Thought leadership

Sunday Business Post, 3 November 2019 One of the damaging aspects of the Votergate controversy is that by focusing on sloppy voting habits and practices in the Dáil chamber, the good work which politicians do on a routine basis for their constituents is undermined. The political clinic is a key element in any democracy, and our TDs and councillors are routinely asked for help and advice on all kinds of social and legal issues.  Tax, in all its complexity, features prominently in TDs clinics.  Against that backdrop, Revenue have provided a helpline for TDs dealing with their constituents’ tax queries for many years.  Every revenue authority that was ever formed could have a tense and fractious relationship with the government, oligarchy or dictatorship of the day.  It’s in the nature of what they do, so many countries have created legal walls between the political system and the tax office.  In Ireland the system is by now quite prescriptive and Irish law stipulates that the government of the day can have no influence on how the Revenue Commissioners handle an individual tax case.  Tax law is drafted in a manner as to give very little wiggle room to revenue officers when they make decisions.  It’s not the same everywhere.  For instance, when it comes to publishing the list of tax defaulters, the Irish Revenue must publish the names of anyone who meets the criteria for publication and have no discretion in the matter.  By contrast, under similar name and shame tax rules, their counterparts in the UK may publish names, or for that matter choose not to.  It’s up to them.  In some areas though the Irish revenue are much closer to the legislative process than their counterparts in other countries.  In Ireland, tax law is drafted by officers from the Revenue Commissioners.  In other countries it tends to be drafted by civil servants from other departments.  Does the provision of a special helpline for TDs by Revenue further muddy the distinction between the political process and the tax collection process? Some weeks ago, Michael Brennan of this paper reported on the success of the Revenue’s PAYE modernisation system.  At the start of the year, many employers were obliged to change their payroll software to a system more closely integrated with Revenue’s own collection and analysis systems.  By all accounts, this generated anything upwards of €100 million in additional income tax collected.  All else being equal, this is a good thing.  The employer who operates the letter of the law when paying employees is at a competitive disadvantage to the employer who does not.  At €100 million, the amount of additional PAYE tax recovered is significant.  But in 2018, Revenue collected €17,672 billion through the PAYE system.  This suggests that the PAYE system may have been flawed, but it certainly wasn’t broken.  Now there are indications that Revenue have become intoxicated with the exuberance of their own collection technology. A review is underway at present of flat rate expenses to employees.  In most cases these are relatively modest tax deductions granted to relatively unskilled workers for uniforms cleaning and the like.  They are available to the various categories of worker irrespective of the individual’s circumstances – hence the term “flat rate”.  It’s not even known if the withdrawal of the expenses is even necessary because according to a Parliamentary Question raised by Deputy Sean Sherlock and answered by the Minister for Finance, “it is not possible to accurately quantify the anticipated increase in tax revenue arising out of any abolition or reduction”.  It's very hard for individual employees to make claims for legitimate expenses and deductions, partly because the tax rules are so tight but also because the correspondence with Revenue on such claims can be tortuous.  The flat rate expenses regime is pragmatic response to a requirement for fairness within the tax system, but the signals now are that many of these expenses are to be extinguished for the employees receiving them. That's going to generate a lot of heat for many employees.  Despite last month’s Budget being largely neutral, quite a few people will find that their after-tax income is a bit less in January 2020.  I understand that the employees who will be affected by the withdrawal of the expenses will be contacted later this month.  Revenue will be largely immune from the irritation their administrative decision will cause, but the political system won’t be.  It can be expected that the number of queries arising from the elimination of flat rate expenses will rise in the various constituency clinics.  Just as well then that Revenue have a hotline for members of the Oireachtas.    Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Nov 04, 2019
Tax

Sunday Business Post, 27 October 2019 The road from Belfast to Dungiven is festooned with roadworks, but such public sector development seems to be less prominent of late the further west you travel in Northern Ireland.  Outside Belfast, larger industry exists only in pockets, and problems for smaller businesses which have been perennial since the downturn – a lack of investment coupled with difficulties sourcing bank financing - have become endemic. The new Brexit protocol for Northern Ireland, currently on life support, is being met with some confusion and scepticism.  It's as if Brexit is being blamed for everything, one businessman told me in Derry this week.  There are indeed genuine concerns among Northern Irish business for the additional paperwork of the proposed new arrangements in Johnson’s proposed deal.  These concerns are well founded.  Brexit Minister Stephen Barclay's slip, to a House of Lords committee, that customs documentation and declarations will be required between Northern Ireland and Great Britain were confirmed and amplified by the acting head of HM Revenue and Customs, Jim Harra, in his evidence to a Treasury select committee on Monday.  According to Harra there will be some documentation “both for regulatory purposes and for fiscal purposes” on goods moving east-west.  For regulators such as HM Revenue and Customs there are three main areas of concern; customs controls, VAT collection and the enforcement of standards.  These translate directly into paperwork for business, the kind of paperwork that most businesses in Northern Ireland have forgotten how to do since the Single Market opened up in 1993. Most types of tax enforcement rely on a declaration of some description – an attestation by the taxpayer that the details on the tax return, VAT return or customs document are true.  Without a declaration, it is very difficult for a revenue authority to make a charge or a prosecution stick.  That’s particularly important when new regulations are being introduced, and new regulations are an inevitable consequence of Brexit in whatever form it finally takes. This explains Harra’s focus in his evidence to the House of Commons committee on declaration procedures which are currently made electronically, and the vast majority of which are cleared electronically by the UK tax authorities.  Their current practice is to carry out checks on about 4% of all declarations, but that relatively small number of verifications doesn’t lessen in any way the compliance burden for business of assembling the declarations in the first place.  A key aspect of the new Brexit protocol for Northern Ireland is that customs duties will be charged when goods move from Great Britain to Northern Ireland, with rebates available if the goods remain in Northern Ireland rather than being transported onwards to Ireland or elsewhere in the EU.  Customs declarations involving such goods are bound to receive particular attention.  This is because they are critical to securing trade controls in the absence of a customs border on the island of Ireland, and because they will determine the amount of customs duties businesses in Northern Ireland will pay on imports from Great Britain.  There is a knock on effect too on customs duties collected by the Irish Revenue on imports from Great Britain.  Will British exporters prefer to ship through Northern Ireland to Ireland and pay tariffs to HM Revenue and Customs, or ship directly to Dublin and pay the tariffs to the Revenue Commissioners?  Only a future free trade agreement between the UK and the EU could resolve that particular headache. Brexit, however, is not the whole story in Northern Ireland.  There is a widespread attitude that the underlying commercial malaise stems from the lack of government from Stormont.  Business weariness with Stormont inactivity is outweighing weariness with Brexit.  Because Northern Ireland is so heavily dependent on the public sector, any slowdown in public sector procurement or investment has an immediate effect on the economies and livelihoods in the provincial towns and cities like Omagh and Derry.  Sites earmarked for projects like new schools remain idle and undeveloped, because of the absence of political go ahead.  Brexit and the lack of government at Stormont are acting almost in a pincer movement on the private sector, the element of the Northern Ireland economy which is already smaller relative to the public sector than it should be.  From a purely economic standpoint a Brexit deal which gives Northern Ireland a special status must be urgently accompanied by the re-establishment of the Stormont executive.  The traditional resilience of Northern Ireland business is being tested to its limits.    Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Oct 29, 2019
Thought leadership

Sunday Business Post, 20 October 2019 Perhaps the key intervention this week in the Brexit talks did not come from Ireland, or the EU, or the British government.  It may have come from the UK’s Comptroller and Auditor General who declared on Wednesday that, officially, Britain was not ready to handle a no-deal Brexit.  According to the report, the UK government “has been unable to mitigate the most significant risks to the effective functioning of the UK border in the event of no deal”.  Sufficient facilities are not in place at UK ports to handle the customs requirements for importing and exporting to the rest of Europe.  This reality may have provided the impetus to get the political deal on Brexit closer to the line. Customs is a tax which changes behaviour. It is designed to ensure that local industry and local agriculture deals with the local population on more favourable terms than those applicable to foreigners.  On paper it is simple to operate.  For customs, all you have to do is look up a table to see the rate of duty on what is being imported, and pay it over at the port or airport or land border.  But like any tax, it must be policed otherwise it won't get paid.  Hence the concerns of the UK’s Comptroller and Auditor General.  Hence the EU insistence that under the terms of the new Withdrawal agreement, goods which enter Northern Ireland from the UK but ultimately end up within the EU must be subject to customs duties.  The EU customs union on which so much has hinged this week and which the Brussels institutions are so desperate to protect, is by no means the only customs union in operation in the world.  Usually speaking, customs unions remove trading barriers among the participating countries, in exchange for the surrender by the participating countries of their capacity to carry out trade deals independent of the customs union to which they belong, coupled with strong enforcement mechanisms to protect trade.  However, the current version of the withdrawal agreement agreed by the EU Council on Thursday suspends or mitigates some of the usual customs union rules for trade on the island of Ireland.  This kind of flexibility on the usual customs union rules is not unique.  There are precedents elsewhere for tinkering with the underlying rules where geography, politics or economic circumstances demand it.  For instance, one approach to a conundrum similar to the challenge of facilitating all island trade has existed for over a century in Africa.  The Southern African Customs Union involves the Republic of South Africa and some of the smaller surrounding countries.  All the countries charge the same customs tariffs on goods entering the Southern African Customs union, irrespective of their final destination, and pool the amounts collected.  A reckoning is carried out by reference to a formula to reflect where the goods were eventually used or consumed.  So, for example, if the Republic of South Africa collects customs at one of its ports on goods which end up in Botswana, a rebate is ultimately paid to the Botswana government.  No customs tariffs are charged on goods which originated within the member countries. These concepts are not very far distant from the solution which is in play in relation to a de facto participation by Northern Ireland in the customs arrangements of both the EU and the UK.  Customs charges are to be levied and, if appropriate, rebated depending on the ultimate destination of goods.  The negotiators of the new Protocol on Ireland/Northern Ireland do seem to have thought outside the box of the usual customs union rules, but they are not the first to have done so. Although the Protocol arrangements would create additional paperwork and cash flow challenges for some Northern Ireland businesses, the commercial advantages of having a presence in two regulatory camps could outweigh these disadvantages.  A recurring challenge for the Northern Ireland economy has been to change its base away from its dependence on the public sector and more towards the private sector.  This was the prompt for the proposed introduction of a 12.5% rate of Corporation Tax for Northern Ireland, which has been one of the casualties of the absence of the Stormont Assembly. There are signs that the EU is increasingly viewing post-Brexit Britain as a competitor rather than as a close trading partner.  Just as the smaller African nations in the Southern African customs union have benefitted enormously from the trading arrangements with the Republic of South Africa (to the extent that business interests in Pretoria are growing disillusioned with the system), the dual customs arrangements and the flexibility that might present could provide a significant boost to the Northern Ireland economy. There is precedent for this type of arrangement working well.  The Protocol may be new but the customs ideas it contains are already being used elsewhere.     Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Oct 21, 2019
Thought leadership

Sunday Business Post, 13 October 2019 The ink had hardly dried on Paschal Donohoe’s Budget papers warning about the sustainability of Irish corporation tax when the OECD launched its latest plan to change the way multinationals organise their tax affairs. Donohoe's concerns are real and not just because of Ireland's unusually high reliance on corporation tax receipts.  The contribution of the Irish corporate sector to the Irish economy is more than just corporation tax.  It is also jobs.  The Social Insurance Fund is bolstered by the PRSI paid by employers, levied next year at a rate of 11.05% on most private sector wages.  An international consensus that would squeeze the Irish corporation tax regime too hard could prompt companies to hesitate on expansion plans, or worse, relocate altogether.  This is the last thing we need given the pending disruption to our trading relationship with the UK post Brexit. No matter, the truth is that the international corporation tax regime has to change, and indeed has been changing over the last decade or so.  Companies are still taxed largely on rules which were first devised in the age of empires.  These rules conspired to ensure that profits from the colonies were taxed first and foremost where the companies were headquartered, rather than where they operated.  In an increasingly digital world, where neither offices nor staff on the ground are required to sell or indeed deliver product, such arrangements are unsatisfactory.  The OECD’s new notion, published on Wednesday last to remedy this is simple.  Allow those countries where goods are sold a share of profits to tax, irrespective of whether or not the multinational has a physical presence in the territory.  It's a simple concept which is proving difficult to deliver.  This week’s announcement is the OECD's third bite (at least) of this particular cherry.  Initial attempts towards taxing the digital economy in the OECD’s first Base Erosion and Profit Shifting project (BEPS) some five years ago were inconclusive.  A second attempt earlier this year also didn't land particularly well, so what are the prospects for this third set of proposals? The OECD isn't the only show in town for tax policy, but it is the main one.  Attempts by the EU to introduce a digital levy have already been parked in anticipation of the OECD sorting out the problem.  Unilateral attempts by countries like France and UK have been half-hearted, or have met with considerable political reluctance.  This political reluctance is particularly acute in countries like Ireland which have a large corporate sector, but a relatively small domestic market.  If in the future companies are to be taxed everywhere they sell, rather than where they make, do or physically locate, that will inevitably drill a hole in Irish Exchequer receipts. There is, however, some encouragement for Ireland in the proposals which emerged this week.  First of all, they acknowledge that some kind of protection is required for countries who might lose out because of relatively small domestic markets.  Secondly, the focus of the new OECD proposals seems to be on the very largest multinational entities which primarily supply services to consumers.  A third aspect of the plan offers reassurance in that it recognises that much of the value of a digitalised product lies in the research, know-how and other forms of intellectual property which underpin it.  It’s too early to predict how much corporation tax Ireland might lose as a consequence of the proposals this week.  What is clear is that this set of proposals seems more benign than previous OECD approaches.  In the past, international cooperation on the corporation tax system has worked in Ireland's favour.  As international consensus grows, uncertainty over the future of the corporation tax regime diminishes.  A genuinely low 12.5% rate when applied in the context of a widely agreed approach over where and how much of a multinational’s profit should be taxed becomes even more useful.  The Department of Finance line is that some form of international consensus is indeed achievable on the taxation of multinational profits, where countries have had no previous entitlement to levy tax on profits earned from sales made in their jurisdictions.  The proposals are still at consultation stage.  That’s critical because a second OECD consultation on corporation tax is due in a few weeks time.  It is understood it could posit the introduction of minimum effective rates of corporation tax , irrespective of the domestic headline rates of the territories where multinationals operate. That kind of notion could be far more damaging to Ireland's corporation tax base, but it is not a foregone conclusion.  I gather that there are concerns within the OECD itself that the minimum tax idea goes further than current political thinking might allow.  Politics will always defeat policy, no matter how good the policy might be.   While politicians understand the political pressure to do something to tax multinational corporate empires, they will not want to surrender tax revenues to other countries when doing so. Nevertheless, we can expect some sundering of the old system to allow a limited redistribution of taxing rights across the world.  The system that worked for the old empires of dominant nations will be changed to tackle the new empires of dominant high-tech multinationals. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland    

Oct 14, 2019
Tax

Sunday Business Post, 6 October 2019 I spent some time in Europe this week, and it was something of a relief to get away from the never-ending cycle of Brexit and budget commentary in the Irish press.  Of course business people in other EU member countries are not nearly as concerned about the impact of Brexit as we are on this island.  Even industries where it has been well flagged that the disruption could be greatest seen almost nonchalant about the impending change.  One executive in the automotive industry told me that his organisation were far less concerned about Brexit than about the advent of electric vehicles.  The finance leader in a chemicals company suggested that the weather, rather than political climate, was of far more consequence to them when projecting sales and business prospects. In an increasingly fractious political world, it is in some ways reassuring to be reminded of the focus on self-preservation.  The willingness of the EU to accept or even contemplate any Brexit proposals from Britain should be viewed through a lens of how any such proposals will impact on the EU's own capacity for self-preservation.  Losing one member country may be regarded as a misfortune, but to lose two (as Oscar Wilde nearly said) would look like carelessness.  It seems that the EU institutions will not contemplate any future arrangements with UK which might see Britain benefiting from its decision to leave, thus tempting eurosceptics in other European capitals.  On the other hand, they will be wary of any proposals which could result in the remaining states being at a disadvantage by virtue of being a member of the European Union.  It is perhaps this latter imperative that bolsters the support from Brussels against any notion of a land border on the island of Ireland.  The stability and security of an EU member country cannot be prejudiced by the decision of another EU member country to leave.  Were that permitted, there could be a domino effect.  Ireland currently has no difficulty collecting taxes.  Since the great depression of 2008, Ireland has rebalanced its tax base and moved away from a dependence on capital taxation, which is vulnerable to falls in asset value, to a dependence on income taxation, which is vulnerable to unemployment.  There are strong arguments that we could do better managing how those taxes are spent.  But for 2019 at least, the Government’s income sources look secure.  Employment growth has met or exceeded any reasonable expectations, securing income tax receipts, VAT receipts (because VAT is largely a consumer tax) and the Social Insurance fund (because there is less of a draw on social welfare payments and stronger PRSI receipts).  Furthermore, the changes to the international corporation tax regime in recent years which many saw as threatening the Irish corporation tax yield, have instead boosted it significantly.  On that topic, the process of adopting of the EU anti-tax avoidance directive which restricts the capacity of multinational groups to manage their tax bills continues.  More corporation tax anti avoidance measures will be announced on budget day.  Compare that kind of planning with the situation in the UK, where the political system is so chaotic that even the date for their next budget day hasn't been set yet. The greatest risk to the Budget arithmetic on Tuesday lies within this chaos, and the threat it presents to employment and business profitability in Ireland.  The worst Brexit outcomes put future Exchequer receipts at risk, just as surely as the property bubble did a decade ago.  The EU can be as supportive as it wishes with regard to not having a hard border on the island, but if and when the UK crashes out, a border will inevitably be created.  Speaking to the BBC on Tuesday, Boris Johnson said that “a sovereign united country must have a single customs territory… one of the basic things about being a country is you have a single customs perimeter and a single customs union”.   This sounds quite like the aspiration of a statesman.  However it is also informed by Johnson’s need to have a clearly defined single customs perimeter before any future trade deals can be struck with any other country.  The outline backstop replacement plans this week appear to confirm that.  Future UK trade deals independent of the EU was one of the great selling points of Brexit, but they won’t happen unless the British create their own customs border.  Brexit itself is a decision by Britain to diverge from the standards and norms of the EU, and that includes customs. How far will the EU look aside from its own rules to ensure there is no Border on the island of Ireland?  How much support would be available from the EU for Ireland to help manage faltering tax receipts?  How far will the UK go to separate itself from the Customs Union?  In the next few weeks we will learn a lot about how far self-preservation extends.   Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland.            

Oct 07, 2019
Ethics

Chartered Accountants Ireland has responded to the FRC Feedback Statement and impact assessment relating to its review of 2016 Auditing and Ethical Standards In our response to the FRC we highlighted our primary concerns about the proposed updates to the standards.  We consider that it is essential that the FRC allow sufficient time for the 2016 standards to be fully embedded and for full consideration to be made of the overall impact of proposed further changes deriving from the reviews undertaken by Sir John Kingman and the Competition and Markets Authority, and the ongoing work being undertaken by Sir Donald Brydon in relation to the quality and effectiveness of audit. In our opinion, introducing an intermediate set of changes to standards prior to completion of that full consideration poses significant risk, given that it places auditors in a position of having to make changes on a piecemeal basis, in the knowledge that further changes will be required in response to those three reviews.   We also have significant reservations about certain aspects of the proposed changes to the Ethical Standard and the proposed extra territorial application of UK rules. On a similar note we have concerns about any divergence of FRC standards from the International standards given the number of groups with companies based in the UK, Europe and elsewhere.   In February 2019 we responded to the previous FRC consultation on the standards. Both responses can be read here: September Response February Response Our response to the Brydon Review  in June of this year can be accessed here.     

Oct 02, 2019

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