Thought leadership

Originally posted on Business Post 20 June 2021. Given Ireland’s pandemic-related national debt, significant income tax cuts in the near future seem unlikely, but moving abroad to work remotely will not always result in savings either. As if it wasn't enough to have ongoing upheaval over corporation tax, events are now conspiring to push the income tax burden into the spotlight. Tánaiste Leo Varadkar has been warning that Ireland's personal tax rates are a major disincentive for attracting mobile workers. Highly paid workers, he believes, could avail of new remote working possibilities to move overseas. Any government minister should be wary of losing high-paid executives from this economy. Broadly speaking, Ireland operates the 80/20 rule when it comes to tax receipts from individuals – roughly 80 per cent of income tax is paid by the top 20 per cent of earners. In common with some other countries, Ireland has tax measures for foreign executives coming in on assignment. A special assignee relief programme, or SARP, allows people coming into this country to have part of their income ignored for tax purposes, provided certain terms and conditions are met. Numbers in the public domain suggest that just under 600 jobs were eligible for SARP in 2018. Given that there were some 2.7 million employees in the country before the pandemic hit in early 2020, SARP doesn’t appear to be making a huge difference either to overall employment, or to the overall tax take. Whatever about coming in, what about people who might leave the country because of the increased acceptability of remote working? Every other day, companies are announcing policies to permit their workers to work remotely from their homes for a proportion of the working week or working month. It's not clear, however, that this will translate to a mass exodus of largely white-collar, higher-paid workers from the jurisdiction. Except for company directors, who are always caught by the Irish tax system irrespective of where they live, taxing rights are usually determined by the employee’s place of residence rather than their place of employment. A worker in Mullingar who emigrates to Marseille, while still working remotely for their Westmeath employer, will be subject to French income tax and not Irish income tax on the earnings. The position of social welfare contributions (PRSI) and the corresponding entitlements is not as clear cut as that of income tax and may differ from country to country. The position also gets tricky if the work involves travel to meet clients, customers or suppliers. Tax-free reimbursement of travel expenses in Ireland is only permissible where the travel is from the normal place of work, which can become problematic for remote workers, even within the jurisdiction. Moving abroad will not always achieve tax savings. An OECD study of the income tax and social security paid by single workers on the average wage in 2020 shows that the tax take in Ireland is more or less in the middle ground by international standards. A person moving from Ireland to Germany or Belgium or Austria will have a lot less after-tax income to spend than if they had stayed put. The difference is mainly due to social security contributions. That person might fare better by moving to Australia or Britain or Canada, but only marginally so. Higher-paid workers may do better than their counterparts on average pay, but few territories offer workers a tax crock of gold. Any telecommuting move, of course, depends on a willing employer. A recently published study from the University of Chicago, analysing personnel and analytics data on professionals in the IT industry, found evidence that while the total hours worked by people working from home did increase, the average output did not significantly change. Not only that, time spent on coordination activities and meetings increased. In short, there seems to have been more management, but less productivity. It is unlikely that company employment and benefits policies will require significant adjustments if a person is to work three days from the house and two days from the office. However, if the person wants to move to another jurisdiction entirely, the chore of administering that employee’s insurance, terms and conditions becomes far more onerous and perhaps without much commercial benefit to show for it. There undoubtedly will be even more studies on the benefits or otherwise of telecommuting, but the University of Chicago findings will resonate with many people who have been involved in telecommuting since the start of the pandemic lockdowns. Part-time telecommuting opportunities may become a part of an employee benefit package, but it doesn't necessarily follow that those opportunities will routinely extend to permitting employees to work offshore. The pandemic has resulted in higher national debt and a bigger state apparatus to pay for. The pressure on taxes generally, and on social security contributions particularly, will increase if government finances are to recover. If corporation tax receipts are indeed under threat – though I suspect that the €2 billion plus estimates may be overstated – it will be difficult on purely budgetary grounds to make a strong case for income tax cuts as well. The threat of income tax loss from offshore working may also, I suspect, be overstated. While the grass may be greener, the tax benefits of offshore working are not black and white. Originally posted on Business Post 13 June 2021.   Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

  Originally posted on Business Post 13 June 2021. Corporation tax might be dominating the headlines now, but environmental matters are of more long-term importance to international finance. Ideas for what constitutes sustainable behaviour change over time too. Over a decade ago, motor tax on diesel cars was reduced here to reflect lower greenhouse gas emissions From the headlines you could be forgiven for thinking that the G7 finance ministers discussed nothing but multinational corporation tax last week. Accounting standards rarely deserve such coverage, but the G7 statements about how businesses should account for their environmental behaviour will have repercussions long after the tumult over tax has subsided. The fundamental issue considered by the G7 finance ministers is that there is no universally accepted standard to measure claims by a business that it is conducting itself in a sustainable way. Misleading impressions are getting created. When it comes to food, for example, there is much talk about the environmental impact of shipping produce from far afield. Yet, as the chief executive of Bord Bia pointed out last week, transport accounts for only about 3 per cent of the carbon footprint of Irish produce. This figure is undoubtedly valid, but without agreed standards, her counterpart in another country may be doing the same calculation a different way and getting a different result. Ideas for what constitutes sustainable behaviour change over time too. Over a decade ago, motor tax on diesel cars was reduced here to reflect lower greenhouse gas emissions. Now there is a pushback from some quarters on the role of diesel cars on the grounds of high particulate emission. If all this confusion makes sustainable consumption choices difficult for the consumer, the problems are even greater for fund managers looking to make planet-friendly returns on behalf of the individuals, unit trusts and pension funds for whom they act. These investment choices are really what prompts the G7 concerns over the lack of generally recognised accounting standards. The idea of obliging companies to report on their sustainability agenda activity is not new. Since 2014, an EU directive on non-financial reporting has required large businesses to report not only on their financial results, but also on things like their approach to human rights, steps to take against corruption and their promotion of diversity in the workforce. It is estimated that perhaps 20,000 companies across Europe have been including this material in their published reports and accounts, some of whom volunteer to do so. The system is not without its drawbacks. It is only a legal requirement for the very largest businesses and it allows companies to choose whatever reporting standards they feel appropriate. This makes it difficult to form objective comparisons between companies. Nevertheless, the directive has promoted the key idea that sustainability reporting needs to be seen in two ways. First it has to show how sustainable conduct contributed to the value of the business – the euros on the balance sheet. Then it has to show what impact the company’s performance has on the broader environment. This idea is known as “double materiality” in the jargon. Persisting with the notion of double materiality will be crucial to any fair measurement of a business in terms of its environmental impact. There are already at least five voluntary consortiums involved in devising reporting standards and the EU now wants to establish yet another standard for itself. The G7, however, seem to be saying that the work should be given to the International Financial Reporting Standards (IFRS) Foundation, the organisation which sets the existing accounting standards to calculate profits, losses and balance sheet values. That approach seems logical, but it is also problematic. The IFRS Foundation will have to develop expertise in sustainability matters. It took well over a decade to devise the current financial reporting regime, but that kind of timeframe surely cannot be repeated if proper sustainability reporting is to be part of a meaningful response to the climate change crisis. These initiatives will affect more than just large multinationals. To be credible, larger entities will have to be able to show that their supply chain also operates with good sustainability credentials. That in turn means that smaller enterprises will have to develop similar credentials to secure their position in supply chains, even if they are exempt from formal reporting themselves. All this will come at a cost. Currently, the relatively modest requirements of the EU non-financial reporting directive drive average costs per company of some €150,000 a year. While such costs would be only a tiny fraction of the total operating costs of a large manufacturer or insurer, they are certain to become proportionately higher as the reporting requirement increases. In addition, there will be training costs for staff, and new systems to be implemented. It's one thing to meter the number of items processed on a production line, but quite another to meter, for instance, the energy consumption per item. The piece missing from the G7 approach is that it is all very well for them to mandate more regulatory change cross their own industries in their own territories, but climate change is a global problem. Regulatory compliance is not always a top priority in every country across the world. The current tax proposals have teeth because the US is threatening to discriminate against countries that don’t apply the proposed 15 per cent minimum rate. There will have to be similar sanctions for countries where their major industries do not have to account for what they are doing to the planet.   Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

  Originally posted on Business Post 6 June 2021. Vat is to all intents and purposes invisible, although for many of us it eats into our disposable income to a much greater extent even than income tax.  On a day when they announced business supports to the value of hundreds of millions of euro, it must have been profoundly irritating for government ministers to see the relatively minor increases in local property tax grab the lion’s share of the headlines. The employer wage subsidy scheme alone has cost the state almost €4 billion to date, and is now being extended to the end of this year. In comparison, LPT has never raised more than around €500 million a year and, even with the projected changes, is unlikely to raise significantly more than that in the future. Yet it is the LPT change that gets the attention. Another tax hike announced last week isn’t getting nearly the same coverage. The Revenue Commissioners have announced that, with effect from July 1 next, they will apply the full rigours of the EU Vat regime to online purchases from non-EU countries. Unlike the revamp of LPT, the change has been met with a national shrug of the shoulders. Like customs duties, excise and carbon taxes, Vat is to all intents and purposes invisible, although for many of us it eats into our disposable income to a much greater extent even than income tax. It adds to the cost of our purchases as consumers, and there is no way to avoid or circumvent it. A Vat rate of 23 per cent applies to many of the goods which make life more enjoyable – cars, most clothes, cosmetics, electronic gadgets of all sorts and white goods. Any consumer buying these types of goods online from outside the EU is not charged Vat if the individual item costs less than €22. From July 1, that practice will cease including for some items which attract lower Vat rates. This may not seem like a big change in the overall scheme of things because the €22 threshold is fairly low. Nevertheless, removing the exemption reinforces the notion that you're always better off dealing with an EU business. Any possible tax saving by shopping online further afield is removed, but the bonus of better regulation and consumer protection when dealing with an EU based supplier remains. Aside from reducing paperwork, it makes little sense to have any form of preference for non-EU suppliers over domestic or EU suppliers, particularly as we exit from the pandemic. Irish business needs every competitive advantage it can secure. Will there be any pushback to this change? Given the increasingly febrile nature of the relationship between Britain and the rest of the EU, this move could well be seen as another gesture by the EU against a post-Brexit Britain by applying Vat charges to Irish consumers buying from British websites. Unfortunately, a fundamental dishonesty, similar to that seen in the 2016 Brexit campaign, is creeping back into the post-Brexit discourse. Edwin Poots, the new DUP leader, has already claimed that the EU is seeking to punish Britain in its application of the Northern Ireland protocol. That view is overly simplistic because it reflects only the commercial disruption created but not the commercial advantages conferred by the protocol. The EU’s ambassador to Britain last week retorted that Brexit, not the protocol, created the problem but that too is overly simplistic. Having managed to control the Brexit negotiation process for so long, the EU allowed itself to be bounced into enforcing impractical arrangements on Christmas Eve last year. The single market would not have been particularly compromised by allowing a further period of trial on new controls and procedures on imports and exports between Britain and the North beyond the Brexit guillotine date of January 1 last. The irony is that this Vat change doesn’t change the treatment of consumer purchases from the North because the North was part of, and remains part of, the EU Vat system for goods. Nor is Britain being singled out by the change, because it applies to purchases from any non-EU country. This is what you would expect, as the EU policy was devised when Britain was still at the table in Brussels. Both the Vat changes and the LPT changes announced last week underline that when it comes to taxes we generally respond primarily by reference to what we last experienced. Consumer reaction to a Vat change is usually a shrug of the shoulders, because the prices of consumer items go up and down all the time and consumers will be indifferent to the Brexit implications. Similarly, our reaction to the LPT change is being informed by the lower amount, or the zero amount, we paid last year. It doesn’t seem to matter that the LPT system as it currently operates works from an out-of-date property register, nor that some measures to raise taxes are inevitable because of the costs of extending the pandemic supports to citizens and businesses. We shouldn’t be surprised if the government is frustrated by the response to the Economic Recovery Plan. Taxation is always a stone in the political shoe. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

  Originally posted on Business Post 30 May 2021. There are important tax implications for employers as they prepare for the winding-down of the pandemic supports.   ‘The caveats associated with the withdrawal of government pandemic supports should not diminish the air of excitement about the prospect of the return to normal business.’ Almost every sector of the economy has benefited from a tax system which, more than a year ago, was thrown into reverse to distribute financial support during the pandemic closures. While there is much talk about the “new normal”, elements of the old normal are going to return. The Revenue Commissioners will soon cease adhering to the belief that it is better to give than to receive. There are of course many issues that businesses which are reopening have to deal with – stocking, premises, staffing, health and safety, debtors, creditors and banking arrangements. As well as these, there are consequences as the government pandemic supports come to an end. Pandemic supports have created three categories to think about. Employees who had to be laid off entirely were more than likely receiving Pandemic Unemployment Payments (PUP) of up to €350 a week. It is up to the employee to notify the Department of Social Protection that they have returned to the workforce. Employers need to be aware that the employee’s tax credits could have been restricted earlier in the year to account for income tax due on the PUP, and the employee might not get into their hand as much as they expected after PAYE. Employees who were on the Temporary Wage Subsidy Scheme (TWSS), which was the first wage subsidy from April of last year, may also have less after-tax income than they expect. This is because of the way the TWSS operated – not all the tax due was gathered through payroll. Workers have an opportunity to spread whatever back taxes from 2020 are due out over the next four years. There is also an option for an employer, should they wish, to settle their employees’ tax liability without further tax consequences either for themselves or the employee. This option runs out in September 2021. In the third category, employees who are on the Employment Wage Subsidy Scheme (EWSS) will not have a back tax issue. EWSS replaced the TWSS and has operated since last September. The scheme allows employers and new firms where turnover has fallen by 30 per cent to get a flat-rate subsidy per week based on the number of qualifying employees on the payroll, including seasonal staff and new employees. Eligibility for the EWSS may continue for the next few weeks even though a business is reopening, provided the reduced turnover criterion for the business remains valid. There are signals that, for some sectors at least, the EWSS could be extended beyond the June 30, 2021 deadline. If the experience in Britain, which is reopening a few weeks ahead of us, is anything to go by, many of the businesses commencing or extending trading again will experience a surge in demand, and a parallel need to enhance conditions or provide more flexible arrangements to attract or retain staff. The tax system remains notoriously inflexible when it comes to staff arrangements. It is almost impossible to broker arrangements whereby current or former employees can be treated as self-employed contractors for part or all of the time they work. It is possible to provide equipment to staff if they can work from home, but the reimbursement of working from home expenses without operating PAYE is limited to €3.20 per day. The consequences of getting employment status or expenses reimbursement wrong almost always land on the doorstep of the employer. One of the better pandemic relief measures for businesses was the strategy of allowing them not to pay over Vat, PAYE and direct taxes as they fell due, but defer them into a “debt warehouse”. Businesses which were affected by the first lockdown last year and which entered the debt warehousing scheme will find that interest will start to be charged on the unpaid tax at a rate of 3 per cent from September 1 next. There is room in the law as currently drafted to extend that September 2021 deadline to December 2022, which would be a great help. For now, if that tax is owing, businesses should budget for interest charges from September next. There is a particular wrinkle on tax debt warehousing for proprietary directors. Even though the PAYE on the income of proprietary directors may have been warehoused by the company, the director will not receive credit for warehoused PAYE on their own tax returns and will have to make a separate application for tax debt warehousing in their personal capacity. The Covid Restrictions Support Scheme (CRSS) was offered to businesses which had to prohibit or restrict customers from entering the business premises. CRSS is worthwhile, with a maximum weekly payment of up to €5,000. There is an arrangement called the restart week, which means that a business can claim double “restart week” payments for a period of two weeks on reopening. While CRSS does not need to be refunded directly, CRSS claims can add to tax liabilities in future years. There was also a waiver of commercial rates for businesses which were forced to close over the lockdown. That waiver expires at the end of June. The caveats associated with the withdrawal of government pandemic supports should not diminish the air of excitement about the prospect of the return to normal business. Last Friday’s announcements concerning the hospitality, travel and events sectors signal what is permissible, even though they are not a guarantee of what is possible. In the rush to get back to normal, it is worth remembering that the state is as anxious for businesses to reopen as the businesses themselves are. The pandemic supports can’t be paid for ever. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

  Originally posted on Business Post 23 May 2021. The Common Consolidated Corporate Tax Base is getting a new title— Befit. But a lack of real change suggests a naïveté and mission creep on the part of the European Commission There can only be two motives for tax. The first and most obvious is fiscal, the second is purely political The word “fair” was on almost every page of the short European Commission communication to its political masters last week. Modestly titled Business Taxation for the 21st Century, it sets out the Commission’s current policy on company tax issues. Unlike regulations or directives, which have legal and binding effect, a communication ranks fairly low in the hierarchy of EU pronouncements. But it is rash to overlook them, because they often serve as harbingers of future mischief coming down the tracks from Brussels. There can be really only two motives for having a tax policy. The first and most obvious is fiscal – the necessity to raise taxes to pay for government and its services. The other motive is purely political. Such tax policies are intended to drive behaviours, or at least to signal official concerns at emerging behaviours in an economy. Last week’s imposition of a 10 per cent stamp duty rate on houses purchased by investment funds is a good example. The new levy won't raise a lot of additional money for the exchequer. It is noticeable that the additional amount that might be collected has been largely absent in the debates. The EU itself will have a pressing need for additional taxes in the coming years as the costs of the pandemic response programmes, funded by Brussels, come home to roost. At the moment, EU costs are mainly met by direct national contributions along with elements of customs and Vat, but that is likely to change. While ideas on how to do this are touched upon in the document, EU funding is not its main focus. Rather, the emphasis is on ensuring that member countries play fair with their business taxes. The political motive for raising taxes is sometimes used to cloak a more unpalatable fiscal motive. This is true of recent US tax announcements for their multinationals. It's appealing to American voters to promise to raise taxes to ensure companies pay a fair share, but the real drivers are the multitrillion-dollar investment and recovery programmes planned by the Biden administration. It's hard to know if the Commission document is genuinely about using taxation as a lever for economic reform, or merely about taking in more money. The question might be easier to answer if there was any new thinking evident in the Commission’s proposals. In fact there is not. It notes that it is following the OECD agenda on corporate tax reform, but that has long been the case. The ideas for a revised approach to calculating corporate profitability across the 27 member countries are not original either. A project to do that called the Common Consolidated Corporate Tax Base has existed for more than 20 years. Now it will have a catchier title – Befit (Business in Europe: Framework for Income Taxation). A name-change doesn't necessarily make something work better, however. This name-change is illustrative of a curious air of naïveté about the whole process. The Commission’s thinking feels like a textbook economic exercise which doesn't recognise either commercial realities or the different needs of its member countries. It may well have a point when it says it wants to migrate the corporate tax system to favour equity funding rather than loan funding, but it is the market that has prioritised loan funding over equity funding, not the tax system. The emphasis on formulaic approaches to calculating the distribution of corporate profits across the single market is not realistic, given the disparity of economic requirements across the European Union. For instance, the economy of Malta is radically different to the economy of Germany. How can a single apportionment formula work across such differences and offer a fair result? As the Commission points out, such apportionment methods are used in the US to help determine taxability between states, but the US is a country. It is not an economic bloc. When it comes to taxation policy, the Commission appears to be looking in the wrong direction and succumbing to mission creep. It should be focusing on what it can control rather than what it clearly wants to control. Both customs policy and Vat policy are entirely within the control of the EU institutions. Europe's external trade policy is controlled by customs and Vat. Trade policy is at least as important as an internal policy on company taxation, yet external trade does not feature in a communication purportedly about business taxation for the 21st century. Maybe external trade does not fit in with the Commission's vision of what needs to be fair. The communication bemoans that only 7 per cent of taxes collected in the EU come through corporation tax. It’s a complaint that rings hollow for a country like ours, where the corporation tax contribution to the total tax take is closer to 20 per cent, with a tax regime that underpins our employment and industrial strategy. Maybe this too is unfair in the Commission’s eyes? Beware of anyone who promotes fair taxation. Ultimately, it might be you they are after.   Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

  Originally posted on Business Post 16 May 2021. The wholesale purchase of estates is a serious problem, but there are many reasons for the high cost of homes, and the most important is lack of supply Beware of name-calling. Pension funds, clearly, are good; so-called cuckoo and vulture funds, clearly, are bad. However, pension funds, vulture funds and cuckoo funds are all versions of the same thing. Large investments call for the large-scale pooling of resources, or otherwise the investments could not happen. That can be done by the state, or by the private sector and one way for the private sector to do it is to form a company. The company raises money through issuing shares, corporation tax is paid on the profits and whatever is left gets taxed a second time when dividends are paid to the shareholders. Another way is to create an investment fund where the income from the investments gets taxed only once. That is when the returns are paid out to the unit holders of the fund. This is undoubtedly a big benefit to the unit holders. Yet if property investment funds did not have this kind of tax arrangement, it is likely there would be less capital in the Irish property market to build houses, just as if pension funds did not have such tax arrangements, putting aside money for retirement would be even more expensive than it is now. This is not to suggest that the wholesale purchase of housing estates, as highlighted by this newspaper, isn’t a serious social and political problem. An investment fund, by definition, will have far more purchasing power than any individual first-time buyer. The purchasing power of Irish Real Estate Funds (Irefs) and Real Estate Investment Trusts (Reits) was most evident in the commercial property sector up until relatively recently, but that has changed. Foreign investors in the Irish property market who use investment funds are more likely to pay tax in their home country rather than here, which is also a legitimate cause of unease. Nevertheless, the cost of housing is a result of many factors, the most important being supply. The behaviour of investment funds in the Irish residential property market is not purely because of tax incentives. It is because the Irish residential property market is currently a solid investment opportunity. Not only is it a good bet now, but it is also likely to remain a good bet over a five- to ten-year horizon because it will take time for supply to ramp up. If tax policy has not created the current problems, it is unlikely to fix them either. Successive Irish governments have aggressively used tax policies in attempts to manage the residential property market since the early 1980s. That we still have supply problems shows how futile these attempts have been. We started in the 1980s with capital reliefs for investment in residential property. The supply improved, but the quality arguably did not. The availability of cheaper money in the mid-1990s resulted in a rapid rise in property values, leading to the then notorious Bacon report which called for increases in stamp duty and reductions in tax reliefs. After all that, we still couldn’t avoid a property crash in 2008, but now changes to the property tax regime are on the government agenda yet again. Based on the experience of the last 40 years, tax measures on their own will be ineffective in resolving the current crisis. Over the decades, the costs of construction have gone up for a myriad reasons. Construction standards are far higher than they once were and having planning permission is no longer a reliable signal that construction can commence. Additional taxes, either on property purchases or on rental property returns, may well swell government coffers in the short term but they won’t do anything to bolster supply. It is worrying to hear opposition parties call for tax increases and restrictions on the activities of investment funds with apparently little thought for anything other than the political optics of the situation. A primary reason for the introduction of the Reit was to attract new sources of non-bank financing to the Irish property market. If that was the case at the time of its introduction, in 2013, it is even more the case now in the context of the withdrawal of Ulster Bank and KBC from the Irish market. Any tax policy changes should be aimed at promoting supply by reducing development costs rather than punishing investment, whether those investments are made by investment funds or, for that matter, anyone else. A tax payment holiday for developer PAYE and Vat costs could be offered until a housing development is fully completed and sold. There might be merit in allowing enhanced tax deductions against the cost of training workers in the construction industry or for providing safety equipment. An upfront tax deduction for the capital cost of the heavy plant and machinery required in the industry, as operated in the 1980s, could also be reintroduced. Such tax changes can only help, but not completely solve, the dilemma of providing affordable housing. The ultimate answer lies in either directly providing additional state funding for property development, or the state facilitating its supply; one such model is the government’s Home Building Finance lending facility. It does not lie in name-calling investors, nor in short-term tax hikes to quieten political opponents. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

  Originally posted on Business Post 2 May 2021. We can’t afford to be fatalistic as the OECD negotiations unfold. There are plenty of reasons to hope we won’t end up €2 billion out of pocket. Last week, writing in this newspaper, the Minister for Finance noted, perhaps with some fatalism, that changes in the international tax environment might mean that the Irish corporation tax take could drop by as much as €2 billion a year. At this early stage in negotiations, fatalism may be inappropriate. Other competing jurisdictions may have higher rates, but they also have generous tax breaks. A low-tax rate jurisdiction is not the same as a low-tax jurisdiction. This fact is often overlooked by our international competitors – which is understandable – and by some of our domestic pundits – which is unforgivable. Neither coterie tends to notice either that the prevailing rate of corporation tax on investment returns from financial assets and property is 25 per cent, and the rate on capital gains is 33 per cent. In 2019, the application of these higher rates accounted for some €2.5 billion of total corporation tax receipts. While these facts reinforce the economic validity of the Irish approach, they cut little ice in the political debates with our international competitors. The minister’s comments were of course prompted by the renewed impetus given to OECD-sponsored discussions on the future cross border tax regime by US president Joe Biden’s ‘Made in America’ tax plan. There were signals last week that the German, French and Canadian governments might not be hostile to the new US proposals, but that isn’t the only cloud on the horizon. The EU coronavirus recovery fund, valued at anything up to €800 billion, will have to be paid for in some shape or form. The European Commission has been toing and froing on some proposals for new taxes to be paid directly to the Brussels coffers. These are the extension of the carbon-trading scheme, a carbon border adjustment mechanism, and a digital tax. The common denominator is that if one or more of these were to gain any traction, they would land at the door of the corporate sector. Then there is the domestic problem of how to compensate for losing up to €2 billion in corporation tax receipts. The overall tax take in this country cannot be reduced, in the foreseeable future, mainly because of the additional pressures on our social welfare system, our health system and debt servicing costs. We cannot just keep borrowing. Put bluntly, if we collect less tax from companies, we have to collect more tax from individuals. The 20 per cent income tax rate would have to go to 23 per cent, or the USC rate for everyone would have to be pushed up to 9 per cent to find €2 billion. But maybe the problems can be avoided. The last time the deck of international tax rules was shuffled under an OECD project, Ireland was a winner. So far, the Irish position has been successfully defended against EU encroachment on tax sovereignty. A narrative was emerging that Ireland’s position on tax matters within the EU is more feeble with our traditional ally in such matters, Britain, having left the bloc. But what did Britain do as soon as it got out from under the apron strings of the EU, but raise its own corporate tax rate. Even without Britain, the Minister for Finance is not without his supporters and allies. Are we underestimating the importance of having the chair of the Eurogroup of Finance Ministers and the clout that can bring to international economic discussions? We may also be underestimating the possibility that an international pushback against the Biden proposals might develop despite the early signals. One potential alternative is to take the discussion of a special corporate regime for digital companies – the Googles, Amazons and Facebooks of the world – off the agenda and instead apply a special levy on the top 100 or so entities worldwide. If this was to happen, it might take some of the heat off the US multinationals as US-headquartered companies would almost uniquely have been the target of a digital tax regime calculated by reference to where products and services are sold. Still, the US is home to one third of the top 100 companies on the Fortune 500 list. So any such revised approach might also push the likes of Volkswagen of Germany and Total of France into a putative higher tax spotlight. This may not entirely suit the Germans or the French, not to mention the Chinese authorities whose companies make up one quarter of the top 100 companies on that list. Higher tax rates are a double-edged sword. Here in Europe we tend to think of the US as an investment supplier, but in fact the US is among the world’s biggest destinations for foreign direct investment. With its proposed higher rates, the US will be a much less inviting place for a foreign investor, unless a universally applied minimum effective tax rate across the world, which is another wing of the Biden proposals, takes hold. That is a very big ask for any country, even the US, to make. The US will surely not want to become less competitive as an investment destination. Similarly, for the sake of the 2.4 million people employed by companies in Ireland, we cannot become less competitive either. We cannot afford to lose any employment and we cannot forego tax revenue of the scale of €2 billion. Fatalism has no place as the corporation tax negotiations unfold. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

  Originally posted on Business Post 25 April 2021. Flawed as it is, the protocol plays a big role in volumes of trade on the island of Ireland which are very much in the North’s favour International agreements can be negotiated, revised, suspended or perhaps ignored. They are rarely sandpapered. Yet that was what Boris Johnson, the British prime minister, suggested was required for the Northern Ireland protocol last week. The protocol has become the cause of dissent not just between London and Brussels, but also between Dublin and Belfast, despite its potential to offer lasting benefits to Northern Irish industry. Because it establishes the North as a special zone for trade in goods with the remaining EU 27 countries, the protocol undoubtedly creates complexity. Nevertheless, the prime minister’s comments almost four months into the operation of the new rules reflect none of the urgency seen, say, in his reaction to a proposed European Super League including six English Premier League clubs. Clearly, some European challenges demand more rapid responses than others. It wasn’t clear from Johnson’s statement exactly what bits of the protocol he wanted to have sanded down. Economic success is neither made nor broken by trade complexities for chilled meats or garden plants. These are the preferred examples used by some British and Northern Irish politicians when describing their unease with the east-west checking required by the protocol. Despite these political qualms, many aspects of business and trade are normalising, as importers and exporters on both islands get more used to the vagaries of the protocol. The level of Vat and customs queries arising has dwindled in recent weeks as traders come to terms with the dual nature of the Northern customs zone. The volume of official bulletins from British government departments to address aspects of protocol operation has similarly dwindled, as the key messages have been getting through. There are still problems, though. One particular area is the treatment of “at-risk” goods. These are goods coming to the North from Britain which might be at risk – the “risk” here is to the customs duty – of onward transmission into Ireland or into the wider EU. Under the protocol, customs duty is charged on such goods and then reimbursed, when it can be shown that the goods in question ultimately remained or were consumed in the North. For many traders, this will have cashflow implications, not helped by the fact that the system to reimburse the duties isn’t ready yet. The health certification of food, livestock and plants is a difficult process already. It will become even more problematic as new EU regulations expand the number of food products which require certificates. For once, this has nothing to do with Brexit, but dates back to an agreement made in early 2016, when the UK was still a full EU member. The regulations apply not just to British food exports but to many processed foodstuffs coming into the EU from any so-called third country. Neither the customs nor the health certification rules are impenetrable. The recurring problems relate to how they are being applied. It’s not the protocol itself that needs to be smoothed with sandpaper, but rather the customs and checking processes that make it work. These processes have to be adaptable to changes like the new EU health certificates, but also to whatever checks on imports Britain may wish to apply in future as its own customs regime takes full effect. Not all regulation is driven by Brussels. Despite the current headaches, the business response on this island has been extraordinary, as is borne out by last week’s figures from the Central Statistics Office for the first two months of the year. Ireland’s imports from Britain for the first two months of 2021 more than halved compared with imports during January and February 2020. Exports from Ireland to Britain were also down, but much less so – by about 12 per cent. However, the picture of trade in goods between the North and South of this island could not be more different. Exports from Ireland to the North were up by more than 25 per cent in the first two months of the year. The volumes imported into Ireland from the North were up by more than 50 per cent. These figures are, of course, skewed by pre-Brexit stockpiling towards the end of last year and changed patterns of trade because of the pandemic. Yet these factors on their own cannot explain the extent to which trade between Ireland and the North showed a dramatic improvement. The operation of the protocol, flawed as it may be, is surely a contributing factor to volumes of trade on the island of Ireland which are very much in the North’s favour. No amount of trade statistics can allay the concerns in certain areas of the community in the North which have resulted in political bickering and violent civil disturbances in recent weeks. However, and perhaps oddly, these trade statistics give validity to Johnson’s ambition to sand the protocol. There are indeed areas of its operation that do need to be smoothed out, but the early evidence suggests that it is worth making the effort. The protocol is already succeeding in keeping a hard border off the island of Ireland. It also seems to be facilitating the North’s trade even in its current rough-hewn state. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

  Originally posted on Business Post 18 April 2021. A move to tax those who’ve done well financially during the pandemic has been mooted, but there are good reasons not to touch it.  ‘Solidarity taxes are not a particularly new idea. Germany introduced one some 30 years ago to help fund the costs of reunification, while a 2.1 per cent surtax was introduced in Japan to help repair the damage from the 2011 earthquake’ When the International Monetary Fund proposed earlier this month that a “recovery contribution” could be levied on businesses and individuals that had fared disproportionately well during the pandemic, an idea which might otherwise have been buried in 100 pages of dry economic commentary got its day in the sun. Some commentators described the notion as politically progressive, if difficult to implement. Joe O‘Brien, the Green Party Minister of State, wrote to Paschal Donohoe, his colleague in government and the Minister for Finance, wondering if the idea might have some traction here. It has been reported that Donohoe’s response didn’t favour going outside the current OECD business tax plans, but suggesting a referral of the matter to the promised Commission on Taxation and Welfare. Solidarity taxes are not a particularly new idea. Germany introduced one some 30 years ago to help fund the costs of reunification with the GDR, while a 2.1 per cent surtax was introduced in Japan to help repair the calamitous damage from the 2011 earthquake. Perhaps a one-off or temporary Covid-19 solidarity levy is an idea whose time has come? Were such a levy to be introduced in this country, the key issue might be not how it could be applied, but to whom it might be applied. Last week, the latest stability update was published. This is an ongoing element of the EU compliance cycle which involves a formal presentation to Brussels of the government’s estimate of the health of the economy. Despite the chaos and suffering of the pandemic, we stand relatively well in comparison with many of our EU neighbours. The relative strength of the economy has been signalled all along by the monthly exchequer tax receipts, which have remained surprisingly high since the first lockdown. Each month, we have neither a sample nor a survey, but an actual tally of payments of income tax to the exchequer, the vast bulk of which are made through the PAYE system. These give a reliable indication not only of the numbers of people employed and the stability of their earnings, but also of the capacity of employers to pay wages and the PAYE and PRSI collected from those pay packets. Last month, those income tax receipts were actually up on the corresponding period in the previous year. This income tax increase seems contrary to what could reasonably be expected, given the 600,000 people who are now unemployed. After the tragic number of deaths and the number of people falling sick, the unemployment figure may be the most arresting measurement of the damage from the pandemic. Yet many have retained their jobs in the manufacturing and services sectors throughout the lockdowns, often with the help of the government‘s employment wage subsidy scheme. Not only that, but almost 450,000 of those out of work are receiving the pandemic unemployment payment (PUP). Businesses, too, have the benefit of supports like the Covid-19 restrictions support scheme (CRSS), along with the wage subsidies and tax deferrals, which may skew direct comparisons with other years. Tax receipts are being made more stable due to the government’s pandemic supports. Perhaps a better piece of advice from the same IMF document that proposed a recovery contribution was its reminder for governments to “do what it takes, but keep the receipts”. That involves providing whatever cash supports are appropriate to get businesses and individuals alike through the lockdowns while keeping a careful tally. This is what the current coalition government has, in effect, been doing this past year. Our costly economic supports all come with terms and conditions, and with a price tag for those availing of them. PUP payments made in 2020 are being taxed over the next four years while payments made in 2021 are (by and large) being taxed in real time. Subsidised wages are not tax-exempt either. Taxes like Vat and PAYE may have been deferred but they have not been forgiven, and a bill for €2 billion or so will fall due across those businesses which availed of the deferrals. The very useful CRSS, which helps businesses maintain closed premises, will be recouped from a restriction of income and corporation tax reliefs into the future. These clawbacks won’t fully cover the cost of all the supports being provided, but from this standpoint at least, it’s legitimate to argue that contributions to the recovery are already falling due in this country. A better way of fostering solidarity than any new tax is for people and businesses to opt for local services and suppliers, if at all possible. Proposals for some kind of new or additional recovery contribution on those who had fared reasonably well during the pandemic are backward-looking, at a time when we need to be looking forward. The pandemic supports of 2020 and 2021 are already bolstering the tax yield and will have to be paid back – at least in part – by those who received them over the coming months and years. That is why there is no justification for a recovery contribution in this country.   Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

  Originally posted on Business Post 11 April 2021. Britain is belatedly tightening up its corporate governance, but Ireland plays by the EU’s rules and ought to act accordingly  While at various times over the past few months, hospitals, financial institutions, sports bodies and even a charity have featured in the headlines here for failures or alleged failures in financial or corporate governance, the British have also had their fair share of high-profile company missteps. The likes of Carillion, BHS and Patisserie Valerie were part of a continual cycle of high-profile corporate failures resulting in what has been described as a “palpable” crisis in public trust. This has ultimately led to the British government’s publication last month of a white paper entitled Restoring Trust in Audit and Corporate Governance. According to its foreword by Kwasi Kwarteng, the British business minister, the plan is to help companies “build back stronger and better equipped to face tomorrow's challenges and enable the UK to remain a premier global centre for investment”. Post-Brexit, Britain has already lost ground in financial services and exports of goods, so this white paper reflects more than a newfound concern over corporate failures. It is not surprising that the British government will look for competitive advantage anywhere it can get it. Corporate failures do more than just damage the employees, creditors and shareholders who are directly involved. According to research published earlier this year by Edelman, the global consultancy, businesses are now more trusted than governments in 18 of the 27 countries they surveyed. Not only that, businesses are generally seen as being more competent than the governments of the countries in which they operate. Whichever way you choose to view results like these, they bear out that trust is essential for a healthy business and therefore a healthy investment environment. The white paper is a distillation of at least three previous reviews commissioned by British governments. Those reviews mainly concerned the work and conduct of the auditors of companies, and of the government institutions which regulate those auditors. The current paper goes some distance further in its examination of the roles of both directors and shareholders in corporate failures. The emphasis is on larger companies initially but it is clear that the medium-term intention is for the suggested measures to extend down the pecking order of corporate size. The proposals recognise that shareholders do not have much to do in terms of the day-to-day running of the businesses they own, but that does not absolve them from all responsibilities towards the way those companies operate. Shareholders should have a chance to approve the audit policies of the companies they own. They should also be allowed to propose areas of emphasis in the audit if they believe that particular issues or activities within the company need to be scrutinised. Government regulators are to be given additional powers of investigation, not only over the accountancy firms which carry out audits but also over the companies which are audited. The role and function of auditing firms will receive a significant shakeup under the proposals, but it is the ideas concerning the conduct of company directors which perhaps reflect the newest thinking by the British authorities. There are to be new sanctions for individual directors who are found wanting when it comes to the proper governance of a company. After all, as the white paper puts it, it is company directors who have primary responsibility for fraud prevention and detection. Boards of directors have collective responsibility. This collegiate responsibility for directors suggests that the free ride for non-executive directors will come to an end, if there ever was one. This is heavy duty stuff. It is made all the more serious by a widespread expectation that this white paper is not merely a consultation paper, but rather an expression of intent on the part of the British authorities. It contains almost 100 specific consultation questions, but it is understood that any responses will serve to fine-tune rather than modify the thrust of the proposals. All this has consequences for commerce on the island of Ireland. Up to now, Irish financial and corporate governance has largely been dictated by the pattern of British rules and norms. Financial and company legislation and regulations more often than not originated in the UK, and were then sprayed green for implementation in Ireland. The proposed new British regime would be intrusive, which is not necessarily a bad thing. It would also be costly and burdensome for many businesses, which is undoubtedly a bad thing if no benefits flow from it. Post-Brexit, it should not automatically follow that Ireland takes the British lead on corporate regulation. Going it alone, as the British economy is already finding, comes at a cost. The Irish economy is not going it alone because it operates within the EU framework. Our patterns of accountability, regulation and corporate governance will in the future come more from the European institutions than from British institutions. There is plenty of evidence that we need to tighten up our regulatory regimes to ensure that individuals are held accountable. While this is the direction the British are taking, the appropriate solution for Ireland may not be simply to follow the British example. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

  Originally posted on Business Post 4 April 2021. A democratic left-leaning president can always be expected to favour big spending programmes, but has anyone ever been as big a spender as US president Joe Biden? After committing $1.9 trillion to pandemic responses, he now proposes to commit a further $2 trillion to infrastructure spend. This marks a radical shift in economic approach between Biden and his predecessor. Donald Trump seemed to view economic growth as being primarily private sector-driven. Biden, on the other hand, is betting on a public expenditure programme. A trillion here, a trillion there, and suddenly you're talking real money. Even for an economy as vast as that of the US, expenditure in the trillions of dollars cannot be sustained by standard taxation or borrowing. Additional tax has to be found somewhere. In line with his election promises, Biden is looking to raise it from the corporate sector, with a shake-up of the tax code and a headline-grabbing hike in corporation tax from 21 per cent to 28 per cent. Any mention of changes to US corporation tax policy tends to cause a flurry among the commentariat here, many of whom seem to regard Ireland's attraction as a destination for US investment as being purely tax-driven. However, Biden‘s proposed reforms are all about how much money is collected by Uncle Sam. The US already has many counterbalancing measures in its tax code to reduce the attractiveness of offshore tax planning by American-headquartered companies. Since 2017, there have been restrictions on tax breaks for foreign expenditure. Intangible assets like patents, held overseas by US corporations, are deemed to generate taxable income in the US. The key to assessing how Ireland will fare as a destination for US foreign direct investment following these reforms is the extent to which Irish corporation tax paid by a US subsidiary reduces the overall tax bill of its US headquarters. At the moment, most (if not all) corporation tax paid in Ireland by a US subsidiary is available to offset against the ultimate US tax bill. There is insufficient detail available yet on the proposals to know if that will continue. Another factor is whether or not these US changes will prejudice how Irish tax rules operate when compared with the tax regimes of competitor countries in Europe, in the Far East and in Latin America. That didn’t happen with the 2017 changes, and hopefully it won’t happen this time either. More broadly, the proposals could well reinforce the position of the US as the ultimate arbiter of cross-border tax policy. There is ongoing OECD work towards reforming the tax landscape for multinationals in the digital sector like Google, Amazon and Facebook. This will involve shifting the taxability of digital services away from the countries where the services are provided, and into the countries where the market exists for those services. As the homeland for most of the tech giants, the US has the most to lose from such a policy shift, and needs to have compensating measures. A minimum effective rate of corporation tax worldwide is also on the OECD agenda. This is a concept the US is far more comfortable with. The Biden administration may be stealing a march by enhancing its own existing models of restricting foreign deductions and claiming the earnings of overseas subsidiaries for additional tax in the US. Will any of this come to pass? US tax reform has traditionally moved at a glacial pace. There were no significant developments in US tax policy between 1985 and Trump’s Tax Cuts and Jobs Act of 2017. Yet the current proposals may be landing at a good time. First of all, if only because of the pandemic response and the obvious need for infrastructure investment in the US, it's hard to argue with a move to increase taxes on companies. After all, companies don’t vote. Secondly, the Democrats currently have a (tenuous) grip on both houses of Congress, which is essential for any fiscal legislation to pass. The main proposal requiring House of Representatives and Senate approval would be hiking the tax rate up to 28 per cent. Thirdly, it seems that many of the plans involve strengthening measures that are already in place to tighten the offshore regime. It’s always easier to work with what’s already there, rather than try to invent new taxes. Ireland has used tax policy to good effect in promoting industrial policy for more than half a century, but tax is not the only driver of foreign direct investment. Speaking at a US-Ireland Economic Roundtable virtual event last week, Congressman Richard Neal pointed towards the Irish education system and the stability of the political system as components for a successful foreign investment regime. That observation has particular significance because all US tax law has to be passed by the House Ways and Means Committee, which Neal chairs. Irish corporation tax policy on its own may no longer be the investment attraction it once was, but as long as it does not become a handicap we can still compete very well. In the years ahead, the Irish policy imperative should be to secure the corporation tax yields that we already have. Joe Biden's America is not the only country that needs to be able to spend on pandemic responses and infrastructure. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

  Originally posted on Business Post 28 March 2021. The announcement from Intel last week that it is to create a further 1,600 jobs in Leixlip in Co Kildare, adding to its existing workforce of 5,000, was particularly welcome in a week where our unemployment rate was touching 25 per cent. Admittedly, that figure is augmented by the number of people receiving the pandemic unemployment payment, and it is reasonable to expect that the numbers will fall sharply as the economy reopens. An ESRI study published last week, however, suggests that the benefits of the reopening may well take longer to be felt than earlier estimates had predicted. The longer a lockdown persists, the less likely it is that some businesses will be able to bounce back quickly. This can be for a variety of reasons, such as staff moving on or premises deteriorating. Firms without an online presence may suffer from having fallen out of customers’ minds because of a long absence from the market. Losing even click-and-collect activity means that it has been harder to keep a brand to the fore. Even as unemployment numbers decrease, some attention will have to be paid to retaining all those jobs which had remained relatively secure since coronavirus hit our shores just over a year ago. While operations like Intel need the physical presence of workers in a particular location, many in the services industry are realising that employees no longer need to be in a fixed office. Some businesses are taking this to extremes. Nationwide, the British building society, announced in recent days that it will allow its entire 13,000 office staff to choose where they work under a new flexibility scheme. It doesn’t necessarily follow that we need to rethink our national taxation strategies just because, in a post-Covid world, Birmingham is as suitable as Balbriggan for a knowledge worker employed by an Irish business. However, many companies in the services sector will in future decide on the location of their headquarters more by reference to the ease of virtual rather than physical connectivity. Forty years ago, the tax system was used to provide incentives to industry by rewarding actual manufacturing activities – people using machines to make widgets from raw components – with low tax rates, bonus tax breaks for buying in stock, and generous tax reliefs for investment in equipment and for building factories. Those incentives were appropriate in the latter decades of the 20th century. Since then they have been reduced or eliminated altogether from the tax code, and replaced with incentives for research and development and the accumulation of intellectual property. This change from rewarding what was sometimes a relatively low-skilled manufacturing model to rewarding a much higher-skilled services and value-added approach was fundamental. A change of this scale need not be repeated, as much of the migration towards working from home will happen of its own accord without the need for incentives. The issue instead is to look again at the current suite of business incentives for the services sector to ensure we don’t lose existing employment or miss out on opportunities for regional development as remote working becomes more prevalent. Indigenous enterprise in the services sector is left entirely to its own devices to raise capital. The tax allowances for the IT equipment needed for remote working are structured around an expected life of eight years. Tax relief for the broadband costs incurred by employees is available, but only by way of temporary concession. The National Remote Work Strategy promises new employment regulations and the usual reviews and studies, but nothing by way of additional government funding. Intel has invested $7 billion in its facilities in Ireland – more than twice the estimated cost of the national broadband plan. Even at a time of budget deficits, there is surely more we can do at a national level to get our act together faster with this critical element of remote working. Our industrial policy for services needs to have remote working at its core. Otherwise it will not be fit for purpose as we try to get back to full employment. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland