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Originally posted on Business Post 23 August 2020.Vague calls for better corporate ‘citizenship’ won‘t help us get through the pandemic – enforcement of the regulations will.A company is nothing more than a legal structure which happens to be treated for many purposes – including taxation – as if it were a citizen.At the time of the last financial crisis, it became commonplace that left-leaning civil society, academics and charities would call for business to become more socially responsible. Tax compliance was a favourite topic, with little regard paid to the existence of enforceable rules to ensure tax collection. Instead, the underlying notion seemed to be that companies, in particular, should act like citizens in some way and go beyond what is merely required under the law.These calls are being made again in the context of the response to the pandemic, but they ring hollow when they are made without reference to the hard facts of enforcement and accountability.Companies are not citizens, at least not in the normally accepted sense of the word. A company is nothing more than a legal structure which happens to be treated for many purposes – including taxation – as if it were a citizen. Nevertheless, in common with all citizens, companies have obligations to stay on the right side of the law.The latest raft of measures in the July Stimulus plan ensure that companies and businesses generally will have to have tax clearance certificates to avail of the employment wage subsidy scheme (EWSS). The new EWSS replaces the temporary wage subsidy scheme (TWSS). While having this certificate is a new requirement, there is nothing new about the tax clearance process. A tax clearance certificate provides evidence that a company’s tax affairs are up to date. Publicans have needed these certificates for years in order to get their licences, as have businesses tendering for government contracts. Even our TDs need tax clearance certificates to sit in Dáil Éireann.The tax clearance process also helps ensure that one arm of government knows what the other is doing, as mismatches can lead to embarrassment. Most people are uneasy about government funds flowing to people who are not paying their taxes. In common with many Revenue procedures, it is highly automated, and the tax clearance status of any business can be verified online. Nevertheless, this new requirement will be a challenge for quite a few businesses wanting to claim the EWSS.It is estimated that there are some 16,000 employers currently claiming the temporary wage subsidy scheme who will not have tax clearance certificates and must apply to Revenue for them. Clearance is usually a straightforward process, but these are not straightforward times.For instance, late payments of PAYE or Vat would normally have disqualified a business from being eligible, but late payments were in many cases permissible in recent months as tax debt is being warehoused, so this should not be a problem. There is, however, increased bureaucracy associated with the EWSS when compared with the TWSS. However unwelcome, these additional controls may be necessary.The tax clearance certificate requirement has a broader significance. Businesses that shirk their tax obligations give themselves a competitive advantage, perhaps because their wage bills are lower if they don’t fully account for PAYE, or perhaps their margins are greater because they don’t properly account for Vat.Similarly, businesses that shirk their responsibilities under the coronavirus restrictions by failing to provide adequate protection for staff and customers, by not making sure that their premises have been properly cleaned and reorganised or by not providing adequate training, are conferring on themselves an unfair competitive advantage.There is little enough evidence to date that this has been the case. Yet, as the pandemic and our responses to it drag on, familiarity with the virus will lead to contempt and the temptation to cut corners will grow. The tax clearance certificate is evidence of just one aspect of good corporate behaviour which must be sustained as long as the EWSS is being claimed.Good corporate behaviour on a continuing basis for all the measures to tackle the pandemic and not just for taxes will be ever more important. Should a belief emerge that compliance with coronavirus restrictions puts individual industries at a competitive disadvantage, the current broad acceptance of the rules could collapse.The message that it makes good commercial sense to be fully compliant with restrictions on movement will get progressively more difficult particularly as we enter into the autumn months. Enforcement of coronavirus restrictions will become increasingly necessary. The headline events of recent days such the resignations of the chairman of Fáilte Ireland, of the Leas-Cathaoirleach of the Seanad and of the Minister for Agriculture, however unfortunate, are vital elements in the messaging.This is why vague calls for better corporate citizenship or for businesses to “do the right thing” should be treated with some suspicion. Appropriate corporate behaviour is about businesses and companies obeying the law, however difficult, at the time of pandemic restrictions. There must be no commercial advantage available by failing to apply the rules. That in turn means there has to be enforcement. Anything else is just grandstanding.Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland.

Aug 31, 2020
Thought leadership

 Originally posted on Business Post, 2 August 2020.Increases in VAT usually pass the acid test of tax policy – the extraction of the most amount of money with the least amount of complaint.  Compared to an income tax increase, the general population rarely gripes about increases in VAT rates.  Hiking the standard rate of VAT of 21% to 23% in 2012 generated hardly any noise compared to the introduction of USC and the reduction of allowances and credits the previous year.  So will people really notice the VAT decrease of 23% to 21% in the July Jobs Stimulus? VAT is a truly European tax in that the rules are devised in Brussels and then implemented in EU member countries.  It is Brussels that decides that the maximum rate of VAT cannot exceed 25%. .  European rules tell us that a box of teabags is charged 0% VAT, but a cup of tea in a café is charged 13.5% VAT while a tin of iced tea in the supermarket is charged 23% VAT.  There’s little enough any Irish government can do to tinker with the VAT system, except make marginal rate adjustments. VAT is a major contributor to the Irish Exchequer.  In 2019, over €15 billion was collected in net VAT receipts which is more than one quarter of the total tax receipts for that year, yet it is a notoriously blunt instrument of public policy.  No VAT is charged on the clothes of the children whose parents are on social welfare, but no VAT is charged either on the clothes of the children of high earners.  Maybe that’s why governments avoid using it for public policy purposes unless you include the now defunct 9% rate of VAT for the hospitality sector.    So it was all the more surprising that the July stimulus knocked two percentage points off the main VAT rate.  The cost of this measure is €440 million, which is a little less than 10% of the total value of the package.  This estimate for the cost of this six month VAT reduction period is in line with Revenue estimates for good years.  In a moribund economy the Department of Finance seems to expect a spending spree.  Remember too that the 23% rate only applies to about half of the items or services we buy.  The rest are charged at lower rates or are exempt. Outside of the retail sphere, the education sector and the banking sector pay sizeable amounts because their activities are largely VAT exempt.  These sectors cannot recover the VAT they pay on purchases because they don’t charge VAT on their sales.  In the main VAT is therefore a consumption tax ultimately falling on the consumer.  So will the VAT reduction boost sales of clothing, alcohol, electrical and other household goods and luxury foodstuffs which fall into the 23% VAT category?  It might not, even if businesses pass on the VAT rate reduction to their customers.  Despite suggestions otherwise from some political quarters, Minister for Finance Paschal Donohoe was quite clear that the 2% reduction should be passed on to consumers.  That's not going to make a huge difference for many items because the value of a 2% VAT reduction approximates to about €1.60 for every €100 spent.  It only becomes a different story if you go out to buy a big-ticket item like a car, where the VAT saving could perhaps insure it for a year. There is no law obliging traders to reduce their prices because there has been a reduction in the VAT rate.  As long as they charge the correct amount of VAT at the correct time, they can take whatever margin they wish.  Past history however suggests that small VAT reductions like the current 2% reduction tend not to get passed on to consumers.  Part of the rationale when the 9% rate of VAT on hospitality was introduced was that a full 4.5% reduction to the normal 13.5% rate would be visible and palpable and therefore consumers would expect to see the difference.So even if it is passed on, a 2% VAT reduction may be inadequate to drive additional volumes of consumer spending.  In terms of business benefit it might have been better to apply the projected €440 million cost towards reducing the vast amounts of VAT debt currently being warehoused against the day when businesses can finally pay their tax liabilities.  Given that the EU state aid restraints are temporarily lifted, that €440 million could have been targeted, for example, specifically to forgive some of the historical VAT due from the SME sector.  The July Jobs stimulus was good.  Ministers and their officials alike did well to deliver what in effect is a full scale national budget in the space of few weeks.  The purpose and rationale of many of the measures like the extension of the wage subsidy, the extension of the pandemic unemployment payments, and the extinguishing of commercial rates is readily apparent.  The object of this VAT reduction is not as clear. I've never seen a tax reduction I didn't like.  However, many consumers may not notice this tax reduction and many businesses could benefit more from this element of the jobs stimulus if the cost of the VAT reduction was diverted to reducing their current and not their future tax debts.  Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Aug 13, 2020
Thought leadership

 Originally posted on Business Post, 26 July 2020.Deadweight is what economists call money that is spent to stimulate activity which would have happened anyway.  No need of any such concerns over the July jobs stimulus package announced on Thursday.  The need is so great that any money pumped in by the government in any direction is going to realise some benefit.  The trick now is to maximise it.Some of the negative responses towards the stimulus package measures look a bit tired and frayed.  The last time we had an emergency stimulus like this was back in May 2011 which brought in the 9% VAT rate for the hospitality sector.  That new 2011 government had been formed in early March, yet it took a full two months to start dealing with the employment crisis prompted by the banking collapse.  Things move faster these days so we need to move on from rear-view mirror economics.  We won’t ever revert to a 2011-style economy but neither can we go back to 2019 methods of doing things.It is clear that government looked to some international experiences when pulling together the bundle of measures.  Using the tax system to deliver relief works well and has been the pattern in several developed countries.  Extending the temporary wage subsidy scheme, even if it is no longer called that, is effective because of the speed of delivery of relief.  The Employment Wage Support Scheme now could cover a greater number of people because the employment reference point of 28 February is no longer sacrosanct.  Its duration, extended up to April of next year, provides yet a further reason for employers to hang on to their workforce.  There had been some suggestions that it would morph into an even more effective arrangement modelled on the German Kurzarbeit system where the government pays salary for the unworked time of employees on reduced hours.  However, the social welfare system in Germany is radically different to ours.  In Germany, almost 40% of a worker's wage goes to the government in social security before any income tax is paid.  In Ireland total PRSI contributions on employment top out at just over 15%.  The Employment Wage Support Scheme in its current shape may be as good as the country can support, because there is zero capacity in the economy to increase taxes in any form.  Every measure in the package needs to be seen in the context of what can be sustained.Any critiques of the jobs stimulus package based on the notion that things will return to 2019 economic status are misguided.  The business models for tourism, the hospitality sector, the entertainment industry and education have changed fundamentally, and might never revert to pre-coronavirus methods of earnings and delivery.  Take professional training for instance.  The technicians supporting the webcasting of classes and online invigilation of examinations will become just as important in the future as the teachers and exam markers were before coronavirus.  It may well turn out that the best elements of this package will be the restart grants to help businesses remodel their premises and service delivery, and the reskilling and apprenticeship programs.  The July jobs stimulus is not without its flaws.  Before the crisis, 330,000 citizens in the total workforce of 2.3 million were self-employed.  The pandemic unemployment payment was an unprecedented gesture towards this cohort of workers.  It was the first time that the State had offered the self-employed unemployment support to this extent.  Although it is being extended to April next year the payments are to be tapered back.  The new income tax reliefs to recover tax paid by the self-employed in happier years is a form of grant, but this assumes that their business was well established and profitable before the virus struck.  Timing is also an issue.  Reducing the VAT rate from 23% to 21% should help retailers manage cash flows, but it could also prompt consumers to delay the purchase of big-ticket items until the cut takes effect in September.  In the past, VAT reductions have been reversed by government in short order because retailers opted to allow the reductions add to their bottom line rather than benefit the customer.  This reduction is time bound, so there is no commercial penalty for not passing on the reduction.Without consumer confidence the stimulus could yet fail.  People need to be comfortable where they shop, where they eat, where they stay, how the travel and where they socialise.  Re-starting a business is not just about reopening doors.  Just as government looked overseas for ideas, consumers are well aware of the consequences of poorly managed reopening in cities as diverse as Leicester and Barcelona.We won't know for a while whether the balance between grants and loans is correct, whether we have done too much for employees at the expense of the self-employed, whether the measures can be implemented with sufficient speed and whether they will generate sufficient confidence in the consumer market.  The stimulus measures must be monitored as rigorously as NPHET monitor the impact of public health measures and adjusted as necessary to ensure they are working. Just as we are right to be concerned about a second wave of coronavirus infection we cannot afford a second wave of economic collapse.  This collapse can be avoided if we focus forward.  Let’s not try to re-model our economy back to how it looks in the rear-view mirror.Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Aug 06, 2020
Thought leadership

 Originally posted on The Business Post, July 19, 2020.On the face of it, Ireland won the Apple case last Wednesday.  The General Court of the European Union held that Ireland was not in breach of EU state aid rules in the manner it had taxed Apple entities in this country.  Some political noise following the ruling had to do with the €13 billion of tax that the Exchequer “lost” as a consequence of the ruling.  This is nonsense.  The €13 billion never belonged to Ireland, because Irish tax law doesn't work that way for anyone, let alone Apple.  The tax rules for the profits which are subject to Irish tax existed long before major multinationals came to our shores.  The Commission's case against Ireland hinged around their misreading of the way Irish tax law operates, and the General Court confirmed that the Commission had indeed got it wrong.  The Revenue Commissioners were also winners.  The Apple case differed from many other state aid cases taken by the Commission in that the focus of the examination was how Irish officials applied the law of the land, and not on the state aid compliance of the law itself.  The judgment is not an undiluted victory for Revenue.  The court cited problems with the methodology applied in calculating the tax liabilities involved.  They talked about there being insufficient documentation being retained.  The judges though allowed common sense to prevail and recognised that an absence of paperwork in itself is insufficient to prove that there was a problem.  Of the scant paperwork which did exist and was discussed in the ruling, one item seemed to suggest that promised employment levels might have a bearing on corporation tax arrangements.  This was worrying from the Irish viewpoint as it highlighted a point of general unease among European institutions about the way Ireland conducts its tax affairs.  Nevertheless the court found that the Commission couldn’t argue that job creation was a factor in the case.There is an assumption in some quarters that the Commission will take this week’s decision to appeal.  To what end?  Though it may feel to them like a pyrrhic victory, the Commission’s entitlement to look at tax issues when it comes to challenging state aid rules was confirmed by the court ruling.  This entitlement, along with the entitlement of national officials to apply domestic law as best they see fit, may well be the only enduring lessons from the Apple case.  The world has changed since 2016 when the Commission first issued its findings against Ireland.  The tax point at issue in the Apple case is no longer an issue, resolved neither by Irish legislation nor by European Commission activity but by changes in US tax law.  The US Tax Cuts and Jobs Act of 2017 cancelled out the strategy of deferring tax on profits of US multinationals earned outside the US by keeping those profits outside the US.  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.  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.  It is hard to see how additional Commission challenges in the Apple case could further that agenda.The Commission should therefore now be looking forward and outward, rather than pondering whether it should be appealing the General Court’s decision.  Anyone who has read the written verdict will be struck not just by how considered and detailed it is, but also by the amount of time and effort taken up by the case from all parties.  All this time and effort could be better applied elsewhere.  Not only that, the European Treaties stipulate that a further appeal can only be on a point of law, which may be difficult given that the outcome was largely determined on the facts.  Losing an appeal on a point of law in a case this big holds significant political risks for the Commission.Giving evidence to the House of Lords last month, the EU's chief Brexit negotiator Michel Barnier underlined the importance of the single market in the context of an ever more disrupted and unstable international trading environment.  Regulating state aid is an internal management problem for the European Union.  Commission resources should now, as Barnier has highlighted, be devoted towards securing Europe's place as an international trading bloc and not fighting internecine tax wars with its member countries.  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.  We will have to secure wins as this change is developed if the corporation tax yield is to be sustained.  God knows, we've had plenty of practice fighting our corner in the international tax debate.Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Aug 06, 2020
Thought leadership

 Originally posted on The Business Post, 16 July 2020.We have been locked for months in a battle against Covid-19, but one thing the pandemic hasn’t put on hold is the ever-closer problem of Brexit which needs our attention now.Imagine a situation where you are asked to negotiate a new deal with a key supplier. The negotiations are tricky because your supplier also competes with you on other products. Then your own shareholders call in the negotiator for the other side to find out what is going on.This unlikely scenario was actually played out last month. In recent days, the House of Lords Committee on the European Union published a transcript of a private meeting they held with Michel Barnier, the EU’s chief negotiator on the EU/UK trade deal. The questions were asked in English, the answers given in French and delivered via an interpreter. Barnier’s answers were bleak. No one will win in negotiations about least worst options. Even the best possible outcome won’t help many Irish businesses an awful lot.The trade negotiations will at best resolve issues of tariff rates and quotas. These are critically important to the agri-food sector because tariffs and quotas affect that sector far more significantly than other sectors. Otherwise most categories of goods, even without a trade deal, attract low or nominal tariffs under World Trade Organisation rules. Goods flowing between the two customs jurisdictions will attract paperwork and still have to be checked at the borders. Goods from Britain coming into the EU will have to be checked the same way as goods, say, from Brazil.The checking obligations will be costly and burdensome for all Irish industry doing business with Britain or doing business through Britain with other EU member states. The Revenue Commissioners were to hire 500 additional customs officers to do all this checking along with apparently 750 in the Netherlands, 700 in France, and close to 400 in Belgium. This is why survey after survey of Irish business concerns over Brexit highlight delays and disruption rather than customs tariffs as being the main problem.As Barnier pointed out in his evidence to the House of Lords, the European single market is an even greater asset for the remaining EU member countries because of increasing international trade tensions. It therefore seems highly unlikely that there will be any delays, postponements or concessions on customs checks next year. Border controls are not just about customs duties, but also certifying compliance with EU single market standards and, in the case of agri-foods and the export of live animals, health checks.The UK will phase in some customs obligations on their imports during the initial six months of 2021. The British side can, of course, do nothing unilaterally about the phasing of obligations on exports. There have been reports of increasing levels of concern regarding security and reputational risks if Britain is unable to police its own borders. Porous customs borders also dilute their capacity to negotiate trade agreements beyond the EU, and Britain continues to pin its hopes on commercial success from a wide range of trade agreements with other nations, notably the United States.The Northern Ireland protocol, the special arrangement which means that Northern Ireland will de facto be a member of both the EU customs union and the UK customs territory, will also take effect next year, independent of the success or otherwise of the trade negotiations. How this will work is still very much up for debate. A report last month from the University of Liverpool, based on interviews with Northern Irish and British business interests, describes a gathering “contagion of uncertainty”.This contagion of uncertainty over the operation of the Northern Ireland Protocol also extends right across the British establishment. This week, the same House of Lords committee that had the private conversations with Michel Barnier wrote to the Northern Ireland Secretary of State, Brandon Lewis, demanding to know why he continued to avoid appearing before them to explain exactly what was going on.Also this week, the UK Revenue and Customs authority, HMRC, invited tenders from interested parties for a service to “identify and support the education of traders” and make electronic declarations for Northern Ireland protocol purposes. That’s cutting it pretty close given that the new rules will come into effect in less than six months. The false dawns in March, May and then again in October 2019 marched business to the top of the no-deal hill and then marched it down again. On each occasion, it turned out to be alright on the night, and an extension averted import and export no-deal Brexit chaos. This time, Britain has ruled out any extension beyond 31 December next.Both border controls and the operation of the Northern Ireland Protocol will be simpler if there is a good trade deal, but a good trade deal will not magic either of them away. We have all been focusing on the problems of the pandemic and its impact right across the island. Yet, disruption for businesses trading post-Brexit is also a serious problem and unfortunately, it deserves our attention too.Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland.

Aug 06, 2020
Thought leadership

 Originally posted on The Business Post, 5 July 2020International associations have not fared well during the Covid-19 pandemic. The EU's approach to tackling the crisis has been (to put it charitably) fragmented because it does not have a core role in health matters, and the G7 group of the world’s richest nations couldn't come up with a joint declaration on the emergency in March, apparently because Mike Pompeo, the US Secretary of State, insisted on referring to the coronavirus as the “Wuhan virus”.Tax receipts for the first half of 2020 are higher than expected, thanks to state supports for SMEs – and keeping those in place will be key.Judging by the tax receipts published last week for the first six months of 2020, Irish business presses on. This is despite all reasonable assumptions, based on so many of us either being out of work or working in struggling businesses, that things are grinding to a halt. More tax was collected in the first six months of this year than in the first six months of last year, according to the exchequer figures published on Thursday.Not for the first time, the unexpectedly high tax receipts are in part due to high corporation-tax receipts, described in the exchequer statement as “volatile”. I'm not aware of any dictionary which defines “volatile” as marked by a consistent pattern of growth over a decade, which is what has happened here.It is often pointed out that 40 per cent of all corporation tax receipts comes from ten large companies anchored in the multinational sector. Less frequently highlighted is that 60 per cent of the corporation tax receipts haven’t come in the past from this exalted cohort. If this trend has continued, it would seem that many Irish businesses are continuing to operate successfully during 2020 – 60 per cent of a very large number is still a very large number.Once a company gets over a certain size, its corporation tax bill becomes, in effect, a real-time tax. Payments are based on current rather than on historic profit levels. If corporation tax receipts are strong – and this month they have been unusually so – it means that many businesses are performing well in many areas of the economy. In addition, the big multinational players are governed by corporation tax reforms introduced in many developed countries over the past decade.These reforms mean that it is increasingly difficult for companies to shut up shop and relocate simply for tax reasons. The level of corporation tax receipts shouldn’t be just dismissed as being further evidence of a perfidious tax haven economy, as so often happens. Rather they can be a useful indicator of the current commercial activity taking place in a country. The money is welcome too.We don’t have reliable signals for Vat this month as Vat payments only come through every two months, but the employment tax figures show a mixed picture. Income tax receipts are 20 per cent down from the same month last year even though the PRSI receipts are a little up. The key point here though is that 80 per cent of the income tax is still being collected, and this may reflect the emerging pattern that lower-paid workers were the most vulnerable to losing their jobs. The vast bulk of income tax receipts comes from higher wage earners.Last week’s exchequer figures reflect what was actually collected, rather than what was due for payment during June. At present, businesses are permitted not to pay over the PAYE they are withholding from their employees, without interest or penalty, under the so-called tax warehousing arrangements.Revenue figures from last month suggest that some €650 million in PAYE liabilities has been warehoused in this way so far. This is a significant sum, but it is only about 2 per cent of the total which might be due for collection from the national payroll throughout the year. Clearly many businesses still have considerable reserves or are sustaining a reasonable cash flow to meet their tax obligations.We know from the last recession that it was the need to borrow over successive years to fund welfare and public services that grew the national debt because tax revenues were insufficient; the cost of the bank bailout was not the main component. The evidence now is that, unlike the last time, we can avoid tax revenues drying up by using supports such as the temporary wage subsidy scheme. This scheme is an employment-related grant for industry and must be continued. If we can preserve the tax stream by continuing to plough money into industry with grant aid, the cost of doing so in 2020 could pale into insignificance when compared with having to fund social welfare and other supports over many subsequent years.Sustaining business activity and encouraging growth to reduce the need for future state supports is key, particularly for the SME sector. The July recovery package being promised by the new government must look to manage future government expenditure by ensuring that businesses rehire to fill the jobs that were lost as soon as possible. We had virtually full employment as recently as March, and we need to get back to that.The two ministers at the helm of Finance and Public Expenditure and Reform will hopefully recognise this and keep the business supports in place as they formulate the July stimulus package. If they can keep Irish business moving, employment will recover and everything else should follow from that.Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Aug 06, 2020

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