Thought leadership

Brian Keegan, Director of Advocacy & Voice writes a weekly column in the Sunday Business Post

Tax

Business Post 9 February 2020 Now that the scramble for votes is over, the scramble for the big jobs in government begins.  The job descriptions of the 15 ministers allowed under the constitution has changed many times, as successive Taoisigh sought to emphasise or reallocate political priorities.  New portfolios get created, and then can be re-amalgamated as happened with Finance and Public Expenditure and Reform in 2011.  Also as part of the deck shuffling by Enda Kenny in 2011, responsibility for trade was moved to the Department of Foreign Affairs.  The move was broadly welcomed at the time, notably by the Fianna Fáil leader Micheal Martin. Trade is where the diplomatic rubber hits the road for open economies.  When outlining Britain’s trade negotiation strategy on Monday last in Greenwich, Boris Johnson quoted the 19th century Liberal politician Richard Cobden.  Cobden once described free trade as “God’s diplomacy”, the best way of keeping the peace. More pragmatically, Ireland’s tiny pool of natural resources along with a small indigenous market means that we simply cannot go it alone and ignore international trade.  It makes perfect sense to have the trade function directly linked to the Department of Foreign Affairs and, in parallel, for Ireland to increase the number of diplomatic missions abroad in recent years as it has done.  Quite literally, if you're not in, you cannot win. If ever there was a need for Ireland's trade concerns to be in step with our diplomatic efforts, it is now.  There will be no immediate land border issue on the island of Ireland as a consequence of Brexit.  Having this problem resolved diminishes any special negotiation status we may have within the European system, though there is optimism in official circles that the other EU countries won’t throw Ireland to the Brexit wolf as the future relationship with Britain unfolds.  As Finance Minister Paschal Donohoe was quoted as saying last week, “we will be seeking at all times to put both the European interests and the Irish interest first and I believe they are going to be fully aligned”. This is the kind of diplomatic circumlocution that will be required in the coming months from our next Minister for Foreign Affairs and Trade.  Brexit makes little commercial sense for most Irish and British people in industry.  It will make even less commercial sense for the British if Britain becomes obliged to stick to EU norms and standards to secure a comprehensive free-trade agreement with the EU.  This was the underlying message of Boris Johnson’s Brexit policy speech in Greenwich on Monday last. On the other hand, the EU cannot grant Britain free access to its market unless Britain continues to accept EU standards.  To do otherwise would dilute the necessity for any country to be a fully paid-up member of the EU to gain access to EU markets.  Compounding this problem for Brussels is that several other EU member countries aren’t entirely clear themselves on what constitutes adherence to standards and quite often don’t bother themselves unduly when going about implementing EU legislation.  Nor is Ireland the only EU member country fighting State Aid tax cases against the Commission. The new Minister responsible for Foreign Affairs and Trade will also be embroiled in two further scenarios.  He or she will need to continually reassure investors from outside the EU that Ireland is still the place to be when doing business with Europe, and that because of Brexit we can offer even more opportunities than before, while at the same time dealing with a growing contradiction in the all island economic approach.  Successive governments on both sides of the border have long extolled the virtues of an all-island economy but the Northern Ireland economy is imbalanced.  It is overly reliant on the public sector.  The Brexit withdrawal agreement has created a hybrid form of trading existence (part UK, part EU) for Northern Ireland.  Northern Ireland will have, in effect, dual membership of both the EU Customs Union and the UK Customs territory, and a similar dispensation for VAT.  This makes Northern Ireland an ideal place to consider establishing a business if looking to trade with Britain in high tariff or highly regulated goods.  It follows that the worse the future trade deal is between the EU and Britain, the greater the potential advantage to Northern Ireland of having this dual-regime arrangement.  A thriving Northern Ireland economy should reduce Stormont’s dependency on public sector funding from Westminster which involves a subvention in excess of £1billion sterling a month.  So now, in the course of the negotiations on the future trading relationship between Britain and the EU, the economic interests of the North and South will be directly at odds.  It will take a particular brand of diplomatic skill to square this particular circle. In his Greenwich speech, Johnson without any sense of irony quoted Cobden’s “God’s diplomacy” idea as the best way of keeping the peace. Cobden could not have envisaged, and perhaps Johnson does not care, about the trouble the next Irish Minister for Foreign Affairs and Trade will have in ensuring that free trade does indeed keep the peace.  Any takers for the job?   Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland    

Feb 10, 2020
Tax

Last Tuesday’s publication of the Sinn Fein election manifesto was met with the usual howls of derision from their political opponents.  You’d be disappointed if it were otherwise. The Sinn Fein manifesto is provoking extreme responses which was possibly its intention.  Its ideology is firmly rooted in socialist ideas which haven’t the same electoral support here as Labour has in the UK.  Their manifesto out-Corbyns Corbyn.  When he was running for election in the UK last year, Jeremy Corbyn only wanted a 50% percent income tax on the wealthy.  The authors of the Sinn Fein manifesto would probably see that as a half-hearted aspiration.  They want earnings over €140,000 to be taxed at a combined rate of 57%.  That’s 4% PRSI, 8% USC, 40% Income Tax and a 5% high income levy. Just because a particular ideology might not sit well with a majority of the electorate does not mean that it is wrong.  Any form of taxation is essentially about redistribution.  It's about moving income from one cohort of society to another, or towards investing in and sustaining services which are available to all cohorts of society.  Devising tax policy is tricky not because of having to set rates nor indeed because of having to decide which and whose money should be taxed.  What makes it tricky is the need to ensure that the policy can be sustained.  When the financial collapse a decade ago led to a collapse in property valuations, property transactions, and hence the tax yield from the construction and banking sectors, we learnt to our cost what happens when tax policy isn’t sustainable. Politicians can set up the tax system in almost any way they want and be reasonably assured that it will work in year one.  It is not a secret how such tinkering can be achieved.  Each year the Revenue Commissioners publish a “ready reckoner”, explaining the impact to Exchequer receipts from increases and decreases to the various bands and rates of tax.  It would for example be possible for a new Finance Minister to double the rate of Capital Gains Tax this year to 66%.  The ready reckoner says that every percentage point change affects the yield by €33m, so that in theory should generate an additional €1billion or so.  This could be used to eliminate local property tax and still have plenty of spare change to reduce the pensions age, so the minister can claim that the figures add up.  He or she might be right in 2020 but would certainly be wrong in 2021 or 2022.  People would look for ways around such a confiscatory tax, or simply defer sales of capital assets in the hope of better days.  The biggest ticket tax item in the Sinn Fein manifesto, restricting retrospectively the tax allowances available to companies for intellectual property, is at best a cash flow advantage.  It is not a new or additional tax.  Their proposal for a high income levy will create what is known in the UK as the cruise ship point – when it’s no longer worth your while after tax to earn more and you may as well go on holiday.  A vacant site levy of 15% may well bring in an additional €100 million or so in the first year, but what happens when the levy starts to work and the number of vacant sites drops off? For businesses, the mooted 15.75% rate of employer PRSI on incomes over €100,000 will create a pay ceiling beyond which few employers will venture.  And will companies be reassured of the commitment to the 12.5% rate in the Sinn Féin manifesto?  Their own Stormont Finance Minister Conor Murphy announced ten days ago that he is not actively pursuing a 12.5% rate for Northern Ireland, although he has the devolved power to do so. Let’s set aside any objections on ideological grounds.  The problem with the tax proposals in the Sinn Fein manifesto is that they are not sustainable.  They would bring in additional money in year one, but not in years two three or four.  All this is a pity because there is much in the Sinn Fein manifesto to like.  They have got the right idea for instance about carbon tax and the futility of increasing it without providing credible fuel usage alternatives.  The current Sinn Fein election manifesto harks back to their manifesto in the run-up to the 2011 General election.  Ireland was a different place back then.  Unemployment was soaring, the national debt was mounting, tax receipts had fallen off a cliff and international creditors were calling many of the shots.  However the core ideas in the Sinn Fein manifesto are the same now as they were a decade ago – higher taxation on a small proportion of individuals, extensive tax reliefs for cohorts of workers on the lower income brackets, and a significant increase in public sector day-to-day spending.  Ireland has moved on. The Sinn Fein manifesto needs to as well.    Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Feb 03, 2020
Tax

Business Post 26 January 2020 There isn't a politician in the country who isn't afraid of the “grey lobby”.  Successive governments have found to their cost that anything which tampers with the benefits being enjoyed by the retired carries a guarantee of protest. So why all the furore about pensions in the current election campaign?  After all, the grey vote is not bothered because they have their pensions already.  The state retirement age moving to 68 isn’t even a new announcement.   Upping the age at which the state pension kicks in has been known about for a decade.  It wasn’t even the work of the current government but of the previous Fine Gael/Labour coalition government.  It's not the usual grey brigade that's affected – it is the greying brigade. The greying brigade - people born in the 1960s and early 1970s - have not done particularly well from the policies of successive governments.  Many of them first came onto the jobs market during the 1980s when jobs were scarce and inflation was rampant.  In recent years we have almost forgotten what inflation is, but in 1984 for instance, inflation ran at somewhere in the order of 8%.  The State responded to that recession by taxing everyone virtually out of existence.  During the 1980s the corporation tax rate was 50%, the standard rate of VAT hit 35% and the marginal rate of tax and PRSI in 1985 for workers on modest wages was 73%.  If you went to a bank looking for a mortgage, you would be solemnly told (if you were lucky) that the natural cost of money was 10%.  Yet the greying brigade, those late baby boomers and early generation Xers, hung on. Things began to get a little better in the 1990s.  Largesse flowed from Brussels, and the economy entered into a period of recovery.  But property prices began to spiral with house prices in the late 1990s increasing by 25% per annum.  That in turn lead to increases in Stamp Duty.  Just as this generation were having kids of their own, the tax relief for children in the family was abolished.  Still the greying brigade hung on. With increasing prosperity in the 2000s, money was pushed into the National Pension Reserve Fund.  This was the original rainy day fund designed to shelter the Exchequer and citizens alike from the cold winds of an ageing demographic.  That pot of money evaporated in the financial crash and a large chunk of it was used to bail out the banks.  Certainly, the late baby boomers and the early generation Xers didn't see it even though it was their taxes that had largely built it up.  No sooner did this blighted generation get to the stage when their own children might be leaving school and contemplating careers, or perhaps a further term in college, than the great recession hit in 2008.  Taxes and unemployment levels soared again, and many saw their children emigrate and their own jobs disappear. And now, just when they think things might be getting a little better, this same generation is being told that their retirement date will be pushed out time and time again.  Is it any wonder the greying brigade are upset?  The wonder is that they have not begun protesting before. While many people are cynical about elections and election campaigns, they serve to focus the minds of citizens on the way they are being governed.  The hustings prompt an authentic examination of current affairs, where politicians have a real interest in saying and doing not just the right thing but the electable thing.  For a few weeks the court of public opinion is less driven by the usual pundits and keyboard warriors, none of whom foresaw how sensitive the retirement age issue would become.  Delaying the pension age was a money-saving ruse.  It is now becoming clear that it is a ruse which is not going to work.  Transitional payments and interim arrangements will eat into the savings in the state coffers, which the extension of the pension age was designed to achieve in the first place.  Fianna Fail talk of a comprehensive review.  Fine Gael promises transitional payments for retirees at the same effective rate as the state pension.  Sinn Fein wants to reverse current policy entirely and bring back the retirement age of 65.  These all amount to the same thing.  They differ only in the grace of the political U-turn involved. A pension is perhaps one of the most boring topics imaginable, except for those in immediate prospect of receiving one.  People who have had little or no interest in financial affairs all their working careers suddenly become pension gurus when their own retirement is looming.  The private sector seems increasingly conscious of how small the benefits are from their pension savings, as purchasing annuities on retirement simply doesn't cut it anymore because of the low yields on government gilts.  Couple that with the disenchantment of the greying brigade towards government policy generally, after years of being in the wrong place at the wrong time.  A new lobby is emerging, of which our politicians would do well to be fearful.  Beware the greying brigade.   Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Jan 27, 2020
Taxation

Business Post 19 January 2020 One of the easiest portfolios for a new minister to pick up in the next couple of weeks could be Finance and Public Expenditure and Reform. Compare it to the lot of the next housing minister or the next health minister, who are bound to pick up their portfolios with some trepidation.  True, we have an enormous national debt, but then international interest rates are at historic lows.  We no longer run a budget deficit and the main tax problem in the economy is that we collect too much tax from companies.  Unless the new finance minister goes on a spending splurge, there will be a budget surplus in 2020.  Paschal Donohoe mastered two of the key requirements for the job of finance minister.  He was clever and he was lucky.  His period of tenure as a minister in the 32nd Dáil coincided with the global economic recovery gaining momentum.  In a small open economy such as ours, economic factors will always trump anything an individual finance minister does or doesn't do.  Our unemployment levels are at a record low mainly because of external factors and only partly because the minister did nothing to hamper employment growth. Nor can any finance minister in any small country dictate the international consensus on cross-border taxation.  Ireland has benefited spectacularly from an unforeseen consequence of the changing international approach to corporation tax.  The so-called BEPS consensus led by the OECD drove income generating assets out of tax havens and into genuine low rate (rather than low tax) jurisdictions.  I'm not aware that anyone predicted the extent of this effect on the Irish economy.  When the New York Times Columnist Paul Krugman sneeringly described the consequent boost to Irish GDP as “leprechaun economics”, he failed to realise that the leprechaun’s pot of gold is actually real and is located on these shores with little apparent sign of it moving anytime soon.  Was this just luck? Donohoe and his officials detected very early on what way the international tax policy wind was blowing.  Although the government was criticised for what seemed to some to be a tardy approach, both Donohoe and his predecessor Michael Noonan eliminated some of the more egregious cross border tax planning schemes.  Less prominent but perhaps as important was Ireland’s role in building a coalition of the cute within the EU.  Simon Coveney and Donohoe orchestrated the responses of the dozen or so smaller nations which became known as the New Hanseatic league.  These countries are linked by a shared alarm over some of the EU tax proposals driven by the larger economies.  Between them they managed to make life a bit more difficult for the EU Commission and sucked the life out of EU proposals for digital taxation. This decisiveness was not always matched by measures on the domestic front.  At times it seemed that the finance minister was paralysed by the fear of doing the wrong thing.  His tenure marked a new way of defining “risk averse”.  Business concerns largely went unheard, and there was little or nothing in the way of new business tax incentives.  The “keep on saying nothing” approach taken by government in the face of Brexit uncertainty meant that many businesses simply could not plan coherently.   The Budget for 2020 was prepared on a worst possible case scenario.  Issues raised at the annual National Economic Dialogue, ostensibly an occasion for civil society to present its ideas to government, went unnoticed. The minister will point towards the economic growth which transpired anyway as justification for this laissez faire approach.   That doesn’t answer whether more could have been achieved, nor does it excuse ignoring the tax system as a lever of policy.  How was it justifiable not to use the tax system to encourage housing development and rental supply to help provide accommodation at a time of crisis?  After all, we know that housing tax incentives are effective.  We even know what mistakes to avoid with them. There were other problems too.  The focus remained on the multinational sector, with little tax support for indigenous industry.  The approach to carbon taxes was hesitant.  Local property tax is no longer fit for purpose.  The valuations are out of date and too many properties are exempt; at this stage LPT is borderline unconstitutional.  Inheritance tax is now largely a tax on Dublin households as the exemption thresholds have not reflected property price growth.  The 40% rate of income tax still applies at low income levels. On balance, I think the history books will be kind to Paschal Donohoe.  It is in the nature of the economic cycle that the term of the next government is likely to span some economic slowdown, if not an actual downturn.  Nevertheless, whoever takes the portfolio next time will be taking it at a good time to become the finance minister.  He or she will have both the economic headroom, and plenty of untapped opportunities, to make a difference.   Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland 

Jan 20, 2020
Tax

Business Post 12 January 2020 It's been a week for job announcements.  Enterprise Ireland and the IDA announced their results for 2019.  It was apparently full steam ahead for the IDA, which supports foreign direct investment into Ireland, but somewhat less so for Enterprise Ireland which supports Irish exporters and whose results were somewhat muted.  Alongside these announcements of what the private sector does best when it's creating jobs, the headline results of the Revenue Commissioners for 2019 also surfaced.  And guess what, they seem to be in the business of job creation as well.  In the past 12 months, the headcount at the office of the Revenue Commissioners has increased from 6,129 full-time equivalent staff in 2018 to 6,621 in 2019.  In parallel, the cost of running the Revenue Commissioners increased by some €25 million year-on-year to a total of €450 million in 2019. A lot of the public service headcount debate in this country tends to focus, rightly, on frontline staff – nurses, teachers and gardai.  If tax receipts are up to the levels achieved prior to the crash in 2008, so now too is the Revenue headcount.  Yet it's not getting any easier for businesses and employers to comply with their tax collection obligations.  So what is the Irish taxpayer seeing for these increases in Revenue staffing and costs? Much of the rationale for this staffing increase was the prospect of Brexit, particularly a hard Brexit.  Additional customs officers were recruited to deal with the additional checking of goods flowing between this country and Britain.  There was also an element of planning involved to secure against staff shortages from pending retirements.  But now that the threat of a hard Brexit has receded, what will all these additional tax officials do? For the 200,000 or so businesses employing people in this country, one of the heaviest tax compliance burdens often has to do with operating PAYE on their employees.  When releasing their 2019 headline results, Revenue made much of the success of their modernisation of the PAYE system during 2019 and portrayed it generally as a boon for all concerned.  The costs to employers to replace or upgrade their software for the change were not in fact seen as a boon by many employers.  There is no doubt that PAYE modernisation has tightened up the PAYE system.  While this can be to the benefit of employees in the long run, the additional cost to employers has gone largely unacknowledged.  There have also been suggestions in the past few months that the vast harvesting of tax data on employees, via their employers, might be further extended to the self-employed.  It's costly enough to do business without having to provide additional statistical data to government. Law abiding taxpayers will by and large be pleased to see that tax audits and enforcement continues, because business tax evaders – businesses not complying with VAT, PAYE or other obligations - are operating illegally but are also effectively stealing an unfair competitive advantage.  Nevertheless, the tax recovered from policing evasion collected from tax enforcement activity declined in 2019 when compared to 2018.  It's probably a little too early to tell whether compliance levels have actually improved by virtue of the additional Revenue staffing and more rigorous PAYE systems.  Or maybe the Irish taxpaying population at large has got that little bit more compliant.  The Revenue results also highlight one of the great unsung costs to Irish business, namely employer PRSI.  Employees fare much better than the self-employed under the social welfare system in terms of contributory non-means tested pension benefits, health and occupational benefits.  These additional social welfare benefits come at a heavy cost to employers, who typically stump up an additional 11% or so onto the cost of payroll to cover employers’ PRSI.  In 2019, Revenue collected over €12 billion in PRSI on behalf of the National Social Insurance Fund.  Those who complain about our welfare state need to remember that over 16% of all revenues collected in Ireland go towards PRSI.  Fully €1 billion more was collected in PRSI in 2019 than in 2018.  Given the scale of the contributions, it's reasonable to ask if PRSI is representing good value for money for the Irish citizen.  For example, how can the health service continue to be in such dire straits given the level of social insurance citizens are paying? The answer to that of course is not in the gift of the Office of the Revenue Commissioners.  Their mission is to collect taxes fairly and efficiently, not to spend them.  While a bumper year for tax receipts is good for the Exchequer, the increasing compliance costs of doing business are worrying. Amounts collected by employers under PAYE amounted to €31.6bn for 2019.  There is a greater obligation than ever on Revenue to provide better support for those who make the headline tax collection figures look so good.   Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Jan 13, 2020
Thought leadership

Business Post, 8 December 2019 Better to have five good one-year plans than one good five-year plan.  It's almost 30 years ago since I was at the receiving end of this advice, from a person whose business success clearly showed it was the right approach.  While long-term planning has always been a good idea, back then strategy development for the medium term hadn't yet become the self-fulfilling industry it is today. Yet, we all try to look a little further down the road than just the next few months, as indeed the Minister for Finance did this week in a speech to the Institute for International and European Affairs.  He identified policy responses to address some of the economic hazards he and his department officials foresee coming down the tracks.  It must be a frustrating business for any government minister to try to lay down plans which might only crystallise long after he or she has been voted out of office.  If a week is a long time in politics, then five years or more must be measured in terms of aeons. In his analysis, the Minister identified 2012 as a nadir for the Irish economy.  He cited the fact that in 2012, unemployment stood at 16% and the budget deficit was 8.1% of GDP.  Tough times indeed, but how well it illustrates the futility of long-term planning.  Whose medium-term strategy formulated in 2012 would have correctly anticipated that long before the end of the decade, we might be back to full employment?  Or that by the middle of the decade, Britain would have decided to pull out of the EU?  Or that the biggest tax problem in 2019 might be a surfeit of corporation tax receipts? Corporation tax receipts traditionally peak in November.  That's because most large companies must pay tax in two instalments and for various practical reasons, the second instalment typically falls due in November.  Not only that, while smaller companies make most of their tax payment in one instalment, that payment tends to fall due in November as well.  The corporation tax receipts for November were announced last Tuesday and, true to recent form, they are almost embarrassingly large.  To put some context on the vast amounts of corporation tax collected, for every person in the country, companies have paid about €2,000 in tax this year so far. The November corporation tax receipts reflect the dominance of the dozen or so very large companies who make the bulk of the corporation tax payments, and they also reflect the contribution of smaller companies within the economy. There is a very simple way to reduce the dependency of the Irish exchequer on corporation tax receipts.  That would be to cut the rate down from 12.5% and thereby collect less.  However badly this might land in a domestic context, it would be totally unacceptable in the current international debate.  The rationale now seems to be that if you can't regulate the biggest tech giants, then at least tax them.  I'm reliably told that at a recent industry gathering in Paris to discuss the current OECD proposals on cross-border digital taxation, everybody in the room welcomed the proposed new rules.  Provided, that is, there were exclusions for their own particular industry. Despite such cynicism it is impossible to disagree with the thrust of Pascal Donohue’s observations that the times are indeed changing for companies.  They need to.  According to a recent OECD report, tax receipts generally in that particular club of wealthy countries are beginning to plateau, and their growth in recent times reflects little more than the growth in their economies.  The inevitable consequence is that most developed economies are going to have to rethink the way they collect tax, not just from companies but also from their population at large. Every time we undertake that kind of rethink in this country however, it falls flat.  There is compelling evidence that we have an ongoing problem with our water supply system, yet we rejected the introduction of water charges.  The funding problems for our national broadcaster (and more broadly the crisis for journalism in all shapes) are acute, yet we resist any notion of a media levy to replace the increasingly irrelevant TV licence.  Despite the introduction of local property tax in 2013, can it be correct that still only 10% of local government funding, according to Thursday’s Seanad Eireann debate, is provided directly by this tax? These are not medium-term policy ideas.  I have some sympathy for a government which is so hamstrung by domestic political events and the risks from the political events across the Irish Sea that it can’t even change the rules of bingo, let alone signal significant tax reform.  Nevertheless, it is this type of single year issue which might change people's lives for the better far more rapidly than medium-term fiscal aspirations. It is still better to have five good one-year plans than one good five-year plan.   Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland  

Dec 09, 2019
Tax

The Sunday Business Post, 1 December 2019, Britain, as the Brexit process constantly reminded us, is our largest trading partner.  It is also a major competitor.   The prospect of Brexit, particularly a crash out hard Brexit rightly put the frighteners on everybody, so much so that our own Minister for Finance could push a Budget through the Dáil with almost no tax benefits for everyone (other than the self-employed) and scarcely a murmur of dissent.   Brexit or not, the British will have a new government after December next.  It will be new either in political hue, or new in the sense that it will be another Tory government operating from a different manifesto.  Now that the manifestoes of the two main parties, Conservative and Labour, have been published, what could change in the competitive environment between our two countries?   Cross-border trade is heavily influenced by tariffs and trade agreements, but it is also influenced by business sentiment and consumer spending power.  Consumers vote; businesses don't, so election manifestoes usually treat most categories of voters with kid gloves.  The Tories are promising that there will be no increases in income tax, national insurance (the equivalent here is PRSI) or VAT over the next 5 years.  The Labour party is making the same promise, but limited to anyone earning below £80,000 per annum, and other terms and conditions (particularly for married people) apply.    Were either party to secure a majority and then follow through on their election promises, it seems that consumer spending power for most voters would be largely unaffected in the UK.  That’s good news for Irish producers and exporters of consumer goods.    For UK companies though the manifestoes from both parties hold less promise.  Previous Tory plans to continue the downward trajectory of the Corporation Tax rate have apparently been reversed, and the promised rate of 17 per cent will not now materialise – the standard Corporation Tax rate in the UK will remain at 19 per cent.  Under a Labour government, the rate is promised to increase to 26 per cent.  Neither of these proposed rates would be the highest by international standards, and both are still lower than the 28 per cent rate paid by companies in the UK a decade ago.    Perhaps more worrying for UK companies is that the manifestoes of the main parties seem tone-deaf to the challenges of attracting foreign direct investment (FDI).  Although the UK economy dwarfs the Irish economy in size, the importance of inward investment is common to both and our industrial agencies compete with their UK counterparts.    It is tricky to make direct comparisons about FDI between countries.  This is because cross border investment can take many forms and can be channelled in different ways.  For example a US company investing into the UK could make the investment via a European subsidiary, blurring the distinction between EU investment and US investment.  Nevertheless, analysis from the UK’s Office of National Statistics identifies the US as the major source of investment into the UK by some distance, but followed by significant annual investments from Germany, France and the Netherlands.  This broadly mirrors the profile of foreign investors into Ireland (if we omit the UK which itself is a source of investment here).   There is a very positive impact of FDI on employment in the UK.  Again according to the Office of National Statistics, despite only 2.0% of UK businesses having any FDI link, they employed 29.8% of UK workers.  That’s 8.5 million jobs.  This also mirrors scale of the impact of FDI on the employment market in this country.   It’s hard to see how either party manifesto will advance the cause of foreign investment into the UK.  Larger industry will balk at the new regulatory regime promised by a Corbyn administration and the prospect of “Inclusive Ownership Funds”.  The idea here is that up to 10 per cent of a company will be owned collectively by employees, with dividend payments distributed equally but capped at £500 a year.    The Tory manifesto isn’t a hazard free zone for companies looking to invest in the UK either.  The Tory slogan to Get Brexit Done is not going to resonate with the very many business people who see Brexit as an impediment to, rather than an opportunity for, trade.  Businesses are also aware of the importance of securing existing EU sourced investment in a post Brexit environment.  Spotting this, the Liberal Democrat manifesto is simply titled “Stop Brexit” and promises a “remain bonus” of £50bn though like Labour they too would push up the Corporation Tax rate.   The competition for FDI is one which it seems to me none of the UK parties are concerning themselves much with at all.  That’s an extraordinary omission for any political system which has been so dominated by three years of Brexit debate on foreign relations and trade.   Dr Brian Keegan is Director of Public Policy with Chartered Accountants Ireland

Dec 02, 2019
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