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
Thought leadership

 Originally posted in The Business Post, 28 June 2020The US had also very publicly pulled its support for the World Health Organisation and in more recent days it has sowed confusion as one of its representatives, Robert Lighthizer, said it was pulling out of OECD talks on a new global tax framework.More on that in a minute, but for now a question – is the momentum for international corporation tax reform as sponsored by the OECD on the wane?The organisation‘s work on the international corporation tax rules has a resonance with current public sentiment against the legacy of empires. The current cross-border corporation tax rules were formulated by the British Empire. The tax from great wealth being produced by corporations in the colonies was not ascribed to the colonies. Any company making its money anywhere in the British Empire had to pay its taxes in London and that was the end of the matter.International tax law has largely stuck with principles that result in tax being paid where the company is incorporated, managed and controlled. This might have been defensible in an era when it was made from digging stuff out of the ground and manufacturing products, but it is 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. This is why the international debate has focused so much on how the digital economy should be taxed.The OECD's approach to overturning the colonial method of taxation involves two objectives, or “pillars” in the jargon. The first pillar focuses on the digital economy. Subject to terms and conditions, the idea is that the profits of some companies should in part be taxed where their products and services are sold. The businesses that would be caught include those which provide content streaming and online advertising, or remote sales of goods and services to consumers. The second pillar is that there should be an effective minimum rate of corporation tax payable by all companies irrespective of where they are located.With more than 130 countries involved in the OECD negotiating process, these objectives have garnered some momentum. If the process becomes fragmented, it could push countries to create their own new tax rules outside of an international consensus approach. The EU institutions are also susceptible to promoting rule change, overlooking the inconvenient reality that the EU does not have the power to establish a corporation tax regime for its member countries.It appears that the US position on the OECD discussions is considerably more nuanced than has been widely reported. Writing to the finance ministers of France, Spain, Britain and Italy just two weeks ago, Steven Mnuchin, the US Treasury Secretary, clarified that the pillar one ideas should, in the view of the US, only apply as a default taxing position when all else fails. He also pointed out that the world may perhaps have better things to be doing than agonising over international tax rules when it should really be focusing on economic issues resulting from Covid-19.He wanted pillar one discussions “to pause” with a view towards resuming later in the year. His assessment of where matters stand in relation to pillar two, the global minimum tax, was that discussions have progressed more rapidly and could be concluded by the end of the year.This assessment is reasonable given that the US has particular cause for concern over pillar one. Due to the American dominance of the digital industry, a significant amount of tax revenue could be displaced away from the US and into other countries. Therefore, as regards digital taxation, it is in the short-term interests of some economies to go it alone. If they do, the US has an answer for that as well.America has a process known as a section 301 investigation, somewhat similar to the EU's competition investigations. Some weeks ago the US opened section 301 investigations on the digital tax proposals of a number of authorities, including Italy, Spain, the EU itself and Britain. It appears that these so-called anti-trust investigations enjoy bipartisan support in the US and are likely to persist irrespective of who is in the White House in 2021. If a response is deemed necessary, the US has plenty of tax and trading remedies at hand to counter any country’s attempts to unilaterally levy tax from American owned companies.Despite the recent suggestions to the contrary, the OECD is still in the tax policy arena. Their processes may have slowed as a result of the recent US intervention, but they have not stopped. The current programme for government states that Ireland should continue to support OECD efforts to arrive at international consensus on taxing methods. Mnuchin‘s letter in combination with the new section 301 investigations suggests that the US is taking the same approach.Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Aug 06, 2020
Thought leadership

 Originally posted on The Business Post, 21 June, 2020The accusation that the proposed coalition of Fianna Fáil, Fine Gael and the Green Party represents no change hardly stands up to scrutiny. Indeed, I can't see how any coalition involving Fianna Fáil and Fine Gael constitutes anything other than significant change.The groundwork for this political structure was laid by the confidence and supply agreement which kept the last government afloat and which, thanks to Brexit, survived much longer than anyone might have anticipated.The programme for government published last week is not the direct descendant of the confidence and supply agreement. It is more like a younger sibling scarred from the experience of the Covid-19 pandemic. The programme does not propose that we repeat past mistakes and try to tax our way out of this recession.Confidence and supply depended on income tax to fund the system. This new programme for government will depend on PRSI and environmental taxes to keep the show on the road. The difference between income tax and PRSI is not mere semantics. If the revenue-raising policies as set out in this programme for government are followed as closely as was the case with the previous tax policies in the confidence and supply agreement, the Irish fiscal landscape will look considerably different in five years’ time.Despite the read-my-lips-no-new-taxes protestations, the new programme for government seems to take what could be quite a different approach to pay-related social insurance. PRSI is not tax. Rather, it is a levy which entitles those who pay it to certain state benefits which come out of the country’s social insurance fund. The charges and entitlements for employees compared to the self-employed are quite different. The emphasis on applying taxes and levies by reference to how income is earned rather than by reference to how much income is earned is one of the greatest inequities in the Irish tax system.To its credit, the last government went some way towards improving the PRSI benefits available to the self-employed, without hiking the 4 per cent rate that they were being charged. These improvements were relatively modest. However, the introduction last March of pandemic unemployment payments at the same rates for the self-employed as for employees was a game changer. If only because of their sheer cost, these benefits can only be temporary. It seems that there is a subtext in the programme for government that in future, equalised benefits will be funded from increased PRSI contributions.Increased PRSI contributions will also be required to resolve the pensions conundrum as contributory social welfare pensions are funded from PRSI. In a normal year, contributory social welfare pension payments make up nearly three-quarters of all the cash paid out by the social insurance fund. The state pension is currently payable from age 66, and if the current retirement age is to stick, increased PRSI becomes the most obvious source of funding.There have been signals that people might be willing to pay additional PRSI if they could secure additional PRSI benefits. In 2017, the Department of Social Protection carried out a survey of mostly self-employed people paying PRSI. Respondents rated cover for long-term illness, short-term illness and unemployment as the most important extra benefits to them.Almost four out of five said they would be willing to pay a higher headline rate of PRSI in return for extra benefit coverage. With the proposal in the programme for government to establish not just a “commission on taxation” but a “commission on welfare and taxation”, those wishes may be fulfilled by the coalition if it ends up in power. .The SME sector has undoubtedly been the hardest hit by the coronavirus lockdown. Here the measures in the programme for government are weaker. Many businesses haven’t the appetite to draw down loans, however inexpensive the rate of finance, to re-establish their business even where they might have the wherewithal to repay them. There is no point in replacing a cashflow crisis in Irish business with an indebtedness crisis, yet that is the thrust of the proposals for the rescue funds in the programme for government.Corporation tax receipts from multinationals and larger indigenous industry have bucked the trend for several years and corporation tax receipts have continued to increase in this country, at least so far, despite the pandemic. The proposals on corporation tax retain the thinking of confidence and supply, with the emphasis on retaining the 12.5 per cent rate.A commitment to adherence to tax sovereignty and endorsement of the OECD’s primacy in formulating international tax reform is a clear signal. The next government will be unenthusiastic about EU attempts to impose new digital taxes or rule harmonisation. Coincidentally, the work of the OECD on these issues received quite a rattle last week when the US signalled a withdrawal from current discussions on digital taxation.Service industry, large or small, is the great driver of employment in this country. Services are largely responsible for the trade surpluses we enjoy with many of our trading partners. The programme for government speaks a lot about jobs recovery and that is the correct approach. If the recovery is to be jobs led, it must be services led.The policies in the current programme are sufficiently vague to allow for a focus on services. If this is missing as the new government takes up its work, the accusations that there has been no real change may prove to have been well founded.Dr Brian Keegan is director of public policy at Chartered Accountants Ireland

Aug 06, 2020
Thought leadership

 Originally posted on the Business Post, 7 June 2020A total of €8 million is a very large, but not incomprehensible, amount of money. It's the kind of amount a lucky person could win in the national lottery. It's also the amount by which the tax receipts up to the end of May of this year fell in comparison with last year. In the context of a €21.7 billion tax take in the first five months of the year, tax receipts haven’t fallen at all.Given that the country has been in lockdown since March, this is really quite an extraordinary result. Few would ever have described the Irish economy as a juggernaut. Nevertheless it seems that it may be taking more than three months of self-imposed recession to knock tax receipts completely off the rails, though spending on social welfare and health has mushroomed according to the exchequer figures published earlier in the week.The positive-looking tax figures can’t all be explained away and have to be taken into account as we plan the exit from the lockdown. Of course, there are timing issues which help explain how little coronavirus seems to have affected the national tax take, but it’s not just about timing. It seems that, contrary to all the evidence, lockdown has left many businesses and individuals relatively unscathed. This is truly the strangest of recessions.January and February 2020 were bumper months for tax collection and this puts a comforting sheen on the overall figures for the year to date. Corporation tax receipts in May were very strong, but because of the way corporation tax is collected, based on current estimates of profitability from large industry, many companies seem to be less affected by the lockdown then we might have guessed.Income tax receipts are remarkably stable. This is despite having hundreds of thousands of people who were previously fully employed either benefiting from the pandemic unemployment payment or having their wages heavily subsidised. The Department of Finance explains this anomaly by commenting that “the progressivity of the income tax system has protected aggregate receipts to some degree”. What this really means is that it is lower-paid workers who have been losing their jobs or are having their wages subsidised by government. Lockdown, at least up until the end of April, did not hit the high rollers.It did however hit the high spenders. Vat and excise duties are considerably down. A fall-off in purchases of luxury goods, cars and indeed new houses will have that effect.What is perhaps the most striking about the May exchequer returns is that many businesses seem to have decided not to defer making tax payments. At the moment any business can decide not to pay over Vat or PAYE without interest or penalties, and there is no cheaper nor more readily available finance anywhere from any source. How is it that so many businesses, just within the last fortnight, opted to settle on time with the Revenue instead? I think it is reasonable to assume that it is the bigger businesses, with the biggest Vat and PAYE bills, that have opted to continue to pay tax on time because they can afford to.The May exchequer figures are therefore better than most would have realistically expected and in ways run counter to the dismal predictions in recent economic forecasts. Well over a century ago, economics was dubbed “the dismal science” by Thomas Carlyle, the British historian and satirical writer, not because of its gloomy predictions, but because of its failure to explain or justify anomalies encountered in society. The current disruption in economic activity is not because of economic mismanagement or failure; it is a result of the change in behaviours prompted by legitimate concerns over public health. We should therefore be particularly wary of any economic forecasts generated when society is struggling with anomalies never seen before.Many business sectors are trying to make the case for their release from lockdown earlier than others. They are right to do so as there is widespread hardship being experienced but opening up one particular sector in priority over another may not be in the best interests either of economic recovery or of public health. There was a harsh warning on the ongoing danger of the coronavirus from Sweden last week as health officials there conceded that fewer restrictions on movement and commerce had contributed to a high per capita death rate.Paul Krugman, the American economist and commentator, put the conundrum most colourfully when he asked if it was the de facto position that Americans must die for the sake of the Dow index. In less emotive terms, however, the planning for re-opening the economy cannot be based solely by reference to industry sector. Some businesses can and have continued operating with remote workers and alternative supply and delivery arrangements. Size matters.Before Covid-19, it was often suggested that a two-tier economy was emerging where the divide was between rural Ireland and our urban centres. The current exchequer figures are pointing towards the emergence of a two-tier economy with a different boundary, where in general higher earners and larger businesses are having a better lockdown than most. We should not allow any divide between large and small industry to widen as the economy reopens. Dr Brian Keegan is Director of Public Policy with Chartered Accountants Ireland

Aug 06, 2020
Thought leadership

 Originally posted on the Business Post, 31 May 2020 The Japanese government is delivering generous one off relief payments to residents of Japan as part of a package of measures to lift its economy following the coronavirus pandemic.  Japan, among the developed nations, has had one of the less stringent lockdowns with many businesses operating more or less as normal, except for the hospitality and tourism industries.  This per capita, no questions asked, lump sum is attractive but it is something of an outlier in the context of international economic responses.  One of the more striking aspects of government bailouts across the world has been their similarity of approach– cuts-and-pastes of policies between one jurisdiction and the next.  Now, as countries emerge from the restrictions, patterns of effectiveness of different types of government support for business are emerging.Like Ireland, many countries used their Revenue Authority as a primary channel for economic relief.  Tax systems have the dual benefit of holding records on the entire business community (at least in theory) along with automated processes.  Few developed economies do not at this stage have highly automated systems for payroll tax collection and sales tax collection and this infrastructure has been widely used to pay funds to support employment.  New Zealand is of course a paradigm of how to deal with the pandemic, and has gone one step further.  The New Zealand Inland Revenue also delivers cheap loans to struggling businesses and the amount of the loans is predicated on the number of employees in the business.Wage subsidy schemes like the Irish scheme have been introduced in the likes of Canada, Australia, Hong Kong and New Zealand.  Not all employment support schemes have been an unqualified success.  Some countries are finding that emergency coronavirus benefits for workers who have been made unemployed trump the benefits of staying in employment.  Complexity and claimant publicity in Canada have turned out to be significant disincentives for take up, similarly to the rumblings in this country when the scheme was first announced here.  Reaction to the UK’s Job Retention Scheme to date seems to have been largely positive, but their scheme is only a few weeks old.Countries are also exploring ways of getting more cash into troubled business.  Germany is looking to revise some of its tax rules so that losses in this pandemic year can be set against more profits already taxed in earlier years, resulting in refunds.  New Zealand is considering allowing estimates of likely losses in 2021 to be used to trigger tax refunds now.  In another echo of the Irish experience, Germany is scoping a new low rate of VAT for its restaurant sector.It seems that in many countries, direct welfare benefits paid to individuals have not just undermined attempts to subsidise businesses to secure employment, but created issues of their own.  There has already been some debate in this country as to how recipients of the pandemic unemployment payment will account for the tax due on those payments at the end of the year.  In Germany it is unclear if individuals receiving comparable benefits to our Pandemic Unemployment Payment will be obliged to file tax returns; normal German tax administration procedures suggest that they will.  On the other hand the peculiarities of the Australian system are such that many individuals will look to file tax returns early to secure refunds of income tax overpaid.  Revenue authorities in different parts of the world are thus facing the prospect of a flood of taxpayer activity either because of refunds due or obligations to be met.  That's something that could well happen here too, unless Revenue devise and publish processes to simplify compliance for all those workers facing tax liabilities arising either from the pandemic unemployment payment, or from wage subsidies which were not subject to PAYE.Future problems are accruing.  It's not just Ireland that is proposing to “warehouse” tax debt, but in every country where there has been tax debt deferral, these liabilities will ultimately have to be paid.  Countries are tending to replace the pandemic business liquidity crisis with a business debt crisis.  As long as that continues, there is little prospect of rapid business recovery.  Businesses which are currently being kept on artificial life support through subsidies, loans and tax deferrals will hit a wall when these dry up.  In Australia, the talk is already of an “insolvency cliff”, as troubled small businesses have up to now been shielded by a nationwide ban on liquidations.This week the Irish Fiscal Advisory Council was calling for an “adjustment” to the national finances but in fact are championing Austerity 2.0.  Yet if we do too much to hinder a return to previous levels of consumption, many businesses will be consigned to a limbo of business stagnation.  When the crisis hit, few jurisdictions had the time and space to look at models implemented in other countries before they introduced their own systems for pandemic relief.  Now it is different.  While we can’t afford to follow the Japanese example, we can benefit from experiences in other countries, and learn from the ones that are getting it right.Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Aug 06, 2020
Thought leadership

 Originally posted on the Business Post, 24 May 2020 The late US President, Ronald Reagan, had a simple maxim about government's view of the economy.  If it moves, tax it.  If it keeps moving, regulate it.  If it stops moving, subsidise it.  Coronavirus has thrown this maxim into action.   Everything has stopped moving in the economy and must now be subsidised. No less a body than the European Commission formally recommended this week that Ireland “take all necessary measures to effectively address the pandemic, sustain the economy and support the ensuing recovery”.  Borrowing is of course one way of funding these subsidies.  In its capacity as the watchdog of fiscal rectitude among EU countries, the Commission has invoked its General Escape Clause.  That means that there won't be any sanctions for countries borrowing what they have to borrow, and doing what they have to do, to secure their nations’ health and livelihoods.  The European institutions have even made long-term finance available at virtually invisible lending rates for these very purposes.While all this is helpful, it doesn't take away from the need to ensure sustainable tax revenues to deal with increased bills for our healthcare system, social welfare and other essential services which are likely now to extend well beyond 2020.  These bills cannot be met indefinitely by borrowing.  Gloomy unemployment forecasts of up to 22% in the second quarter of this year, as suggested by the Department of Finance this week, don’t augur well for sustainable tax revenues.We find ourselves in something of a phoney war, a period of stabilized abnormality.  Everyone is looking forward to the resumption of something approaching normality as the country embarks on its phased reopening of businesses and amenities.  The real measure of the Covid-19 pandemic will be not so much on what does reopen, but what does not.  While it is the high-profile household names – Debenhams, FlyBE - which receive all the attention when they hit the wall, most industry will find it just as difficult to return to pre-covid trading levels.  Smaller service industries in particular are now finding that once they have worked through any business that was on hand, there is nothing new in the pipeline.To compound matters, the British government's proposals on implementing the Northern Ireland Brexit protocol published this week, while receiving cautious welcome as being something rather than nothing, will not be workable.  The proposals emphasise not imposing additional customs declarations on GB and NI business as trade in goods flows between Britain and Northern Ireland.  This is politically understandable, but customs is a tax.  Taxes are very hard to enforce without declarations.  Further, the proposals are silent on how to manage the exports from Northern Ireland to Britain which are channelled for instance through Dublin Port.We have a battered economy that is dealing with massive unemployment, compromised business models and the challenges of Brexit rearing up again.  Irish industry is not even paying the taxes which are currently due let alone being able to deliver additional ones.  Downturns tend to promote clamour for tax reform because the fairest tax is always the one which you don't pay yourself.  Tax reforms like changing the corporate tax regime or introducing a wealth tax seem all the more attractive when cash is tight.  The current signals are that tax-raising measures are not high on anyone's priority list, but that will change.  Given the high number of business closures and job layoffs, there will be fewer income earners and hence fewer taxpayers for the next several years.For years Ireland has used tax as a primary lever of economic policy.  Long before we surrendered our interest rate and exchange rate mechanisms when we joined the euro group of countries, tax was used to drive investment and the employment which follows it.  Our system is characterised by a high rate income tax regime, a high rate VAT regime, a moderate rate capital tax regime, and a low rate corporate tax regime.  We aspire to social equity by having income tax rate thresholds and allowances skewed towards lower earners, generous tax relief for pension provision and a wide range of essential goods and services charged with VAT at lower rates.  It is impossible with any certainty to determine what tax changes might be sustainable when we really don't know what our economy is going to look like in three months’ time, let alone three years.  Overall though, when compared with most other developed economies the Irish tax burden is not particularly high.  We can rely on debt to meet the upfront emergency costs in 2020 and hope that these do not recur, but we cannot rely on it indefinitely while waiting for the numbers of successful businesses recover, and unemployment to fall.Changes will have to be made, but now is not the time to make them.  It is still the time for subsidies, not for taxes, just as Reagan’s maxim demands.Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Aug 06, 2020

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