Thought leadership

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

Thought leadership

Originally posted on Business Post 23 August 2020.Vague calls for better corporate ‘citizenship’ won‘t help us get through the pandemic – enforcement of the regulations will.A company is nothing more than a legal structure which happens to be treated for many purposes – including taxation – as if it were a citizen.At the time of the last financial crisis, it became commonplace that left-leaning civil society, academics and charities would call for business to become more socially responsible. Tax compliance was a favourite topic, with little regard paid to the existence of enforceable rules to ensure tax collection. Instead, the underlying notion seemed to be that companies, in particular, should act like citizens in some way and go beyond what is merely required under the law.These calls are being made again in the context of the response to the pandemic, but they ring hollow when they are made without reference to the hard facts of enforcement and accountability.Companies are not citizens, at least not in the normally accepted sense of the word. A company is nothing more than a legal structure which happens to be treated for many purposes – including taxation – as if it were a citizen. Nevertheless, in common with all citizens, companies have obligations to stay on the right side of the law.The latest raft of measures in the July Stimulus plan ensure that companies and businesses generally will have to have tax clearance certificates to avail of the employment wage subsidy scheme (EWSS). The new EWSS replaces the temporary wage subsidy scheme (TWSS). While having this certificate is a new requirement, there is nothing new about the tax clearance process. A tax clearance certificate provides evidence that a company’s tax affairs are up to date. Publicans have needed these certificates for years in order to get their licences, as have businesses tendering for government contracts. Even our TDs need tax clearance certificates to sit in Dáil Éireann.The tax clearance process also helps ensure that one arm of government knows what the other is doing, as mismatches can lead to embarrassment. Most people are uneasy about government funds flowing to people who are not paying their taxes. In common with many Revenue procedures, it is highly automated, and the tax clearance status of any business can be verified online. Nevertheless, this new requirement will be a challenge for quite a few businesses wanting to claim the EWSS.It is estimated that there are some 16,000 employers currently claiming the temporary wage subsidy scheme who will not have tax clearance certificates and must apply to Revenue for them. Clearance is usually a straightforward process, but these are not straightforward times.For instance, late payments of PAYE or Vat would normally have disqualified a business from being eligible, but late payments were in many cases permissible in recent months as tax debt is being warehoused, so this should not be a problem. There is, however, increased bureaucracy associated with the EWSS when compared with the TWSS. However unwelcome, these additional controls may be necessary.The tax clearance certificate requirement has a broader significance. Businesses that shirk their tax obligations give themselves a competitive advantage, perhaps because their wage bills are lower if they don’t fully account for PAYE, or perhaps their margins are greater because they don’t properly account for Vat.Similarly, businesses that shirk their responsibilities under the coronavirus restrictions by failing to provide adequate protection for staff and customers, by not making sure that their premises have been properly cleaned and reorganised or by not providing adequate training, are conferring on themselves an unfair competitive advantage.There is little enough evidence to date that this has been the case. Yet, as the pandemic and our responses to it drag on, familiarity with the virus will lead to contempt and the temptation to cut corners will grow. The tax clearance certificate is evidence of just one aspect of good corporate behaviour which must be sustained as long as the EWSS is being claimed.Good corporate behaviour on a continuing basis for all the measures to tackle the pandemic and not just for taxes will be ever more important. Should a belief emerge that compliance with coronavirus restrictions puts individual industries at a competitive disadvantage, the current broad acceptance of the rules could collapse.The message that it makes good commercial sense to be fully compliant with restrictions on movement will get progressively more difficult particularly as we enter into the autumn months. Enforcement of coronavirus restrictions will become increasingly necessary. The headline events of recent days such the resignations of the chairman of Fáilte Ireland, of the Leas-Cathaoirleach of the Seanad and of the Minister for Agriculture, however unfortunate, are vital elements in the messaging.This is why vague calls for better corporate citizenship or for businesses to “do the right thing” should be treated with some suspicion. Appropriate corporate behaviour is about businesses and companies obeying the law, however difficult, at the time of pandemic restrictions. There must be no commercial advantage available by failing to apply the rules. That in turn means there has to be enforcement. Anything else is just grandstanding.Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland.

Aug 31, 2020
Thought leadership

 Originally posted on Business Post, 2 August 2020.Increases in VAT usually pass the acid test of tax policy – the extraction of the most amount of money with the least amount of complaint.  Compared to an income tax increase, the general population rarely gripes about increases in VAT rates.  Hiking the standard rate of VAT of 21% to 23% in 2012 generated hardly any noise compared to the introduction of USC and the reduction of allowances and credits the previous year.  So will people really notice the VAT decrease of 23% to 21% in the July Jobs Stimulus? VAT is a truly European tax in that the rules are devised in Brussels and then implemented in EU member countries.  It is Brussels that decides that the maximum rate of VAT cannot exceed 25%. .  European rules tell us that a box of teabags is charged 0% VAT, but a cup of tea in a café is charged 13.5% VAT while a tin of iced tea in the supermarket is charged 23% VAT.  There’s little enough any Irish government can do to tinker with the VAT system, except make marginal rate adjustments. VAT is a major contributor to the Irish Exchequer.  In 2019, over €15 billion was collected in net VAT receipts which is more than one quarter of the total tax receipts for that year, yet it is a notoriously blunt instrument of public policy.  No VAT is charged on the clothes of the children whose parents are on social welfare, but no VAT is charged either on the clothes of the children of high earners.  Maybe that’s why governments avoid using it for public policy purposes unless you include the now defunct 9% rate of VAT for the hospitality sector.    So it was all the more surprising that the July stimulus knocked two percentage points off the main VAT rate.  The cost of this measure is €440 million, which is a little less than 10% of the total value of the package.  This estimate for the cost of this six month VAT reduction period is in line with Revenue estimates for good years.  In a moribund economy the Department of Finance seems to expect a spending spree.  Remember too that the 23% rate only applies to about half of the items or services we buy.  The rest are charged at lower rates or are exempt. Outside of the retail sphere, the education sector and the banking sector pay sizeable amounts because their activities are largely VAT exempt.  These sectors cannot recover the VAT they pay on purchases because they don’t charge VAT on their sales.  In the main VAT is therefore a consumption tax ultimately falling on the consumer.  So will the VAT reduction boost sales of clothing, alcohol, electrical and other household goods and luxury foodstuffs which fall into the 23% VAT category?  It might not, even if businesses pass on the VAT rate reduction to their customers.  Despite suggestions otherwise from some political quarters, Minister for Finance Paschal Donohoe was quite clear that the 2% reduction should be passed on to consumers.  That's not going to make a huge difference for many items because the value of a 2% VAT reduction approximates to about €1.60 for every €100 spent.  It only becomes a different story if you go out to buy a big-ticket item like a car, where the VAT saving could perhaps insure it for a year. There is no law obliging traders to reduce their prices because there has been a reduction in the VAT rate.  As long as they charge the correct amount of VAT at the correct time, they can take whatever margin they wish.  Past history however suggests that small VAT reductions like the current 2% reduction tend not to get passed on to consumers.  Part of the rationale when the 9% rate of VAT on hospitality was introduced was that a full 4.5% reduction to the normal 13.5% rate would be visible and palpable and therefore consumers would expect to see the difference.So even if it is passed on, a 2% VAT reduction may be inadequate to drive additional volumes of consumer spending.  In terms of business benefit it might have been better to apply the projected €440 million cost towards reducing the vast amounts of VAT debt currently being warehoused against the day when businesses can finally pay their tax liabilities.  Given that the EU state aid restraints are temporarily lifted, that €440 million could have been targeted, for example, specifically to forgive some of the historical VAT due from the SME sector.  The July Jobs stimulus was good.  Ministers and their officials alike did well to deliver what in effect is a full scale national budget in the space of few weeks.  The purpose and rationale of many of the measures like the extension of the wage subsidy, the extension of the pandemic unemployment payments, and the extinguishing of commercial rates is readily apparent.  The object of this VAT reduction is not as clear. I've never seen a tax reduction I didn't like.  However, many consumers may not notice this tax reduction and many businesses could benefit more from this element of the jobs stimulus if the cost of the VAT reduction was diverted to reducing their current and not their future tax debts.  Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Aug 13, 2020
Thought leadership

 Originally posted on Business Post, 26 July 2020.Deadweight is what economists call money that is spent to stimulate activity which would have happened anyway.  No need of any such concerns over the July jobs stimulus package announced on Thursday.  The need is so great that any money pumped in by the government in any direction is going to realise some benefit.  The trick now is to maximise it.Some of the negative responses towards the stimulus package measures look a bit tired and frayed.  The last time we had an emergency stimulus like this was back in May 2011 which brought in the 9% VAT rate for the hospitality sector.  That new 2011 government had been formed in early March, yet it took a full two months to start dealing with the employment crisis prompted by the banking collapse.  Things move faster these days so we need to move on from rear-view mirror economics.  We won’t ever revert to a 2011-style economy but neither can we go back to 2019 methods of doing things.It is clear that government looked to some international experiences when pulling together the bundle of measures.  Using the tax system to deliver relief works well and has been the pattern in several developed countries.  Extending the temporary wage subsidy scheme, even if it is no longer called that, is effective because of the speed of delivery of relief.  The Employment Wage Support Scheme now could cover a greater number of people because the employment reference point of 28 February is no longer sacrosanct.  Its duration, extended up to April of next year, provides yet a further reason for employers to hang on to their workforce.  There had been some suggestions that it would morph into an even more effective arrangement modelled on the German Kurzarbeit system where the government pays salary for the unworked time of employees on reduced hours.  However, the social welfare system in Germany is radically different to ours.  In Germany, almost 40% of a worker's wage goes to the government in social security before any income tax is paid.  In Ireland total PRSI contributions on employment top out at just over 15%.  The Employment Wage Support Scheme in its current shape may be as good as the country can support, because there is zero capacity in the economy to increase taxes in any form.  Every measure in the package needs to be seen in the context of what can be sustained.Any critiques of the jobs stimulus package based on the notion that things will return to 2019 economic status are misguided.  The business models for tourism, the hospitality sector, the entertainment industry and education have changed fundamentally, and might never revert to pre-coronavirus methods of earnings and delivery.  Take professional training for instance.  The technicians supporting the webcasting of classes and online invigilation of examinations will become just as important in the future as the teachers and exam markers were before coronavirus.  It may well turn out that the best elements of this package will be the restart grants to help businesses remodel their premises and service delivery, and the reskilling and apprenticeship programs.  The July jobs stimulus is not without its flaws.  Before the crisis, 330,000 citizens in the total workforce of 2.3 million were self-employed.  The pandemic unemployment payment was an unprecedented gesture towards this cohort of workers.  It was the first time that the State had offered the self-employed unemployment support to this extent.  Although it is being extended to April next year the payments are to be tapered back.  The new income tax reliefs to recover tax paid by the self-employed in happier years is a form of grant, but this assumes that their business was well established and profitable before the virus struck.  Timing is also an issue.  Reducing the VAT rate from 23% to 21% should help retailers manage cash flows, but it could also prompt consumers to delay the purchase of big-ticket items until the cut takes effect in September.  In the past, VAT reductions have been reversed by government in short order because retailers opted to allow the reductions add to their bottom line rather than benefit the customer.  This reduction is time bound, so there is no commercial penalty for not passing on the reduction.Without consumer confidence the stimulus could yet fail.  People need to be comfortable where they shop, where they eat, where they stay, how the travel and where they socialise.  Re-starting a business is not just about reopening doors.  Just as government looked overseas for ideas, consumers are well aware of the consequences of poorly managed reopening in cities as diverse as Leicester and Barcelona.We won't know for a while whether the balance between grants and loans is correct, whether we have done too much for employees at the expense of the self-employed, whether the measures can be implemented with sufficient speed and whether they will generate sufficient confidence in the consumer market.  The stimulus measures must be monitored as rigorously as NPHET monitor the impact of public health measures and adjusted as necessary to ensure they are working. Just as we are right to be concerned about a second wave of coronavirus infection we cannot afford a second wave of economic collapse.  This collapse can be avoided if we focus forward.  Let’s not try to re-model our economy back to how it looks in the rear-view mirror.Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Aug 06, 2020
Thought leadership

 Originally posted on The Business Post, July 19, 2020.On the face of it, Ireland won the Apple case last Wednesday.  The General Court of the European Union held that Ireland was not in breach of EU state aid rules in the manner it had taxed Apple entities in this country.  Some political noise following the ruling had to do with the €13 billion of tax that the Exchequer “lost” as a consequence of the ruling.  This is nonsense.  The €13 billion never belonged to Ireland, because Irish tax law doesn't work that way for anyone, let alone Apple.  The tax rules for the profits which are subject to Irish tax existed long before major multinationals came to our shores.  The Commission's case against Ireland hinged around their misreading of the way Irish tax law operates, and the General Court confirmed that the Commission had indeed got it wrong.  The Revenue Commissioners were also winners.  The Apple case differed from many other state aid cases taken by the Commission in that the focus of the examination was how Irish officials applied the law of the land, and not on the state aid compliance of the law itself.  The judgment is not an undiluted victory for Revenue.  The court cited problems with the methodology applied in calculating the tax liabilities involved.  They talked about there being insufficient documentation being retained.  The judges though allowed common sense to prevail and recognised that an absence of paperwork in itself is insufficient to prove that there was a problem.  Of the scant paperwork which did exist and was discussed in the ruling, one item seemed to suggest that promised employment levels might have a bearing on corporation tax arrangements.  This was worrying from the Irish viewpoint as it highlighted a point of general unease among European institutions about the way Ireland conducts its tax affairs.  Nevertheless the court found that the Commission couldn’t argue that job creation was a factor in the case.There is an assumption in some quarters that the Commission will take this week’s decision to appeal.  To what end?  Though it may feel to them like a pyrrhic victory, the Commission’s entitlement to look at tax issues when it comes to challenging state aid rules was confirmed by the court ruling.  This entitlement, along with the entitlement of national officials to apply domestic law as best they see fit, may well be the only enduring lessons from the Apple case.  The world has changed since 2016 when the Commission first issued its findings against Ireland.  The tax point at issue in the Apple case is no longer an issue, resolved neither by Irish legislation nor by European Commission activity but by changes in US tax law.  The US Tax Cuts and Jobs Act of 2017 cancelled out the strategy of deferring tax on profits of US multinationals earned outside the US by keeping those profits outside the US.  It is not just the US system which has moved on.  The underlying rules of the global corporation tax collection system were created over a century ago.  Now the concepts of company management and control as factors in deciding where tax is paid (and which helped give rise to the Apple conundrum) are the focal point for the international corporation tax reform agenda led by the OECD.  It is hard to see how additional Commission challenges in the Apple case could further that agenda.The Commission should therefore now be looking forward and outward, rather than pondering whether it should be appealing the General Court’s decision.  Anyone who has read the written verdict will be struck not just by how considered and detailed it is, but also by the amount of time and effort taken up by the case from all parties.  All this time and effort could be better applied elsewhere.  Not only that, the European Treaties stipulate that a further appeal can only be on a point of law, which may be difficult given that the outcome was largely determined on the facts.  Losing an appeal on a point of law in a case this big holds significant political risks for the Commission.Giving evidence to the House of Lords last month, the EU's chief Brexit negotiator Michel Barnier underlined the importance of the single market in the context of an ever more disrupted and unstable international trading environment.  Regulating state aid is an internal management problem for the European Union.  Commission resources should now, as Barnier has highlighted, be devoted towards securing Europe's place as an international trading bloc and not fighting internecine tax wars with its member countries.  Future history books will note the Apple case as one of the last tests of an old corporation tax system before it became displaced by a new regime involving where companies generate their sales as well as where they generate their value.  That change will present challenges for small countries like Ireland where the capacity of companies to generate profits here is not matched by the size of the domestic Irish market.  We will have to secure wins as this change is developed if the corporation tax yield is to be sustained.  God knows, we've had plenty of practice fighting our corner in the international tax debate.Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Aug 06, 2020
Thought leadership

 Originally posted on The Business Post, 5 July 2020International associations have not fared well during the Covid-19 pandemic. The EU's approach to tackling the crisis has been (to put it charitably) fragmented because it does not have a core role in health matters, and the G7 group of the world’s richest nations couldn't come up with a joint declaration on the emergency in March, apparently because Mike Pompeo, the US Secretary of State, insisted on referring to the coronavirus as the “Wuhan virus”.Tax receipts for the first half of 2020 are higher than expected, thanks to state supports for SMEs – and keeping those in place will be key.Judging by the tax receipts published last week for the first six months of 2020, Irish business presses on. This is despite all reasonable assumptions, based on so many of us either being out of work or working in struggling businesses, that things are grinding to a halt. More tax was collected in the first six months of this year than in the first six months of last year, according to the exchequer figures published on Thursday.Not for the first time, the unexpectedly high tax receipts are in part due to high corporation-tax receipts, described in the exchequer statement as “volatile”. I'm not aware of any dictionary which defines “volatile” as marked by a consistent pattern of growth over a decade, which is what has happened here.It is often pointed out that 40 per cent of all corporation tax receipts comes from ten large companies anchored in the multinational sector. Less frequently highlighted is that 60 per cent of the corporation tax receipts haven’t come in the past from this exalted cohort. If this trend has continued, it would seem that many Irish businesses are continuing to operate successfully during 2020 – 60 per cent of a very large number is still a very large number.Once a company gets over a certain size, its corporation tax bill becomes, in effect, a real-time tax. Payments are based on current rather than on historic profit levels. If corporation tax receipts are strong – and this month they have been unusually so – it means that many businesses are performing well in many areas of the economy. In addition, the big multinational players are governed by corporation tax reforms introduced in many developed countries over the past decade.These reforms mean that it is increasingly difficult for companies to shut up shop and relocate simply for tax reasons. The level of corporation tax receipts shouldn’t be just dismissed as being further evidence of a perfidious tax haven economy, as so often happens. Rather they can be a useful indicator of the current commercial activity taking place in a country. The money is welcome too.We don’t have reliable signals for Vat this month as Vat payments only come through every two months, but the employment tax figures show a mixed picture. Income tax receipts are 20 per cent down from the same month last year even though the PRSI receipts are a little up. The key point here though is that 80 per cent of the income tax is still being collected, and this may reflect the emerging pattern that lower-paid workers were the most vulnerable to losing their jobs. The vast bulk of income tax receipts comes from higher wage earners.Last week’s exchequer figures reflect what was actually collected, rather than what was due for payment during June. At present, businesses are permitted not to pay over the PAYE they are withholding from their employees, without interest or penalty, under the so-called tax warehousing arrangements.Revenue figures from last month suggest that some €650 million in PAYE liabilities has been warehoused in this way so far. This is a significant sum, but it is only about 2 per cent of the total which might be due for collection from the national payroll throughout the year. Clearly many businesses still have considerable reserves or are sustaining a reasonable cash flow to meet their tax obligations.We know from the last recession that it was the need to borrow over successive years to fund welfare and public services that grew the national debt because tax revenues were insufficient; the cost of the bank bailout was not the main component. The evidence now is that, unlike the last time, we can avoid tax revenues drying up by using supports such as the temporary wage subsidy scheme. This scheme is an employment-related grant for industry and must be continued. If we can preserve the tax stream by continuing to plough money into industry with grant aid, the cost of doing so in 2020 could pale into insignificance when compared with having to fund social welfare and other supports over many subsequent years.Sustaining business activity and encouraging growth to reduce the need for future state supports is key, particularly for the SME sector. The July recovery package being promised by the new government must look to manage future government expenditure by ensuring that businesses rehire to fill the jobs that were lost as soon as possible. We had virtually full employment as recently as March, and we need to get back to that.The two ministers at the helm of Finance and Public Expenditure and Reform will hopefully recognise this and keep the business supports in place as they formulate the July stimulus package. If they can keep Irish business moving, employment will recover and everything else should follow from that.Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Aug 06, 2020
Thought leadership

 Originally posted in The Business Post, 28 June 2020The US had also very publicly pulled its support for the World Health Organisation and in more recent days it has sowed confusion as one of its representatives, Robert Lighthizer, said it was pulling out of OECD talks on a new global tax framework.More on that in a minute, but for now a question – is the momentum for international corporation tax reform as sponsored by the OECD on the wane?The organisation‘s work on the international corporation tax rules has a resonance with current public sentiment against the legacy of empires. The current cross-border corporation tax rules were formulated by the British Empire. The tax from great wealth being produced by corporations in the colonies was not ascribed to the colonies. Any company making its money anywhere in the British Empire had to pay its taxes in London and that was the end of the matter.International tax law has largely stuck with principles that result in tax being paid where the company is incorporated, managed and controlled. This might have been defensible in an era when it was made from digging stuff out of the ground and manufacturing products, but it is increasingly inappropriate in a world where goods are internationally traded and cross-border services are provided, the latter often without need for any physical movement of either people or goods. This is why the international debate has focused so much on how the digital economy should be taxed.The OECD's approach to overturning the colonial method of taxation involves two objectives, or “pillars” in the jargon. The first pillar focuses on the digital economy. Subject to terms and conditions, the idea is that the profits of some companies should in part be taxed where their products and services are sold. The businesses that would be caught include those which provide content streaming and online advertising, or remote sales of goods and services to consumers. The second pillar is that there should be an effective minimum rate of corporation tax payable by all companies irrespective of where they are located.With more than 130 countries involved in the OECD negotiating process, these objectives have garnered some momentum. If the process becomes fragmented, it could push countries to create their own new tax rules outside of an international consensus approach. The EU institutions are also susceptible to promoting rule change, overlooking the inconvenient reality that the EU does not have the power to establish a corporation tax regime for its member countries.It appears that the US position on the OECD discussions is considerably more nuanced than has been widely reported. Writing to the finance ministers of France, Spain, Britain and Italy just two weeks ago, Steven Mnuchin, the US Treasury Secretary, clarified that the pillar one ideas should, in the view of the US, only apply as a default taxing position when all else fails. He also pointed out that the world may perhaps have better things to be doing than agonising over international tax rules when it should really be focusing on economic issues resulting from Covid-19.He wanted pillar one discussions “to pause” with a view towards resuming later in the year. His assessment of where matters stand in relation to pillar two, the global minimum tax, was that discussions have progressed more rapidly and could be concluded by the end of the year.This assessment is reasonable given that the US has particular cause for concern over pillar one. Due to the American dominance of the digital industry, a significant amount of tax revenue could be displaced away from the US and into other countries. Therefore, as regards digital taxation, it is in the short-term interests of some economies to go it alone. If they do, the US has an answer for that as well.America has a process known as a section 301 investigation, somewhat similar to the EU's competition investigations. Some weeks ago the US opened section 301 investigations on the digital tax proposals of a number of authorities, including Italy, Spain, the EU itself and Britain. It appears that these so-called anti-trust investigations enjoy bipartisan support in the US and are likely to persist irrespective of who is in the White House in 2021. If a response is deemed necessary, the US has plenty of tax and trading remedies at hand to counter any country’s attempts to unilaterally levy tax from American owned companies.Despite the recent suggestions to the contrary, the OECD is still in the tax policy arena. Their processes may have slowed as a result of the recent US intervention, but they have not stopped. The current programme for government states that Ireland should continue to support OECD efforts to arrive at international consensus on taxing methods. Mnuchin‘s letter in combination with the new section 301 investigations suggests that the US is taking the same approach.Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Aug 06, 2020
Thought leadership

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

Aug 06, 2020
Thought leadership

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

Aug 06, 2020
Thought leadership

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

Aug 06, 2020
Thought leadership

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

Aug 06, 2020
Thought leadership

 Originally posted on the Business Post, 17 May 2020 Coronavirus is decimating employment, but tackling it is now creating a whole new industry of its own.The complexity of existing support, solutions and proposed solutions is multiplying by the day.  There is at least a dozen state supported funding options announced, from the Covid-19 working capital scheme to the SME credit guarantee scheme.  These are worthwhile incentives in their own right.  Nevertheless, for many business owners struggling to deal with the day-to-day practicalities of handling a collapsing business, the range of options, terms and conditions can be bewildering.  Even the most effective government support for business currently on offer, the temporary wage subsidy scheme, is becoming bogged down by the weight of its own complexity.  The guidance notes for employers operating the scheme have mushroomed.  The short “Frequently Asked Questions” guide which was issued by Revenue in March is now over 60 pages long after weeks of adding extensions, clarifications and examples.  Currently one of the best supports for business is the temporary suspension of collection of PAYE and VAT.  It has the virtue of simplicity.  VAT and PAYE do not “belong” to a business.  They are collected and transferred to Revenue on behalf of consumers and workers.  If you're a small business, you just don't pay over the PAYE and VAT due this month or next month.  If your turnover is in excess of €3 million, you just need to let Revenue know that you intend to postpone payment.  Given that the national payroll before the current slump was heading towards some €100 billion euros, and that on average, PAYE takes out approximately 15% of that, there can be no doubt that deferral of PAYE currently being planned means a very substantial contribution to the cashflow of employers but at a heavy cost to the State.  VAT is different in that ultimately it is a consumer tax.  Depending on the product or service, VAT can add 13.5% or 23% to the purchase price.  Much of it is collected by retailers and businesses providing services to private consumers.  If the priority is to target the SME sector, VAT relief is particularly effective as we saw with old the 9% VAT rate for hospitality.The plans to extend the current PAYE and VAT deferral arrangements, still to be fleshed out in any great detail, involve PAYE and VAT “warehousing”.  The term warehousing suggests something being put into storage for access at a later stage.  However, are there situations where the collection of the PAYE and VAT should not just be postponed, but rather forgiven altogether?In the US there is a loan scheme for businesses damaged by the Covid-19 response known as the Paycheck Protection Programme.  Loans are given to employers for a two year term, at a 1% rate of interest.  In many cases the loans will be forgiven in full or in part, depending on the employer maintaining or quickly rehiring employees and maintaining wage levels.  $200 billion of such loans to 2.6 million businesses have already been approved.The prospect of having the loan written off creates a huge incentive for businesses to sustain employment and manage their way back to financial health.  The arrangement also removes much of the risk (if not the cost) from the official point of view, because ultimately it’s a form of grant aid for businesses who have shown they put this state support to best use.A similar approach could be taken with the PAYE and VAT warehousing proposals here.  As well as deferring tax payments, businesses that maintain employment levels could be forgiven some of the VAT and PAYE due in the warehouse.   In this way, we rebuild our industrial base first by easing cashflow, and secure it then by further boosting employers who have best managed the consequences of the pandemic.  There is no doubt that this US style approach would be costly, but the potential for saving on social welfare benefits for the unemployed is significant.  No matter what happens, Covid-19 is going to cost the country a lot of money.  Is it better to spend that money on providing employment or providing welfare?Perhaps this type of solution is too straightforward.  Industry and officialdom alike have become familiar with complexity to the extent that we become suspicious if complexity is absent.  The business lobby must take its share of the blame for this attitude.  IBEC’s Reboot and Reimagine campaign launched earlier this week is an impressive piece of work, and has much to recommend it.  Simplicity however is not among its attributes.  It's hard to disagree with much of its content, but the range and nuances of its asks challenges how quickly those requests could be acted upon.Because of the rapid fall-off in activity, many business operators don’t have the time or the expertise to work through what supports they can or should avail of.  Few want to borrow, no matter how low the interest rate, no matter the moratoriums or guarantees, when their business model is in collapse.  We need simple and quick supports to cope with Covid-19 unemployment crisis, not a complex new industry of loans, grants, tax breaks and deferrals.Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Aug 06, 2020
Thought leadership

 Originally posted on The Business Post, 2 August 2020VAT and Consumer BehaviourIncreases in VAT usually pass the acid test of tax policy – the extraction of the most amount of money with the least amount of complaint.  Compared to an income tax increase, the general population rarely gripes about increases in VAT rates.  Hiking the standard rate of VAT of 21% to 23% in 2012 generated hardly any noise compared to the introduction of USC and the reduction of allowances and credits the previous year.  So will people really notice the VAT decrease of 23% to 21% in the July Jobs Stimulus? VAT is a truly European tax in that the rules are devised in Brussels and then implemented in EU member countries.  It is Brussels that decides that the maximum rate of VAT cannot exceed 25%. .  European rules tell us that a box of teabags is charged 0% VAT, but a cup of tea in a café is charged 13.5% VAT while a tin of iced tea in the supermarket is charged 23% VAT.  There’s little enough any Irish government can do to tinker with the VAT system, except make marginal rate adjustments. VAT is a major contributor to the Irish Exchequer.  In 2019, over €15 billion was collected in net VAT receipts which is more than one quarter of the total tax receipts for that year, yet it is a notoriously blunt instrument of public policy.  No VAT is charged on the clothes of the children whose parents are on social welfare, but no VAT is charged either on the clothes of the children of high earners.  Maybe that’s why governments avoid using it for public policy purposes unless you include the now defunct 9% rate of VAT for the hospitality sector.   So it was all the more surprising that the July stimulus knocked two percentage points off the main VAT rate.  The cost of this measure is €440 million, which is a little less than 10% of the total value of the package.  This estimate for the cost of this six month VAT reduction period is in line with Revenue estimates for good years.  In a moribund economy the Department of Finance seems to expect a spending spree.  Remember too that the 23% rate only applies to about half of the items or services we buy.  The rest are charged at lower rates or are exempt.Outside of the retail sphere, the education sector and the banking sector pay sizeable amounts because their activities are largely VAT exempt.  These sectors cannot recover the VAT they pay on purchases because they don’t charge VAT on their sales.  In the main VAT is therefore a consumption tax ultimately falling on the consumer.  So will the VAT reduction boost sales of clothing, alcohol, electrical and other household goods and luxury foodstuffs which fall into the 23% VAT category?  It might not, even if businesses pass on the VAT rate reduction to their customers.  Despite suggestions otherwise from some political quarters, Minister for Finance Paschal Donohoe was quite clear that the 2% reduction should be passed on to consumers.  That's not going to make a huge difference for many items because the value of a 2% VAT reduction approximates to about €1.60 for every €100 spent.  It only becomes a different story if you go out to buy a big-ticket item like a car, where the VAT saving could perhaps insure it for a year.There is no law obliging traders to reduce their prices because there has been a reduction in the VAT rate.  As long as they charge the correct amount of VAT at the correct time, they can take whatever margin they wish.  Past history however suggests that small VAT reductions like the current 2% reduction tend not to get passed on to consumers.  Part of the rationale when the 9% rate of VAT on hospitality was introduced was that a full 4.5% reduction to the normal 13.5% rate would be visible and palpable and therefore consumers would expect to see the difference.So even if it is passed on, a 2% VAT reduction may be inadequate to drive additional volumes of consumer spending.  In terms of business benefit it might have been better to apply the projected €440 million cost towards reducing the vast amounts of VAT debt currently being warehoused against the day when businesses can finally pay their tax liabilities.  Given that the EU state aid restraints are temporarily lifted, that €440 million could have been targeted, for example, specifically to forgive some of the historical VAT due from the SME sector.  The July jobs stimulus was good.  Ministers and their officials alike did well to deliver what in effect is a full scale national budget in the space of few weeks.  The purpose and rationale of many of the measures like the extension of the wage subsidy, the extension of the pandemic unemployment payments, and the extinguishing of commercial rates is readily apparent.  The object of this VAT reduction is not as clear.I've never seen a tax reduction I didn't like.  However, many consumers may not notice this tax reduction and many businesses could benefit more from this element of the jobs stimulus if the cost of the VAT reduction was diverted to reducing their current and not their future tax debts.Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland 

Aug 06, 2020