Thought leadership

Brian Keegan, Director of Public Policy & Taxation, writes a weekly column in the Sunday Business Post

Tax

Sunday Business Post, 11 February 2018 We are all used to government commissioned reports and consultations being produced and then quietly shelved if they don't suit the political priorities of the day.  This habit can generate a degree of cynicism, but sometimes shelving a report is exactly the right thing to do. It seems that shelving is what Social Protection Minister Regina Dorothy proposes to do with last week’s report from her department concerning the future PRSI treatment of the self-employed.  She was right to do so.  The report is poor, not only when judged in the context of what might be politically possible, but in its response to the nature of the self-employed sector in this country. PRSI looks like a tax, is collected like a tax, but is not in actual fact a tax.  It is instead a form of insurance, “Pay Related Social Insurance”.  All PRSI payments go to the Social Insurance fund, rather than directly into the exchequer like other “tax” receipts.  According to the January Exchequer returns, which describe the totals collected for the full year, PRSI came to €9 billion.  It accounted for 14% of all government receipts during 2017.  By contrast, income tax (which includes USC) accounted for 31%.  €9 billion is a huge sum of money, and about half of that comes from employers PRSI contributions. Safety Net PRSI is simultaneously a contribution to a state run pension scheme, to a state run permanent health insurance scheme and to a state run income protection policy.  PRSI benefits ensure that there are safety nets for workers who could become unemployed, or who fall ill, or who eventually retire.  The safety net is not the same however for all workers. In common with every insurance scheme ever devised, the more you pay, the more you should get.  While both employed and self-employed workers pay PRSI at a rate of 4%, for employees this is just part of the story.  Employers pay an additional contribution, this year at 10.85%, on top of the payroll cost of their employees.  It is this additional contribution that provides the additional benefits which employees enjoy over the self-employed, notably unemployment and health care benefits like the jobseekers benefit and occupational injuries benefit. The self-employed are acutely aware of this discrepancy.  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 4 out of 5 said they would be willing to pay a higher headline rate of PRSI in return for extra benefit coverage. Some type of a problem The lack of emphasis on this linkage between PRSI payments and PRSI benefits makes the current report poor.  The initial consultation document which canvassed observations and comments (I was involved in one of the consultation responses) seemed to regard self-employment as some type of a problem.  Its purpose was, in its own words, to "invite submissions from interested parties on possible measures to address the loss to the Exchequer".  Self-employment, and intermediary structures involving self-employment, were seen as vessels for what is at best tax avoidance, at worst tax evasion.  Self-employed status was seen as a way of avoiding the high 10.85% employer contribution. While evading or avoiding tax does indeed contribute to a loss to the Exchequer, the position is not nearly as clear when it comes to PRSI avoidance or evasion.  If there are fewer PRSI contributions, there are fewer benefits to be paid out so who is really at a loss?  Is it the Exchequer, or the worker? The report is useful in that it clearly identifies that Ireland is not an outlier when it comes to the proportion of self-employed people in the Irish economy, and the proportion is comparable to EU norms.  It notes that over the past 20 years or so the ratio of employees to self-employed has been remarkably stable at approximately 7 to 1, a ratio that persisted even through the great recession.  That kind of stability suggests that the proportion is driven by economic realities rather than by widespread attempts at bogus self-employment for the sake of saving PRSI. Resilient It also suggests that the self-employed are a remarkably resilient bunch.  While most of the 300,000 self-employed people work on their "own account" as the report has it, almost one third of them have employees of their own.  That makes the self-employed sector, most of which is paradigm indigenous SME, a particularly important driver of job creation within our economy. Which is why this time the Minister's response is exactly right.  Rather than blindly adopt the report's recommendation to reduce the differential between employers and employees in the total PRSI paid, she has been reported as saying that she is more concerned about extending rights to self-employed people under the social insurance fund.  While the money to extend those rights will have to be found somewhere, this particular line of thinking should not be shelved.  Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland          

Feb 12, 2018
Tax

Sunday Business Post, 4 February 2018 A US firm of tax return preparers, Jackson Hewitt, recently surveyed individual US taxpayers.  Remember there were tax changes for American individuals as well as changes for companies that have been grabbing the headlines over here, and a lot of those people will be filing their 2017 tax returns over the next few months.  It was reported that so keen were people on US tax reform that two out of every five surveyed thought the changes would help with their 2017 tax bills.  Sadly for them, they won’t benefit or at least not immediately – the changes only take effect for 2018. That kind of enthusiasm for anything remotely resembling a tax cut is not unique to the US psyche; it’s a feature on this side of the Atlantic as well.  When it comes to people’s fondness for a tax break, economic predictions of the impact of tax changes falls down.  Economists are excellent at mapping tax yields to GDP growth, or predicting the impact on prices and inflation of changes here and there across the tax system.  A tax change however seems to have a disproportionate consequence on taxpayer behaviour, often far greater than a relatively modest rate change or tax allowance might suggest it should. Official Aversion One of the consequences of the great recession is an official aversion to tax incentives.  In the past tax breaks – big income tax reliefs for rented residential accommodation, renewal of cities and towns, holiday cottage incentives and student accommodation tax deals contributed to the property crash.  Many properties derived their value not from their location nor the accommodation they offered, but from the attraction of the tax relief.  Housing Minister Eoghan Murphy gave us a stark reminder of this official aversion last week. His reported response to a suggestion from one of the major banks that the VAT rate on construction activities would be cut was less than welcoming.  The suggestion is that a reduction to the VAT rate of 13.5% on housing, comparable to the reduction extended to the hospitality sector in 2011, might boost the supply of housing units.  Such a move, according to a response to a Parliamentary Question from the Minister for Finance, might cost in the order of €240 million per annum.  It doesn’t seem to be the amount involved that presents the problem, as much as the very notion that a property incentive could be part of a solution to a current market failure. Notorious VAT reductions are notorious for being absorbed by the retailer to the benefit of their profit margin.  When Charlie McCreevy was Minister for Finance, he cut a percentage point off the lower VAT rate across the board for all industries.  The following year he reinstated it upwards again to its current level of 13.5%, citing evidence that few retailers had passed the benefit onto the consumer.  When the hospitality sector received a VAT reduction in 2011, many restauranteurs for example went to the trouble of clearly identifying how much the customer was saving when presenting their tab.  That clearly showed how the VAT reduction was being passed on; a practice perhaps not quite as evident now as it was at the start.   I think lessons were learned when it comes to planning tax reliefs.  The Department of Finance’s own guidelines on the matter speak of tax incentives and reliefs having to be prompted by market failure, to be time bound, and to be re-evaluated on an ongoing basis to ensure that they continue to fulfil their intended purpose.  But it is not wise to close off from political discourse any possible solutions on ideological grounds.  It’s a problem for social reasons, not just economic reasons, that housing market supply is not closely matching the demand. The Dancer and the Dance Of course a property VAT rate reduction might not be effective in improving the supply of housing but it merits examination, if only because tax incentives can be introduced quite quickly and the housing problems demand an urgent solution.  A VAT rate reduction would attempt to address the supply side of the economic equation, rather than the demand side.  That’s in contrast to the recent changes to the tax system towards address the imbalance in the property market.  The “help to buy” scheme introduced some years back, and last year’s extension of mortgage interest relief, have primarily been directed towards the buyer rather than towards the vendor.  As a former Finance Minister observed to me once, when interest groups put forward ideas for tax breaks, it can be hard to separate the dancer from the dance.  The most fervent advocates of tax reform are often those who will benefit most from it.  Nevertheless, there has to be room for debate and discussion on tax incentives.  Tax is not a four letter word. Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland

Feb 05, 2018
Tax

Sunday Business Post, 28 January 2018 There is always one isn’t there?  One begrudger, one individual with the awkward question.  This week, for the Taoiseach in the European Parliament, the begrudger was Green MEP Philippe Lamberts from Belgium.  He was the one using the “tax haven” expression. The irony was clearly lost on the MEP.  He is a democratically elected representative to a bloc of nations which relies for its very existence on taxation policy.  No country can become a member of the EU without first agreeing to adapt tax policies which are protectionist.  There is quite a long list of conditions a country must meet before it can join the EU, but close to the top of this list is a willingness to implement a VAT system using the EU rules.  A country must surrender its control over how its consumers are taxed as part of the price of EU membership.  Key to the success of this system is how they are taxed, not how much.  That is why VAT rates are allowed to vary widely across the EU member states.  What is not allowed to individual countries is the freedom to categorise the goods and services on which VAT is charged.  Instrument VAT also works as an instrument for securing the EU borders.  EU countries are not allowed to penalise imports and exports of goods and services among themselves, but they must demand upfront payments of VAT on most goods imported from so-called third countries – that is- any country which is not a member of the EU.  While there are terms and conditions and workarounds this upfront payment requirement makes for a significant cash flow cost for many importers.  Typically they will have to pay an extra 20% or more to the local taxman when importing goods from outside the EU.  Post Brexit, this aspect of the VAT system will have a knock-on effect for many EU countries importing goods from the UK.  It’s a consequence of Brexit which has only just begun to dawn on the UK political system.  Last week the UK Parliament’s Treasury committee got very bothered about the impact on future UK trade of this particular “unknown known”.  It has demanded reports and analysis from HMRC, the UK Revenue authority, on the likely extent of this further cost of Brexit.  The EU also relies for its coherence on customs, a common obligation shared across EU member states, to preserve the integrity of the trade borders.  Goods from outside the EU must be penalised with tariffs quotas and declarations, goods within the Customs union must not.  Like VAT, this requirement has broader policy consequences.  CETA, the much vaunted trade agreement between Canada and the EU, insists on all parties having tight borders and customs controls and one of its advantages is having “simplified” rules for determining where goods came from in the first place.  As a model of a modern and comprehensive free trade agreement, CETA confirms a precondition for any serious trade deal.  The participants must be able to manage their borders. Conspiracy Theory The rigours of EU VAT and customs law exists to ensure that the economic policies of member states are preserved - that is why most countries joined in the first place.  Whether it’s tourism or agriculture or manufacture or information and communication technologies, EU tax policy conspires to ensure that those industries in the territories of the EU member states are favoured.  Does that make the EU itself a tax haven? Irish corporation tax policy has since the 1950s been about attracting corporate investment from beyond our own shores primarily towards job creation.  As Stephen Kinsella put it in these pages last week, the best social programme for poverty alleviation in the world is a job.  In recent years we have progressively aligned our corporation tax system with all of the important European and international norms, except for the rate.  Does that make Ireland a tax haven?  Or worse, are we a corporation tax haven within the EU’s very own VAT and customs tax haven? Perspective It all depends on your perspective.  I suspect much of the EU institutional support for Ireland’s position in the first phase of the Brexit talks derives not just from the kind of fellow feeling that the Taoiseach managed to elicit from most of the EU parliamentarians this week.  It also stems from the more pragmatic recognition of Ireland’s critical role in policing future borders between the UK and the EU post Brexit (be they invisible, frictionless, virtual or non-existent).  If the EU wants us to ensure that its tax policies, designed to favour EU industry, are preserved, should it not return the compliment and allow us to preserve our own domestic tax policies?  Why should it be driving forward proposals like the Common Consolidated Corporate Tax Base (which would move tax yields from smaller markets to bigger markets) or the so-called Equalisation Levy on digital companies (again which favours countries with bigger markets)?  If a country is aligned with the general rules of engagement, the particular tax rates should not matter just as they don’t for VAT. There are questions we can ask back to the EU in response to the tax haven charge levelled at us in the EU parliament this week.  With Brexit negotiations for Phase 2 due to get in to full swing there might never be a better chance to ask them. Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland    

Jan 29, 2018
Tax

Sunday Business Post, 14 January 2018 Business people have many roles.  They are entrepreneurs, salespeople, managers, recruiters, designers, builders, marketers.  Business people are also unpaid agents of the Revenue Commissioners.  Whether you’re just starting out in business, growing a successful SME, or working on the finances of a major multinational, you need to have tax responsibilities at the back of your mind all the time.  Almost €8 out of every €10 collected in tax in this country is collected by Irish businesses on behalf of Revenue.  Increasingly, the role of revenue authorities, not only in Ireland but across the developed world, is just to count and check.  The tax collection figures for 2017 were at a record high, but there is a cost to making that happen. According to Revenue, some 647,000 “compliance interventions” were completed during 2017 which yielded €492 million.  A compliance intervention is any form of enquiry, audit or investigation on the affairs of the taxpayer, and the number of such interventions was up 15% on 2016.  There is not only a tax cost associated with this type of revenue enforcement activity. There is also a time cost for the taxpayer, and the disruption to normal business activity which is particularly galling if no tax mistake had actually been made. Revenue audits can be particularly disruptive, and can take months to resolve. Furthermore, an increasing number of businesses rely on being able to produce a tax clearance certificate to secure new work or to retain existing work. Any business requiring any form of public license to carry on the trade – publicans, fuel retailers and the like won’t get a licence without producing a tax clearance certificate. Since the tax clearance verification process went online it becomes even more important to establish a tax compliance record right throughout the year and not just at the end of the year.   At the more extreme end of things, there were 24 criminal convictions for serious tax and duty offences during 2017 with 301 settlements being published on the List of Tax Defaulters.   Finding yourself included in these numbers isn’t great for business either.  For all these reasons it makes good and ethical business sense to stay as best as possible on the right side of the tax rules, and to be seen to be staying on the right side of the tax rules. Here are my top tips for being a good tax citizen and keeping Revenue off your back.  1          Pay on time It may seem trite and obvious, but consistently late tax payments ring alarm bells in the Collector General’s office.  It is far better to source finance from almost anywhere rather than making a late payment to Revenue. Interest on underpaid tax runs at 8% percent per annum (10% if VAT or PAYE is late) and the interest on late payment of tax isn’t tax deductible when calculating your income tax or corporation tax liability for the year.  Revenue make the banks look cheap.  2          Watch your Payroll practice Because the Exchequer is so reliant on PAYE (it brought in over €13 billion with employer PRSI on top of that last year) the penalties are very heavy if you get it wrong and the job itself is thankless.  Don’t expect good service from Revenue either if looking for help on any issue which is not totally routine. A change in last year’s Finance Act means that in 2018 it is now more costly for employers to correct PAYE errors as Revenue will be looking for a higher settlement amount.  The rules have become so tight that businesses should always think about whether they are obliged to apply PAYE to any payment made to an individual for a service.  3          Change your payroll system in 2018 Almost all businesses have some form of payroll software or outsource payroll operations.  From the start of 2019, almost all businesses will have to use computerised systems capable of connecting directly to the Revenue computer systems to provide real-time information on their employees and their wages.  It doesn’t look like there is any way around this additional state-imposed cost to doing business.   4          VAT Thresholds If you’ve just started a new business, or set up as a professional on your own account, watch out for the way the VAT thresholds work.  A business providing more than €37,500 worth of services or selling more €75,000 worth of goods must register for and charge VAT.  Because VAT is calculated on turnover, the amounts of tax involved can get quite large as your business grows and develops.  Large amounts of tax means large settlements of interest and penalties should something go wrong.  5          VAT Rates Computerised accounting systems generally are good at handling VAT, so the main problems that can arise often have to do with applying the wrong rate of VAT in the first place.  Be particularly careful if you are operating in the food sector (which has myriad VAT rates often depending on the state of processing of the foodstuffs), or in the education services sector where the VAT rate can depend on the exact nature of the training and materials you are providing.  The other VAT area which often causes problems is where your business has a non-routine transaction, perhaps buying or selling second-hand equipment.  Trickiest of all is where there is property involved, for example buying a new premises or leasing a shop.  VAT on property is an area where even the most compliant of taxpayers can get caught out.  6          Capital Gains Tax  Businesses have to pay CGT in the same way as individuals.  For incorporated businesses, CGT is paid via the corporation tax system.  If your business is unincorporated, even though the Capital Gains Tax year is the same as the Income Tax year, it is broken into two periods for payment purposes.  Tax on gains in the first 11 months of the year is paid in December.  Tax on gains in December is paid in January.  The January payment date is easy to forget.  Missing a payment deadline will attract an interest charge.  7          Directors’ Tax Responsibilities  Company directors have particular responsibilities under Irish tax law and can be regarded as being self-employed.  Company directors who own shares in their business are subject to the same income tax filing rules as the self-employed.  They must file a return by 31 October each year, even if they have no additional tax liability after PAYE is paid.  If they don’t file, Revenue can increase their tax liability by up to 10%.  (This harsh rule doesn’t apply if the director is only a director of a non-commercial company, for example, the management company of a block of apartments.)  8          Keep the records straight Again, this might fall into the blindingly obvious category of things to do, but remember that there is little concept of materiality in tax matters. You might regard your petty cash as petty, but that doesn’t mean the Inspector of Taxes will.  Usually there is no problem reimbursing staff for reasonable expenses or mileage claims particularly if the amounts are within Civil Service norms. However, you have to keep clear books and records as evidence of how much you are paying and why. Businesses more often fail the tax test for how they reimburse, rather than for how much they reimburse.  While always important, these steps are vital if you are running your own small professional services company.  9          Take particular care with Family Owned Companies  A shareholding in this type of company can be quite hazardous to your tax health.  There’s a significant block of tax law specially designed to apply penal taxes on funds transferring between the company and its shareholders.  The reason behind this is to deter people from channelling earnings into companies (taxed at 12.5%) instead of accounting for them in their own right (and paying tax, USC and PRSI at anything up to 55%).  Be careful of either lending money into, or borrowing from, the company.  Private use of the company’s assets can also lead to perhaps unexpected tax bills.  10        Special rules in special cases Anyone in business in building, meat processing or professional services must be aware of the special rules that apply to their industries.  Those businesses which operate Relevant Contracts Tax (RCT) and Professional Services Withholding Tax (PSWT) will know how easy it is to fall foul of rules which can require tax to be deducted from gross earnings.  Neither RCT nor PSWT are taxes in their own right. Instead they are mechanisms for ensuring tax compliance and enforcement in areas which are seen as high-risk from a tax collection perspective. Think of them as applying on the basis of presumed guilt, so that you can always establish your innocence.   Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland

Jan 15, 2018
Tax

Sunday Business Post, 7 January 2018 The first week of a new year is often seized upon as a time for warning of things to come.  In general tax is easy to predict because it’s a certainty that tax will happen.  We now know much of the detail of how it will happen, as the Finance Act 2017 which gives effect during 2018 to last October’s Budget announcements was signed into law by the President on Christmas Day.  Most commercial activities in Ireland are suspended for that one day of the year, but it seems the ship of state must continue to sail regardless. The modest changes to USC and tax bands will leave many workers a few euros more a week after taxes this year, but the elusive feel good factor will remain missing.  I think that’s because Government is refusing, as a stated tax raising measure, to index tax bands and allowances as the economy recovers.  Therefore as incomes recover we pay proportionately more tax on them.  This year’s trimming of USC doesn’t compensate for that. Misfiring If the gains for workers are modest, such gains as there are for business are painfully shy.  The fine print of Finance Act 2017 did not quite live up to the promises from Budget day. The main new initiative was the introduction of employee share ownership arrangements where the granting and exercise of share options do not immediately attract income tax.  The law as enacted excludes workers in a number of important sectors such as the professional services sector and the construction industry.  Yet again workers are being taxed not on how much they earn, but how they earn it.  2018 will also be a tougher year for employers to comply with their tax obligations, as the rules for settling PAYE defaults and mistakes will make the process a lot more costly.  Other provisions could misfire. A new tax relief for refurbishing residential properties prior to letting them could actually be counter-productive in terms of bringing houses and apartments onto the rental market. That’s because the property has to be vacant for a period of 12 months prior to being let, thus creating an incentive to delay putting the property on the market.  A tightening of the rules on how companies can be funded prior to their sale was designed to ensure that an income tax charge could not be swapped for a lower capital gains tax charge.  Fair enough, but the way it was done has the side-effect of closing off some standard funding arrangements for management buy-outs.  That isn’t a great outcome within a recovering economy.   Gung Ho? It’s not possible for businesses to plan for 2018 without making some provision for Brexit, even if the 2017 Finance Act hasn’t done so.  This gap possibly reflects the “you broke it you fix it” approach of government towards the end of the Phase 1 Brexit negotiations.  However the diplomatic achievements of last year in getting those negotiations across the line shouldn’t offer anyone a false sense of security.  The EU set the terms for Brexit Phase 1.  Once it had won the battle over the sequencing of the Phase 1 discussions (at the outset it was to be the “row of the summer” according to the UK’s Brexit minister David Davis), Brussels got its way over the UK on pretty much all of the material aspects.  If anything the EU is now sounding a bit too gung ho over Phase 2.  The terms and conditions which Brussels has already set out for the UK entering a transition phase are stark.  Under the EU negotiating guidelines for Phase 2 a Brexit transition would involve the UK continuing to follow the whole of existing and new EU law, while respecting EU budgetary commitments, related obligations and judicial oversight but without any say in EU decision-making.  Though admittedly an opening position and necessary under current EU law, these guidelines sound more like surrender terms than a basis for a future partnership. A Short Transition Given these terms, there is now surely a greater risk that the UK might just balk at what is being demanded in exchange for access to the Customs Union and Single Market during a transition.  That could result in a negotiated Brexit transition period being shorter than first envisaged, or not happen at all with Customs and VAT on UK imports and exports applying from April 2019.  Businesses could find that borders cease to become invisible quite quickly when the local Customs officer is looking for a cheque for tariffs or VAT, or have their shipments held up because of regulatory controls.  No EU member state can unilaterally eliminate these hazards in its own domestic tax legislation, but it can introduce cash flow and other relieving measures against the evil day.  Such measures were absent from Finance Act 2017. Among the earliest tweets of 2018 from any government department was an invitation to use Revenue’s complaints procedure in case of mishap. Do they know something we don’t know, perhaps a warning of things to come?  Let’s hope not.  What we know already about the tax landscape for 2018 already gives plenty of warning. Dr Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland

Jan 08, 2018
Tax

Sunday Business Post, 31 December 2017 It’s almost as if a tide of fiscal, regulatory and political uncertainty hit the Western world in 2017.  In Germany the major political parties are still trying to form a government as the AFD, a far right party, has won representation in the Bundestag for the first time in decades.  A new Austrian coalition government already features ministers from a far right party.  After an inconclusive election it took months for the Netherlands to form a government.  Italy is facing into another general election in 2018.  In Spain the elections in Catalonia this month hold a significance greater than ever before following the region’s bid for independence.  The government of Malta is dealing with ugly allegations of corruption.  That’s before even mentioning the UK government’s travails and Brexit. Whether it’s a cause, a symptom or a consequence of this turbulent tide, there was no shortage of new tax reports, decisions and law during 2017 either.  Despite politician’s claims to the contrary governments have few enough direct levers to pull when directing the course of their countries’ economies.  It’s often the case that tax policy is the handiest one available, even if all the consequences of its use can’t be foreseen. The best example during 2017 is of course the huge block of US tax law that has been pushed through Congress during the last few months and finalised just before Christmas.  It is worth noting that the US Tax Cuts and Jobs Act faltered at its very first administrative hurdle.  Small discrepancies in the version of the Act as passed by the Senate meant that the bill had to be returned to the House of Representatives for them to vote to re-approve legislation they had already passed. That kind of problem at such an early stage doesn’t augur well for the coherence of the new Act. Unintended Consequences It is almost inconceivable that the new US tax law, running as it does to over 1,000 pages, won’t have mistakes or unintended consequences. Most tax law does.  Even our own most recent Finance act, a mere stripling of 118 pages, had to have last-minute corrective surgery in the Seanad.  It was considered necessary to fix the law governing new rates of stamp duty on commercial property to ensure that the higher rate would apply in every selling arrangement.   It’s easier to understand why it might be tricky to make a tax hike stick, but a tax reduction can have unintended consequences also.  While the overall intent of the US legislation is to give effect to tax cuts broadly across the board, such reductions are unlikely to materialise for all individuals and all businesses.  Only time will tell which US industry sectors will win out, and which US industry sectors might lose out.  Intended Consequences? On our side of the Atlantic it seems that the UK authorities are finally beginning to think about which of their industry sectors might gain or lose because of Brexit.  The UK Parliamentary Committee on Exiting the EU chose the days before Christmas to publish the British government’s sectoral analyses of the impact of Brexit. There are 39 of these reports, covering sectors from agriculture to wholesale, with the likes of fisheries, gambling, medical services and the nuclear industry all commented upon. Because parts of the reports are redacted, readers are left to work some things out for themselves. Take the sectoral analysis of professional services for example, which covers areas such as legal, accounting, research and development, along with areas like advertising, market research and human resources consultancy.  According to the British government analysis there are almost 600,000 firms in the UK providing such services and sustaining 4.6 million jobs, adding £186 billion to the value of the UK economy and generates some 27% of UK exports.  About 60% of the firms in the sector are outside of London and the south-east, and the vast majority are small firms.  The analysis goes on to list the advantages and supports offered to the sector by EU membership.  This includes recognition of professional qualifications across borders and the entitlement to establish and provide services in other EU territories.  Post Brexit such recognition and entitlement cease to be guaranteed within the EU.  Comparisons are then drawn between EU membership and other existing trade agreements which cover the provision of professional services between countries, none of which seem as favourable.  There is no official conclusion offered on the consequences for the sector of the UK’s leaving the EU.  It’s so obvious that there doesn’t need to be one.  No Change Against such a backdrop it may well be that in 2018, stability will be at a premium.  An unwillingness to make sweeping policy changes could be a most useful selling point for a small country like Ireland, highly dependent as we are on external markets and for foreign direct investment.  Maybe the lesson of 2017 was that to sustain the growth in the number of jobs and the overall economic recovery, less change works best when there is chaos all around in other countries.  While there are intolerable shortfalls in our capacity to deliver on infrastructure, housing and education, having a minority coalition government with a built-in inability to deliver radical change might have been crucial to some of the Irish economic successes of the year.  At least that way, there are fewer unintended consequences.  Happy New Year.   Dr Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland    

Jan 04, 2018
Tax

Sunday Business Post, 24 December 2017 It’s Christmas Eve, a few years from now.  Somewhere over the North Atlantic, Santa gets a call on sleigh radio, ordering him into a holding pattern.  A few minutes later, a man wearing a helicopter jumpsuit is winched down onto the sleigh.  His crash helmet has the HM Revenue & Customs logo on the side… The man on the winch took off his helmet and shouted across to Santa over the howling wind. – Santa – long time no see!  – Customs Officer Smith, is that really you?  Good to see you again my friend.  How long has it been – 25 years? – More.  We used to meet all the time.  You were always welcome at our customs checkpoint.  It’s the only benefit of Brexit – we get a chance to see each other more often, you and I.  The other Customs lads asked me to give you their regards. – Most kind of them.  I see your own career has reached new heights since, Mr Smith, ho ho ho. – It’s the new invisible frictionless border thing.  They wouldn’t let us build any customs posts on the ground, so we had to have a bold and imaginative solution to check the imports and exports, just like the politicians were saying. – Dangerous work, I’d say. – Customs work was always a bit dangerous Santa.  Glad to see you’re still using the sleigh.  Much easier than landing on the wing of a 747 cargo plane.  Mind you, those of us in the Air Division we have it easy, considering.  Wouldn’t fancy being in the Underwater Division. – Underwater? – Yep.  Half the Customs lads are working in old diesel submarines in the Channel.  We can’t use the nuclear ones, cos we can’t import nuclear isotopes since Brexit wrecked the Euratom agreement.  The underwater customs units frighten the life out of the poor truckers, waking them up with the noise of the sub latching onto the hull of the container ships.  The truckers are all sleep deprived now after queuing for four days at Dover for clearance to enter Europe. – Ah Brexit.  Of course Mr Smith, that explains all this nonsense.  But why are we meeting here?  We’re somewhere over Greenland. – That’s the bold and imaginative solution thing again Santa.  Remember no one wanted a border on the Irish Sea?  Well, everything going to the UK now gets shipped west via the Atlantic and the Pacific.  I’m told the Panama Canal has never been busier.  And we route the planes over the North Pole – I’m sure you’ve seen them. – Yes.  Mrs Claus says she can’t get wink of sleep with the noise of the jets.  The polar bears aren’t delighted either.  But now, if you don’t mind… – Sorry Santa, I forgot.  You’re a busy man this evening.  So, anything to declare in the sacks? – I don’t think so Mr Smith.  The letters from the boys and girls were very peculiar this year.  Less of the usual toys books and games being asked for.  Instead the lists contained groceries – steaks, fresh chicken and the like.  – You’re not going to thank me for this Santa, but you might owe Customs a few bob.  There’s a lot of customs duty on meat, especially the nicer cuts.  By the way, any fizzy drinks in your sacks? – Why, are there duties on those too? – It’s the sugar tax I’m after.  Since Brexit, sugar tax is the only reliable tax.  Income tax has hit the floor because wages are falling, and as for corporation tax… – I can guess Mr Smith.  Companies making no profits? – I wish, Santa.  There’s no companies left I’m afraid.  Brexit has been tough on everyone, UK and EU alike.  The good news is that this is only the transitional period.  This time next year everything will be sorted out. – Well, that would be very good news Mr Smith, but how is that possible?  I thought the UK was determined to leave the EU and the Customs Union behind. – And they still are determined, Santa, except for just one day in the year.  The day when hardly anyone around here does any trading, and when nobody moves unless they absolutely have to, and goodwill abounds. – You mean Christmas Day? – Exactly Santa.  Mr Barnier and Mr Davis finally got their act together.  The UK remains in the Customs Union, but on Christmas Day it’s allowed pop out of it to sign trade deals with other countries as it wishes.  – But won’t the UK still have to make payments to the EU? – Yes Santa.  But this is the real genius bit.  Britain will make its payments to Brussels on Christmas Day.  That way, it’s not a contribution to the EU Budget, but a Christmas present for Donald Tusk.  No-one, not even Nigel Farage, ever objects to Christmas presents. – A ludicrous solution to a ludicrous problem, but I’m so glad it’s all sorted out.  It’s enough to restore your faith in politics.  Well done everyone.  Now Mr Smith, I must really be on my way.  Happy Christmas to you. – Take care Santa.  Happy Christmas! Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland

Jan 04, 2018
Tax RoI

Sunday Business Post, 17 December 2017 The last few days have seen a fundamental change in the approach to how much multinational companies should contribute in the form of corporation taxes.  Up to now, the tenor of the debate officially at least has been about fair share.  No longer. The debate on US tax reform has, if nothing else, burst some fake bubbles of concern about tax fairness for multinationals, held together by the soft soap of tax equity, and inflated by the need to make contributions to support the society in which they operate.  The US tax reform bill, which now looks like it will be passed in the first year of the Trump presidency, will unashamedly bring tax revenues “back home” to the States.  Sucking Revenues While the headlines are all about cutting rates and adding €1.5 trillion to the US Federal deficit, there is much less talk about how the measures could suck tax revenues from countries outside the US and spit them into the coffers of Uncle Sam.  On Monday last, the U.S. Treasury predicted that its tax policies would result in additional tax collected thanks to economic growth.  That commensurate growth in taxes collected would eclipse the €1.5 trillion over a ten-year period. It’s easy to be sceptical about economic forecasts, particularly if the evidence for them doesn’t extend beyond a one page statement.  However these bullish predictions received perhaps unwitting support from the finance ministers of five EU countries.  As reported on the same day the finance ministers of the UK, Germany, France, Italy and Spain (the five largest EU economies) wrote a joint letter to US Treasury Secretary Steven Mnuchin to outline their concerns about some of the proposed US tax proposals. These European fiscal grandees told the Treasury Secretary that while the establishment of a modern, competitive and robust tax system is one of the essential pillars of a state’s sovereignty, it had to be done in such a way as not to contravene any international obligations, specifically the taxation agreements which already exist between the US and other territories.  It’s wise counsel, though the same countries don’t follow it in their all too frequent attacks on Irish tax legislation and policy.  Such is the lot of a small country. Tax Bonanza I haven’t seen the response from the US Treasury Secretary.  If there was one I suspect it would have been suitably diplomatic, but he would surely also have read between the lines of the European complaint.  It’s arguable that the finance ministers are not really exercised about international conventions or agreements.  Instead they are just worried that the US tax reforms will draw money out of the tax take from companies in their own jurisdictions.  That concern gives credence to the US claims of a future tax bonanza following tax reform. I’m not sure that anyone can predict with any degree of reliability the effect of major tax reform over a ten-year period.  While the direct effect of a tax change is fairly predictable in the short term – a reduction of X percent on a tax rate will cost Y euros a year – longer term predictions are more suspect.  That’s because there is behavioural impact as well as an economic impact.  Business taxpayers tend to rearrange their affairs to accommodate and adjust to new tax regimes.  Grounds for Concern Given these uncertainties, have the European Finance Ministers grounds to be concerned?  In their letter they identified three potential outcomes in the US proposals with cross-border reach - an excise tax on some foreign (that is, non-US) sales, limiting US tax deductions for some types of payments to foreign subsidiaries, and a special tax on foreign royalty payments.  On the principle that every additional dollar in taxes a multinational pays in the US can mean a euro less paid in the EU, and vice versa, US tax reform will cost European exchequers. Nevertheless, there is some hypocrisy on the part of the Europeans.  That US proposal on excise tax resembles in all but name the “equalisation levy” currently promoted by some of the same Finance ministers which would tax the gross receipts from online cross-border trade, irrespective of where a company is located.  Why is it OK for the EU to try and tax companies where their markets are located, but not OK for the US to do the same thing?  The only way to reconcile these conflicting approaches is to recognise that for all the political talk about reforming the tax regime for multinationals on both sides of the Atlantic, the real concern is not how much multinationals pay, but where they pay it.  “Our share” has replaced “fair share” as the political imperative.  The US position is now more coherent than the European position.  As the US Treasury Secretary himself put it, changes to US law “will also make American businesses more competitive so that workers will have access to more, better-paying jobs.”  The link between corporate tax policy and job creation seems to have been lost in European tax policy.  For the larger EU countries, tax competition is not about jobs for their citizens – it is merely about winning a bigger share of taxes from the corporate sector. Dr Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland

Dec 18, 2017
Tax

Sunday Business Post, 10 December 2017 The avoidance of a hard border through the overall EU – United Kingdom relationship is one of the most important elements of Friday morning’s communication from the EU Commission (as Brexit negotiators) to the European Council.  But then the communication identifies an enormous problem.  In a sentence immediately afterwards it says “this intention seems hard to reconcile with United Kingdom’s communicated decision to leave the internal market and the Customs Union”. Usually a Customs Union is regarded in terms of internal flows of commerce between members of the customs union.  There are two main aspects – policing and payment.  Policing involves declarations, customs checks, barriers, borders, queues, delays, and officers with peaked caps and sniffer dogs.  Payment involves paying whatever customs tariffs and value-added taxes are due on the goods being shipped across the border.  Membership of the EU customs union eliminates both policing and payment for most practical purposes on transactions between EU businesses.  Surveys and research earlier this year showed that Irish businesses feared the bureaucracy and delays associated with crossing between North to South at least as much as the actual customs tariffs involved when trading with UK after it left the EU customs union.  The news that a hard border is to be avoided is unequivocally good news. External Borders However a question mark remains over another other key aspect of a customs union.  A customs union works by allowing free trade within its own borders, but the corollary is that the external borders must remain secure.  There can be no importation of cheaper or inferior standard goods without customs tariffs from outside the customs union, because that would prejudice the commercial interests of businesses within it.  The border between all customs union members and so-called “third countries” which are not within the customs union must be secure.  The UK’s “communicated decision to leave the internal market and the customs union“ will make it a third country, and so there must be a border in the future between the UK and any remaining EU member state.  Such a border might not be a “hard border” but it will have to be secure.  This is not just about playing with words.  Customs and trade agreements do not work when countries have porous borders, and the EU is particularly rigorous when it comes to policing its own member states.  In 2016 the EU antifraud office, OLAF, initiated proceedings to recover almost €2 billion in customs duties from the UK because of shortcomings in declarations of goods being imported from China and then shipped onwards to other EU destinations.  Undervalued Chinese textiles dumped in the EU market could not be allowed to undermine EU producers.  There is absolutely no reason to believe that the EU’s approach to the UK when it comes to enforcing customs duties will be any less rigorous when the UK ceases to be a member of the customs union.  In fact the importance of safeguarding the internal market is repeated over and over again in this week’s communication. Safeguarding the Customs Border As Ireland has a particular responsibility, as a remaining EU member state, to manage whatever form any future border takes with the UK, reinforcement from Brussels will be forthcoming.  Should the need arise, Madrid will undoubtedly receive support if there are issues with the Gibraltar border, and Paris can expect similar solidarity if it has to restructure customs controls at Calais.  For now though the most difficult section of the EU-UK border to negotiate is on this island.  Here, another assurance in the communication that the Ireland/Northern Ireland issues will continue to be a distinct strand of phase II negotiations reflects the scale of the practical customs union enforcement problems. While the EU’s own Community Customs Code sets out the ground rules for the operation of the Customs Union, the actual details of customs policing is by and large left to individual Revenue Authorities – the Revenue Commissioners and HM Revenue and Customs are the key agents on this island.  The practical terms for future customs payment and policing between the UK and the rest of the EU are likely to be determined outside the political sphere, but must conform to both the political aspirations of the Commission communication and the legalities of the Customs Community Code.  A Tall Order While that’s a tall order it is in the UK’s interest as well.  A much vaunted advantage of Brexit is that the UK will in the future be able to negotiate its own trade deals with countries outside of the EU.  No new deals would be forthcoming if the UK cannot show to putative partners that its own trade borders are secure. Friday’s communication on the status of the article 50 negotiations provides a very welcome political solution, but it requires some serious work to make it a practical commercial reality.  This is not “hard Brexit” nor “soft Brexit” nor “Brexit light”.  It is “Brexit different”.  When the UK finally leaves the customs union, there will be tariffs on UK imports and exports.  The point of charging those tariffs will just not be at a hard border.  Unless the UK remains in the customs union there will still have to be checks on the quantities, valuations and standards of goods being imported and exported.  But those checks will not take place at a hard border.  This week’s agreements mean that north-south trading post Brexit will be a lot easier than it could have been.  While the challenges are certainly mitigated, businesses which trade with the UK would be prudent to plan for the UK’s departure from the customs union as if nothing, however momentous, had taken place this week. Dr Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland  

Dec 11, 2017
Tax

Sunday Business Post, 19 November 2017 There are 450,000 or so self-employed or self-assessed individuals who have to make returns of income every year to Revenue.  Most of them filed their tax returns last week.  In addition tens of thousands of companies have to make returns as well.  All of these tax returns are screened and checked.  If Revenue see something they don't like, they will make enquiries.  There are few enough businesses that haven’t been at the receiving end of Revenue curiosity at some stage, at least to some degree.  So what do you need to know to deal with Revenue Audits, investigations or enquiries?   1         Why me? Almost all Revenue audits happen for a reason.  Either Revenue are dissatisfied with something on one of your returns, or have information that some income hasn’t been declared, or you have claimed something incorrectly.  If you are in business, they may have picked up something incorrect or suspicious in the way you operate PAYE or VAT.  Revenue do audit some cases each year at random but it’s most unlikely that you have been randomly selected. Revenue sometimes look at particular industry sectors or business activities.  You may receive an enquiry because of the sector you operate in, rather than because of anything you might or might not have done.  For example in recent times Revenue have focussed on the medical profession, and on professional contractors operating through their own companies.  The construction sector is perennially being challenged, and at the moment some claims by businesses for tax relief for Research and Development expenditure are being audited.   2         What is Revenue looking for? Revenue operate a system they call REAP - a computer database which logs all the information they hold on you received directly from yourself, or from third parties like the Department of Social Protection or the Department of Agriculture.  They will also have things like Stamp Duty records, so outside of your return of income they will have data about your purchases and sales of assets.  These records are matched up to the contents of your return of income.  The fewer items that match properly, the higher the risk of being audited or investigated.  In tandem with all this sophisticated matching and screening, there’s plain old fashioned information.  Revenue read the papers.  They consider tip-offs from civic-minded citizens and slighted partners and spouses.  And in more recent times they have a wealth of information on offshore activities coming in from their counterparts in other revenue authorities across the world.  Revenue will not tell you precisely why they have been in touch – you’ll have to figure that out.   3         What do I do when I get a letter from Revenue? Open it!  I am constantly amazed by the trouble people create for themselves by ignoring tax correspondence or by just assuming their accountant is handling it.  Revenue will usually copy in a taxpayer’s professional adviser, but it’s not guaranteed.  A brown envelope with a harp on it rarely improves your day, but open it anyway.  Then look at the letterhead.  If it makes any reference to Investigation Branch, get legal advice straightaway.  Chances are that Revenue are looking to prosecute you for tax evasion.  Most cases don’t involve investigations, but are just queries or notices of an audit.  That said, on average someone is jailed every month as a result of a Revenue investigation.   4         It seems to be a routine query – what should I do? Sometimes an apparent discrepancy on your tax return will be handled by Revenue issuing a query letter asking questions about a specific item.  Depending on how satisfactory your response is, Revenue will either decide to fully audit your case or let the matter rest.  The letter will specify a time limit for a response, and it’s generally a good idea to answer it within the 21 days, or whenever specified on the letter.  If you need more time than you are being offered, ask for it.   5         The letter says “Notice of a Revenue Audit” – what does that mean? The letter may state that your tax affairs are to be “audited”.  If so, and there are indeed some problems, there may be an opportunity to settle outstanding taxes without the investigation and prosecution process.  If you are unclear about the queries, you are within your rights to write back to ask for clarification, or perhaps to phone the tax office and ask the tax inspector to explain to you exactly what is needed.  You can also ask for more time to deal with the issue.  As with a routine query, the main thing is not to ignore the correspondence or delay answering it. The letter will usually outline the area Revenue proposes to audit, whether that is your own personal tax liability, your company’s corporation tax liability, or the business taxes you operate such as VAT or PAYE.  It won’t go into specifics. 6         What are the main tax problem areas? First of all, an audit notification doesn’t mean that you are being accused of tax evasion.  Tax law is overly complicated, and tax payments can be missed simply through an innocent error or carelessness.  Most Irish businesses are tax compliant and are good at handling the routine stuff; sales, purchases, stock, and the like.  Tax problems often arise as a result of non-routine activity, such as the transfer of assets into or out of the business.  Property transactions, particularly the VAT aspects, are often problematic.  Revenue often focus on where money leaves the business or the company and is paid into the hands of individual owners or employees.  Are the books and records up to date and correct?  Is there any non-business expenditure included in the accounts?  Are all employees shown on the payroll?  What controls are in place over the payment of expenses to employees?  What kind of benefits are being provided by the business to owners and staff?  7         I’ve found a problem – how do I sort it out? If you find a problem after you get the Revenue audit notice, most business taxpayers have the option to offer what is called a Qualifying Disclosure to Revenue.  You should tell Revenue within two weeks of receiving the audit notification that you intend to make a Qualifying Disclosure.  After contacting Revenue in writing about your intention, you will then have another sixty days to put together the Qualifying Disclosure and make arrangements for payment of back taxes and whatever interest is due (at rates of up to 10% per annum).  The Qualifying Disclosure must address all the different types of taxes mentioned in the Audit Notification and any tax of any sort which was deliberately evaded.  So if for example, the Audit Notification concerned VAT, but you also had people on your payroll where you didn’t apply PAYE, you would have to include any underpaid PAYE in your Qualifying Disclosure. 8         Will there be penalties? If there’s a problem, there probably will be penalties.  Revenue will calculate what these are based on the contents of your qualifying disclosure.  Generally speaking, Revenue will not ask you to settle tax more than four years back, but they will reserve the right to go beyond four years.   Typically, this will happen if Revenue suspect fraud or neglect on your part, as distinct from simple carelessness about keeping your tax affairs up to date.  Making a valid Qualifying Disclosure can mean that you pay a much reduced penalty.  Penalties start at 100% of the tax at issue, but proper disclosures can abate the penalty down to as little as 3%.   You can appeal a Revenue penalty through the courts if you think it is too harsh.  Most people don’t appeal penalties however, as a court appeal can put your private business and tax affairs into the public domain if the case is reported.   9         Will my name be published? That depends on how serious the matter is.  Tax penalties are calculated by reference to the nature of the mistake (deliberate or otherwise) and the amount at issue.  If the penalty is calculated as being 15% or less your case will not be published.  There’s also a minimum threshold for the settlement amount – if the settlement is below €35,000 you won’t be published either.  Another good reason for making a disclosure is that in most cases it will keep your name out of the paper as a tax defaulter.  However, if you have form with the Revenue as a persistent offender, you might not be able to rely on these get out clauses.    10       How long does the process take? After responding to a Revenue enquiry letter, you may not get a response for some months, if at all.  A span of two to three months from the time of receiving an audit notification to conclusion and settlement, perhaps including a few days when Revenue officers are on site in your business, can be expected.  However some cases can drag on a lot longer especially if some of the tax issues are unclear and are being contested.  Inevitably there will be some business disruption – you could have to make available to the tax inspectors all types of data, books and records which can soak up a lot of your time and your staff’s time.  Revenue can also seek electronic copies of data from your accounts system. Brian Keegan is Director of Public Policy and Taxation with Chartered Accountants Ireland

Nov 20, 2017
Tax

Judging by some of the reaction to the Paradise papers revelations, it is as if all offshore financial planning and advice is illegal, or at best operating at the very edge of legality.  This is not the case.  One of the freedoms of EU membership is the freedom to move capital across borders.  Cross-border trade and investment is fundamental to the success of any modern economy, and the U.K.’s choosing to curtail its own rights to provide cross-border financial services is one of the more bizarre consequences of the Brexit referendum decision.  Yet the argument that all of this activity may be “perfectly legal” is ringing hollow. Is it perfectly legal? So what is “perfectly legal”?  In this country it is legal for any taxpayer of any type to put their money wherever they want, onshore or offshore, as long as tax has been accounted for on the earnings and continues to be accounted for on the return on investment.  Also fitting into the “perfectly legal” category is the use of trusts and companies.  Seeing the use by others of trusts and companies in offshore locations creates doubt and suspicion, and some justification.  At the risk of oversimplifying, when a trust or company is created, a new legal person is created.  That new person mightn’t be subject to the same tax or other rules as the person creating it, most likely because it has been set up in a foreign country.  That opens up possibilities for secrecy, tax avoidance and tax deferral. The Paradise Papers leak is far from unique.  It is just the latest incident in a sequence extending back at least two decades, where public disquiet has prompted political attempts to extinguish opportunities for tax avoidance using cross-border transactions.  By and large the early attempts were not particularly successful.  They relied on the capacity of the tax authorities to smell a rat.  The so-called general anti-avoidance rules and rules which mandated the disclosure of special-purpose arrangements had relatively limited effect. More recently governments have changed tack and began to place the emphasis on cross-border information sharing among themselves.  Double taxation agreements and other international accords including EU directives put the legal framework in place; OECD initiatives such as the common reporting standard are putting the analysis tools in place.  Both Luxleaks in 2014 and the Panama Papers in 2016, both antecedents to the Paradise Papers, undoubtedly increased the momentum behind these changes. Long Term Effects Similarly I think a long term effect of the Paradise Papers could be to accelerate the finalisation of rules which were already under discussion.  There already exist proposals on both sides of the Atlantic to sideline traditional tax charging mechanisms on the profits of multinationals by imposing hard to avoid levies on their gross income instead.  The EU is looking at the possibility of charging such a levy on the gross income of digital economy companies.  In the US, the Tax Cuts and Jobs Act in debate at Congress would introduce a levy on some types of cross border trade between companies under common ownership, if it were to be passed in its current form.  Also Brussels has long been muttering about creating a black list of countries which don’t play ball with cross border attempts to eliminate tax avoidance and evasion.  That list, politically sensitive and highly charged though it is, is now likely to be published in the coming weeks having been years in gestation. Naming and shaming is undoubtedly effective as a deterrent.  We are accustomed to seeing the quarterly list of tax defaulters published in this country as a deterrent to those who evade without attempting to fix their affairs.  Collection enforcement which becomes public in any way, for instance Revenue attaching the money owed to them by business debtors (often a bank account), is commercially a kiss of death.  The more traditional tax avoidance and evasion deterrents like financial penalties pale into insignificance in comparison with the power of publicity. Casualties Sunday Business Post, 12 November 2017 This fear for reputation often leading to commercial damage is what provides the Paradise Papers with their power.  Public identification as being involved in the dark side of tax compliance, legal or not, is commercially damaging and career damaging.  There are casualties where there is an unmoderated and unfettered leak of information of the type seen in the Paradise Papers and the Panama papers.  There can be good reasons for confidentiality.  Would the reaction we’ve seen to the Paradise Papers be the same if bank account details or even worse, medical records, had been leaked?  A decade ago on the other side of the fence the UK Revenue Authorities lost tens of thousands of child benefit records due to a system failure.  That cost the then HM Revenue and Customs Chief Paul Grey his job, even though there was no evidence that the records ever got into the public domain. The likes of the Paradise papers leaks are prompting a redefinition of ethical tax behaviour as what is publically acceptable, but not by reference to the rule of law.  The ultimate sanction for not doing the right thing is to suffer the commercial and reputational damage of compliance failure should it come into the public domain.  Luxleaks, Panama and now Paradise will advance government action against unacceptable tax practices across borders.  This is an important service but it comes at a high cost to anyone named.  Leaks cannot become an acceptable proxy for the efforts of governments and their revenue authorities.  Brian Keegan is Director of Public Policy and Taxation with Chartered Accountants Ireland

Nov 13, 2017
Tax

Sunday Business Post, 5 November 2017 This week I found myself at a reception organised for South African accountants working in London.  About 60 people attended to hear about new South African tax rules which would cost their expatriates a lot of money; new rules which parallel the arrangements in place here that stop people avoiding Irish tax liabilities simply by leaving the country.  Almost all of the people I met were working in financial services in the city of London.  And most of them were looking to get out.  Because of Brexit the future for an expatriate working in financial services in London doesn’t look quite as rosy as it used. This isn’t a constituency you’d immediately associate with being affected by Brexit.  Nevertheless, whether they felt they would have to move because their employers required them to, or because they feared for the future stability of their employment after the UK leaves the European Union, the talk was of relocation back home.  Or of moving to Frankfurt or to Luxembourg or to Dublin (though I suspect the latter was only being politely name checked when I was in earshot). It is dangerous to extrapolate too much from the evidence of a small sample, but to me the discussions were indicative of how deaf the political debate on Brexit has been to its impact on people from all walks of life.  Businesses too are trying to plan for the changes and many are frustrated.  Seven months after the formal notification of intent was made to depart, we are not much further on in understanding what the future trading landscape will be.  Customs Controls Customs controls for importers and exporters are of course only one aspect of the Brexit dilemma, but are arguably among the most high-profile, and therefore, along with the free movement of people, the most politically charged.  The practicalities of trade are routinely blended together with the politics of border controls.  The Irish government’s challenge to the UK on customs borders – you broke it so you can fix it – may well be a politically appropriate response, but it’s useless to business. Customs border controls are primarily needed for economic reasons.  The essence of a customs union (which the UK tells us it is leaving) is that the countries within the union must have a fortress-like mentality towards countries outside of the union.  The borders of the entire EU customs union, which will continue to include Ireland, must be sealed.  Trade in goods between the customs union members is tariff free, but that trading privilege can only work if there are no tariff free goods coming in to the EU from countries outside the Customs union.  A future arrangement between the UK and say a far Eastern trading partner country like China (as nothing more than a random example) could result in no customs controls on some goods moving from China to the UK.  But if the EU didn’t operate controls between itself and the UK in the future, there is nothing to prevent those Chinese goods coming into the EU via the UK with neither UK nor EU duty being paid.  Whatever any politicians in Dublin or London might think, the other 26 EU member states will not permit the integrity of the customs union to be jeopardised by a porous border between Ireland and the UK. An Autonomous Territory? A former EU Commissioner and former head of the World Trade Organisation, Pascal Lamy, suggested in Dublin last week that Northern Ireland could be treated as an autonomous customs territory.  That could provide a legitimate and workable mechanism for having no customs controls between Northern Ireland and the South, and thus no border controls of any type.  Workable that is until the politics are factored in, because such an arrangement would in effect shift the Customs border between the UK and Ireland into the Irish Sea.  The suggestion deserved attention because up to now ideas for border solutions have been politically feasible (frictionless borders and the like) but lacking from a customs union perspective.  The Lamy idea seems the other way around; sound from a customs perspective but perhaps politically unrealistic. A new impetus to arrive at Brexit solutions may be developing in Whitehall for the most banal of reasons.  The UK financial year does not run from January to December but from April to March.  By accident or design, the triggering of Article 50 on 29 March 2017 has resulted in the Brexit departure date coinciding with the end of the tax and financial cycle within the U.K.’s national Budget process.  The mandarins will need to be able to forecast tax revenues and expenditure with some degree of accuracy.  That will require more detailed and more nuanced policy decisions than the blunt statements of intent to leave the customs union and single market.  A key date could be 22 November next.  This is the date of the next UK Budget, and the first since the Article 50 countdown clock started.  The announcements by the UK Chancellor Philip Hammond on that day might well reveal what the UK government actually expects its future customs borders and trading relationships to look like.  The nature of Brexit, hard or soft, with a transition or an abrupt break might not be driven by political posturing and EU resolutions and deadlines, but by the need for the UK to balance its own books.  Whatever about being deaf to the impact of Brexit on particular cohorts of people, the UK government must surely recognise that the national show must be kept on the road. Dr Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland

Nov 06, 2017

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