it has been harder to keep a brand to the fore. Even as unemployment numbers decrease, some attention will have to be paid to retaining all those jobs which had remained relatively secure since coronavirus hit our shores just over a year ago. While operations like Intel need the physical presence of workers in a particular location, many in the services industry are realising that employees no longer need to be in a fixed office. Some businesses are taking this to extremes. Nationwide, the British building society, announced in recent days that it will allow its entire 13,000 office staff to choose where they work under a new flexibility scheme. It doesn’t necessarily follow that we need to rethink our national taxation strategies just because, in a post-Covid world, Birmingham is as suitable as Balbriggan for a knowledge worker employed by an Irish business. However, many companies in the services sector will in future decide on the location of their headquarters more by reference to the ease of virtual rather than physical connectivity. Forty years ago, the tax system was used to provide incentives to industry by rewarding actual manufacturing activities – people using machines to make widgets from raw components – with low tax rates, bonus tax breaks for buying in stock, and generous tax reliefs for investment in equipment and for building factories. Those incentives were appropriate in the latter decades of the 20th century. Since then they have been reduced or eliminated altogether from the tax code, and replaced with incentives for research and development and the accumulation of intellectual property. This change from rewarding what was sometimes a relatively low-skilled manufacturing model to rewarding a much higher-skilled services and value-added approach was fundamental. A change of this scale need not be repeated, as much of the migration towards working from home will happen of its own accord without the need for incentives. The issue instead is to look again at the current suite of business incentives for the services sector to ensure we don’t lose existing employment or miss out on opportunities for regional development as remote working becomes more prevalent. Indigenous enterprise in the services sector is left entirely to its own devices to raise capital. The tax allowances for the IT equipment needed for remote working are structured around an expected life of eight years. Tax relief for the broadband costs incurred by employees is available, but only by way of temporary concession. The National Remote Work Strategy promises new employment regulations and the usual reviews and studies, but nothing by way of additional government funding. Intel has invested $7 billion in its facilities in Ireland – more than twice the estimated cost of the national broadband plan. Even at a time of budget deficits, there is surely more we can do at a national level to get our act together faster with this critical element of remote working. Our industrial policy for services needs to have remote working at its core. Otherwise it will not be fit for purpose as we try to get back to full employment. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

  Originally posted on Business Post 21 March 2021. President Michael D Higgins is expected to soon sign a piece of criminal justice legislation to bring Ireland into line with EU initiatives to combat money-laundering. Successful approaches to criminality must tackle both the crime itself, ie, where the money came from, and serve to limit the use of the proceeds. There is no point in stealing or extorting money if it cannot be spent. Anti-money laundering initiatives are not new to this country. A need to “know your customer” explains why banks, which normally do their utmost to keep their customers at a safe electronic distance, insist on their physical presence and tangible evidence when opening a bank account. Similar responsibilities extend beyond the traditional financial institutions where a business handles perhaps unexplained bundles of money. There is no particular onus on individual businesses to identify the proceeds of crime, but the law creates a requirement to notify something that might be unusual. These “suspicious transaction reports”, as they are known, are the foundation for anti-money laundering initiatives. Reports are made both to the Gardaí and to the Revenue Commissioners. The new legislation will bolster the existing money laundering laws by widening and deepening the duties of care for the likes of tax advisers, letting agents, bitcoin traders and art dealers. Because of the multinational nature of organised crime, there is little benefit if only one country applies anti-money laundering laws. It is a good thing that the initiative is European-driven. We are merely applying approaches already agreed by all of the EU member countries in our national law. Britain has enthusiastically adopted this regulatory environment, claiming some credit for devising it in the first place, and promising to stay aligned. In this area, at least, the British seem unlikely to diverge from European standards. European regulation isn’t just about the law. It is also about whether the agency responsible for enforcement is located centrally, or is devolved to each of the individual member states. For instance, few of us had heard of the European Medicines Agency, which somewhat ironically had been located in Britain before Brexit, until we all developed a fascination with vaccines, but its work is key to the authorisation of medicines across Europe. By contrast, while anti-money laundering policy is coordinated, enforcement remains primarily the responsibility of domestic governments, at least for the time being. Any system of regulation imposes burdens on those who are asked to comply with it. The temptation will always be there to take shortcuts to save costs or, worse, to create an unscrupulous competitive advantage by failing to apply the law. The day-to-day operation of the current anti-money laundering legislation in the private sector largely falls to those “designated persons” who must make suspicious transaction reports. The designated person is more often than not a company or a firm, rather than an individual. Yet it is not a company as such which makes a decision to comply with the law, but rather the individuals who own or manage it. The anti-money laundering legislation, in common with so much of Irish business regulation, tends to penalise the business when things go wrong, not the responsible person within the business. The Central Bank has identified this as an obstacle in some of the regulatory work within its ambit, proposing an aptly acronymed “senior executive accountability regime”, or SEAR, as a remedy. Last week in this paper, Michael Brennan wrote on the difficulties for the government of introducing a SEAR which would migrate some of the penalty regime for corporate shortcomings down to the responsible executive. Removing the shield of employment within a firm for wrongdoing is a difficult area, but it is not a new one for our politicians. At the Dirt inquiry, more than 20 years ago, TDs were frustrated at the apparent immunity of bank officials to the consequences of their actions in not applying the correct tax on interest earned in deposit accounts. In the 20 years or so since then, little has changed in the way the Irish regulatory regime can reach behind the corporate wall to apply sanctions to individuals. Solid regulatory regimes which monitor wrongdoing, and sanction it appropriately, have to be effectively policed. Ireland is not an outlier when it comes to the application of anti-money laundering initiatives. Being a decent place to do business provides a competitive advantage, just as the strength of our international brand confers a competitive advantage. Having the rules in place, though, is not enough. We have to show we can enforce them effectively. We need to think more about how we sanction individual wrongdoers, rather than just the businesses in which they are involved. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland