Originally posted on Business Post 28 February 2021. Last week’s dispute between the Australian government and Facebook over payment for news content is just the latest chapter in a larger narrative of governments trying to manage the presence of the big technology platforms in their jurisdictions. While it is no surprise that the action taken by Facebook to close down news-related content in Australia gained widespread attention, it is surprising that it was deemed to be necessary. Few western-style democracies launch any form of regulation or imposition on their citizens and businesses without first of all flagging the issues. The Australian government's ambition was that its media companies might be entitled to some financial compensation for their content if reused on some digital platforms, initially Facebook and Google. This was flagged in early 2020 and a public consultation ensued, but it seems that wasn’t enough to avert last week’s stand-off over the news media bargaining code. The actions of the Australian government reflect a broader concern across the world to try to either rein in or manage the growing influence and power of the major digital platform providers. The Australian experience is something of an outlier in that the plan was to impose a contractual obligation between content providers and digital platforms. Elsewhere in the world, the emphasis is on imposing a different type of contractual obligation on digital platforms by way of additional digital taxes. The Irish position on digital taxation has consistently been that an international approach to an international problem is required, and that such matters need to be worked out at OECD level. While Ireland has important allies in this approach, notably Germany, the attractions of this international consensus approach may be dwindling. Many countries have either introduced or are in the process of introducing their own form of digital taxation. The amounts due are calculated not by reference to where the platform provider traditionally pays its corporation tax, but rather by reference to the size of their country's market for digital services. Britain has a digital tax, and the first receipts from it will flow into the British exchequer later this year. A recent KPMG study identifies over 30 countries which have enacted digital tax rules, including Austria, Italy, Portugal, Slovakia and Spain. A few days ago, the Indian government announced changes to its own digital tax regime which, it has been reported, will have the effect of increasing the levies payable by the Googles, Facebooks and Amazons of the world. India’s action is particularly significant because of the size of the market in that country. New digital taxes in one country inevitably have the effect of reducing traditional tax yields elsewhere. Contrary to the belief in some quarters, companies are not limitless generators of profit. Being the home of the largest multinationals, the US is likely to be the biggest loser. In one of his last acts as US trade secretary last month, Robert Lighthizer published a review of digital tax initiatives in Brazil, the Czech Republic, Indonesia and the European Union. While the review work is ongoing, it is fair to say that the Americans are taking a dim view of the various plans. It might not be helpful to the US position on the matter that a number of US states are planning to apply forms of digital taxation to businesses in their own jurisdictions. Earlier this month, the state of Maryland enacted a tax on digital advertising. It is likely though that this will be challenged given that the state legislature had to overrule the wishes of its own governor in so doing, yet the action seems illustrative of a change in political thinking. If that is indeed the case, it is time to re-examine the need for international consensus on digital taxation and challenge the notion that a fragmented approach creates a risk of everyone losing out, businesses and national treasuries alike. The OECD argument has long been that calculating tax on digital-economy companies should be based on where they have their markets rather than on the physical locations of their buildings and staff, because markets cannot be shifted. That argument can also embolden governments to stake their own claims to tax from their own markets using their own rules. Imposing tax should be a political, not a technocratic, decision. Governments across the world must now deal with the deficits created by their pandemic response and they will undoubtedly look to new methods of taxation to help them do so. If that prospect includes taxing foreign corporations who do not vote, and cannot conceal their profitability in an immobile market, many finance ministers must be wondering about the advantages of waiting for the OECD to come up with a plan. Despite signals last week from the US authorities that the Biden administration seems more amenable to compromises with the OECD process than the Trump administration, consensus is still some distance away. The ‘go it alone’ approach by the Australian government on regulating digital platforms in their jurisdiction has wider repercussions for commercial regulation. It also challenges the OECD line that together is better when it comes to taxation. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

  Originally posted on Business Post 21 February 2021. Whatever else might be said about our 12.5 per cent corporation tax regime, it carries little risk to the exchequer. Risk is not the same as cost. Of course, more tax could be collected if the rate was a few percentage points higher. Indeed, there are straws in the wind that Rishi Sunak, the British Chancellor of the Exchequer, might reverse the recent British trend of lowering corporation tax rates in his upcoming budget on March 3 to do just that. However, having a low tax rate on corporate profits is not as risky as giving tax breaks for making investments in new ventures. The various tax incentives that have been put in place over the years to promote indigenous business carry exchequer risk. The clumsily-titled Employment Investment Incentive Scheme (EIIS) has been running with relatively little effect for the best part of a decade, and is now in the crosshairs of a Department of Finance review promised in the last budget. The essence of the scheme is that the exchequer will share the risk to the capital invested by a private individual in a small Irish business. The EIIS grants income tax relief on the value of the investment being made. For every €100 invested by an individual taxpayer, the state will refund €40. There are sound arguments for having some form of tax incentive for investment in indigenous enterprise. Effective tax reliefs can mitigate market failures. It is particularly difficult for businesses which are under-capitalised at the outset to succeed. If an emerging business is finding it difficult to raise loan capital, or if its founding shareholders are themselves running out of funds, there is merit in having a state-backed mechanism to plough capital into early-stage businesses. Yet people tend to fear loss much more acutely than they anticipate gain. That’s even more true when public money is involved. Perhaps this explains why the EIIS has been plagued with new terms and conditions being added, which by now have made its operation largely unviable. A system of self-certification of eligibility along with increasing demands from Brussels for EIIS to comply with state aid rules didn't help. In 2016, there was over €100 million in EIIS investment. By 2018, the latest year for which statistics are publicly available from Revenue, it had dwindled by a half. More significantly, only 37 companies used the system in 2018 compared with 209 in 2016. This decline happened at a time of significant economic growth when an increase in take-up might have been expected. On top of all this, from its inception the scheme was designed to exclude the type of indigenous business which might need it the most, namely services. EIIS funding can be raised by manufacturing or trading entities. But try to use it to set up a training firm or an IT consultancy and you won't have a hope. During 2021 and beyond, many small Irish indigenous businesses are going to need capital injections to help them resume trading post-pandemic. While current pandemic reliefs are excellent, the bulk of the reliefs, like the wage subsidy schemes and the pandemic unemployment payment, are to the benefit of workers rather than to the businesses which employ or employed them. Even the Covid Restrictions Support Scheme, which provides a form of advance tax refund to business, is subject to very much the same terms and conditions as the EIIS – no services businesses need apply. We are in an era of negative returns on savings. Even some credit unions are asking their members to reduce the amount they have on deposit with them, so it might be thought that investment in Irish industry might be more attractive. Yet when a company invests, its return is taxed at 12.5 per cent but when an individual invests, the effective rate of tax on the return can be 48 per cent or more. Maybe the EIIS approach of providing tax relief on the investment is incorrect. Should we instead reward investment in the SME sector by providing tax relief on the returns from it? The approach has been taken before. A half a century ago, dividends from some exporting companies here were exempted altogether from tax for several years in an attempt to foster enterprise. A 2018 report from economic consultants Indecon pointed out that several European countries offer reduced tax rates or exemptions on investment returns from the SME sector. The current design of the EIIS will do very little to help many businesses reopen or expand once consumer footfall resumes and commercial confidence is restored. The rules are too complex for many SMEs, the service sector is excluded, and the tax relief might be more effective if applied to returns than to investments. We know how to design tax policies to drive foreign direct investment. We should use the same design principles to help our indigenous sector, particularly now, as businesses need to reopen when restrictions are lifted. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

  Originally posted on Business Post 14 February 2021. It is difficult to remember an arrangement that has come under as much sustained criticism and attack as the Northern Ireland protocol. The device establishes a trading relationship between the North and Britain such that a hard border is not required on the island of Ireland to comply with the post-Brexit trading relationship agreed between Britain and the EU. If you were to judge from the commentary in recent weeks, this is the only advantage offered by the protocol and everything else to do with it is a disadvantage. But this is simply not true. The protocol has become a lightning rod for all that is dysfunctional with international trade following Brexit. The only surprise is why anyone is surprised. On first principles, single markets exist to simplify trading arrangements between countries. Should one country leave a single market, as Britain has done, it follows that trading arrangements become more complicated. Giving the North special arrangements complicates things further. The complaints from the political arena are, as always, the most audible. The North’s politicians seem not to be focusing on business concerns as such, but rather on how trading problems translate to consumer concerns. In the overall scheme of things, the free movement of garden plants and pets is not as important as container loads of goods perishing at ports. It is certainly not as important as the commercial decisions now being taken by some British and European traders not to bother with each other’s markets because of customs complexity. Missing from the discussion is a recognition that the protocol designates the North as a uniquely privileged trading zone. It is now a member of both the EU customs area and the British customs area. Ironically, because the Trade and Cooperation Agreement largely eliminates tariffs between Britain and the EU, this advantage is not as pronounced as it might have been. Nevertheless, an EU supplier can sell high-tariff goods, typically food and manufactured products, into Northern Ireland without any customs consequences. The benefit of this is not obvious at present, because Britain, for its own reasons, is only applying light-touch customs controls on many types of goods entering Britain from the EU. Once the British authorities close that particular door next July, the North’s privileged status as an export destination for EU produce and goods will become very apparent. Furthermore, the noise over difficulties with the control of goods coming from Britain to the North has drowned out the fact that there are little or no controls on goods moving from Northern Ireland to mainland Britain. In combination, these two factors make the North an unrivalled location for EU businesses wishing to trade with Britain. It is clear that Britain’s suitability as a distribution hub for EU goods is fast dwindling. The opposite is the case for the North. Vat is the other great handicap to cross border trade in goods. When Vat is taken into account, the position of the North gets even better. Here again, thanks to the protocol, Northern Ireland has a hybrid status. It remains part of the European Vat territory for goods, yet compliant with British rates and rules. This has thrown up some anomalies like the Vat treatment of second-hand goods in the North, but most goods are not second-hand. From a Vat perspective, it is as easy for a French exporter to supply goods to a customer in Belfast as it is to a customer in Berlin. It is not as easy for a French exporter to supply goods to Birmingham. None of this is to undermine the genuine concerns on this island about post-Brexit administrative hold-ups, supply chains and transportation costs. The Europeans seem unwilling to resolve these with a more liberal application of the rules of the Northern Ireland protocol. The excellent, albeit unspoken, reason for this is that from an EU perspective the protocol already creates a very favourable trading zone within the North. This may explain the hard line been taken by the European Commission with Britain, as evidenced in European Commission vice-president Maroš Šefčovič’s correspondence last week with Michael Gove, his counterpart and British cabinet minister, on the operation of the protocol. There is now a window of opportunity for EU enterprises to locate distribution and processing activities in the North to avail of the best elements of the protocol. They will, however, have to move fast. The protocol has a potential expiry date of the end of 2024, when the Stormont Assembly can decide whether or not it is to continue operating. Few if any of the Northern political parties are noted for their commercial awareness, and they are well capable of spurning these opportunities irrespective of the benefits they offer for Northern businesses and workers alike. The protocol is not just about avoiding a hard border. It also creates opportunities for investment in the North. Goods exports from the North have been in decline for the past few years and that trend can be reversed. It is unfortunate that the complaints over the protocol are obscuring the opportunities. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

  Originally posted on Business Post 7 February 2021. Brexit has been divisive, and will continue to be so, largely because economic issues were not explored with any rigour in the political decision-making process. As the events in the North over the past week have shown, problems arise when international boundaries are redrafted. Brexit was not merely a matter of reorganising economic and regulatory arrangements. It changed the borders of the European Union. Those changes are becoming more pronounced with every passing week. So too are the debates over the status of both the North and Scotland, not just relative to the EU but also relative to the rest of the UK. Brexit is providing the opportunity, if not the justification, for commentators, pressure groups and politicians on all sides to challenge the existing relationships between Holyrood and Westminster and between Stormont and Westminster. The Scottish National Party is planning for a second independence referendum. Sinn Féin wants a referendum on Irish unity. None of these debates is new. It is ironic that the man charged with upholding the union in the United Kingdom, Boris Johnson, and the woman charged with upholding union within Europe, Ursula von der Leyen, have contrived in their own ways to bring these debates centre stage. Paschal Donohoe, the Minister for Finance, frequently points out that the economy exists to serve the citizens of the country, and that the citizens of a country do not exist to serve the economy. Economic consequences are indeed secondary to national, political and social concerns but they cannot be disregarded. Last month, the Northern Ireland Minister for Finance and the Scottish Cabinet Secretary for Finance published budgets for their devolved regions for 2021/22. Though it is not their intention, these documents reveal the economic consequences for both Scotland and Northern Ireland should their relationship to the rest of the UK ever change. The devolution arrangements within the UK are such that the powers available to the Scottish parliament and to the Northern Ireland assembly differ, yet there is a common thread to both budgets. That thread is that without cash supports and service provision directly from Westminster, neither region could operate. Interest rate policy and exchange rate policy cannot be set by either of the devolved governments. That in itself is not particularly unusual. None of the eurozone countries have those policy levers available to them either, at least not directly. The big difference between independent nations and devolved regions is that independent nations have taxing rights. Scotland and Northern Ireland do not. The Scottish parliament has the power to set income tax rates and bands for most, though not all, of the income of Scottish taxpayers. The revenue received goes to the Scottish government. Next year the Scottish government expects to receive about £12.2 billion in income tax. This looks great but, in reality, the tax is collected by the UK Revenue authority HMRC and then paid over to Holyrood. The amount paid over is netted off against the block of money paid into Scotland by Westminster. That’s accountancy, not taxation. Scotland’s budget is not a conventional government budget balancing income and expenditure, but a spending budget to disburse funds mainly coming from Westminster. The position for the North is similar. The Northern Ireland draft budget explains that the main source of financing for public expenditure within the North is from the HM Treasury, and that is ultimately funded by the proceeds of general taxation across the UK. While the North, like Scotland, has some minor sources of funding aside from the block grant received from Westminster, the latter dominates its budget funding. For next year the Northern Ireland Department of Finance estimates that the block grant will total some £14 billion. Both devolved governments will point to the contribution of their regions to the UK Exchequer. The most recent HMRC analysis, from 2019, suggests that Scotland contributes 7.5 per cent of total UK tax receipts, and the North 2.0 per cent. As it happens, the absolute tax numbers approximate to the block grants they receive. But the block grants don’t cover the cost of providing or managing the wide range of non-devolved matters ranging from national security and immigration to trade and regulation. The absence of any serious engagement with the economic consequences of a political decision has plagued the Brexit process for the past four years and will continue to do so. Slogans on the side of a bus were just not good enough. The current furore over the Northern Ireland protocol is only the first of a number of crises which will emerge this year. Further flashpoints will emerge over the capacity of the UK to act as a distribution hub, data protection concerns, the ramping up of full UK customs controls and the operation of British financial services within the EU market. Any consideration or debate over the future status of the North or Scotland must include a frank discussion over the economic consequences between advocates on all sides. We know from Brexit that changing borders comes at a price. We also know that the price gets even higher when it hasn’t been planned for. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

  Originally posted on Business Post 24 January 2021. Ever since January 1, various business groupings and representative associations both here and abroad have been queueing up to make complaints to their respective governments over the handling of the Brexit deal. Unfortunately, some of them are barking up the wrong tree. Disruption and curtailment to business opportunity and profitability have been a daily part of many working lives since the de-facto British membership of the EU customs union and single market ended on December 31. The haulage associations were in early, followed in quick succession by retail, financial and fishing interests looking for concessions or adjustments to the Trade and Cooperation agreement between Britain and the EU. Most recently, the arts industries in Britain have been complaining about the constraints on their rights to perform beyond the English Channel. The Trade and Cooperation agreement deals only with goods, not services. British qualifications and standards, particularly the equivalence required by financial services, are not automatically recognised any more within the EU. The Brexit referendum result was partly viewed as an expression of a desire to curtail immigration, and you cannot have cross-border services without allowing people to move. If anything, the EU line on services is hardening as evidenced by the European Commission’s strategy for the European economic and financial system launched last week. The problems for cross-border trade in goods do not derive from what the Trade and Cooperation agreement contains but, rather, from what is missing from the agreement, such as the removal of customs paperwork. Customs compliance is proving to be more challenging than many businesses, even those who had geared up for it, had expected. Agri-food imports and exports are worst affected, because agricultural projects and foodstuffs require additional sanitary checks as well as customs inspection. The sanitary checking and customs checking systems are not integrated, thereby duplicating the virtual paperwork and increasing the scope for error. Things will be much worse in the coming months because trade volumes were artificially depressed by pre-December 31 stockpiling, and also because Britain is not implementing the full rigours of its customs regime until next June. These problems cannot be lobbied away. Contributing to the chaos of the customs declarations are the so-called rules of origin. The Trade and Cooperation agreement does not comprehensively deal with goods assembled in Britain with a certain level of foreign components, nor does it deal with situations where Britain is merely a distribution hub for goods. Such goods are not automatically exempt from customs duties. The rules of origin effectively rule out Britain as an efficient distribution hub for supplies originating from within the EU and destined for markets in other EU countries. Short of Britain rejoining the EU customs union, no amount of lobbying is going to sort out this problem either. From the Brussels point of view, why should a British distributor be allowed to take a margin on EU produce going to EU markets? This is especially bad news for Ireland, because we are the island beyond the island beyond the English Channel. Irish trade is as much a victim of geography as it is a victim of trade rules. The Vat position is somewhat better. Like customs, Vat gets charged at borders if one of the countries involved is not a member of the single market. Both the British and Irish authorities have finessed their Vat rules – at, incidentally, a considerable cashflow cost to the Irish exchequer – so that Vat obligations don’t disrupt cross-border trade between businesses. Cross border trade direct to the consumer is another matter entirely. Because different Vat collection rules apply, some smaller EU traders may find that British customers are not worth the bother. The EU’s stated intention during the Brexit negotiations was to secure the single market and hence the interests of EU traders relative to the position of British traders. In this it has succeeded, but the success is not clear-cut. It was a failure of negotiation to allow the deal to be concluded on Christmas Eve, one week before it was to take effect and thus adding to the Brexit damage. That failure also sidelined the European Parliament in the treaty approval process. This lack of regard for a European democratic institution may well come back to haunt Ursula von der Leyen’s European Commission. Yet there is little to be gained now by looking for changes to the law, or by seeking to apportion political blame, or by trying to have the treaty overturned. Brexit did not apply new trading rules with Britain. It simply removed the decades-long exemptions from normal trading rules between countries. We are all having to change the way we trade with Britain, whether by learning and applying the customs rules, or by developing new supply chains and trading routes to get around the rules in the first place. The customs authorities also have to up their game. While not insurmountable, these are not mere teething problems as Tánaiste Leo Varadkar has claimed. The sooner we all make these changes, the better. Trade with Britain is not going to get any easier. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

  Originally posted on Business Post 17 January 2021. Last Friday, the office of the Revenue Commissioners made 2020 statements of account for several hundred thousand taxpayers available via its website. For many workers, this was not good news. Between March 26 and August 31 of last year, 664,500 employees had their wages subsidised under the temporary wage subsidy scheme (TWSS). The PAYE system normally takes whatever taxes are due out of pay packets as wages are paid. However, because of the way the temporary wage subsidy scheme worked, the PAYE system did not capture all of the tax due on subsidised wages. Further, because the collection of tax due on employer benefits was suspended, employees with company cars or subsidised health insurance will also owe tax for 2020. Another cohort, people who were laid off because of the national pandemic response and received the Pandemic Unemployment Payment (PUP), will also face income tax bills. At the height of the lockdown last year, as many as 600,000 people received the PUP. It’s an often overlooked reality that social welfare payments, with very few exceptions, are generally taxable. The PUP, paid at rates higher than the usual unemployment benefit, has left many more individuals with taxes owing for 2020. In short, several hundred thousand workers now owe back tax from last year. This is a paradox because in another document published on the Revenue website earlier this month, the Revenue Commissioners noted income tax receipts of €22.7 billion for 2020. That compares to an income tax result of €22.9 billion published a year ago reflecting the outcome from 2019. How has it happened that in a pandemic year, with businesses closed for extended periods and unemployment numbers surging, national income tax receipts were virtually unaffected yet some people still owe money? This is partly explained by an income tax policy pursued by successive governments irrespective of political hue. While the commitment to the 12.5 per cent corporation tax rate has been consistent, an equally consistent though less obvious policy has been to push more of the income tax burden onto higher earners. In 2020, over 80 per cent of the country’s total income tax and USC was paid by higher income earners, those earning more than €50,000 per annum. Only one in four of the taxpaying population are in this cohort according to the Tax Strategy Group which compiles the options for government in the run up to annual budgets. Figures produced by the Department of Social Protection and the Revenue suggest that it was mostly workers from traditionally lower wage – and thus lower income tax paying – sectors who claimed the PUP or benefitted from the TWSS. Hospitality along with wholesale and retail accounted for the majority of claimants and beneficiaries. While there may be greater demands on expertise and productivity, it appears that higher paying employment does not automatically carry with it a higher degree of risk to job security. This accounts for the strong national income tax receipts. Those who lost their jobs or whose income was subsidised through the temporary wage subsidy scheme – and more recently the employment wage subsidy scheme where tax problems do not arise – were those who were paying relatively low amounts of tax at the standard rate of 20 per cent. In very many cases, it is this same cohort who are now facing tax bills. And this outcome has several implications. Firstly, the government will have to explain that this is tax which is correctly due. That’s a hard ask because the bills will come as a surprise to many. Were the Revenue and the Department of Social Protection sufficiently forthright to the general public about the tax consequences of the subsidies and payments as the schemes were launched? In the vast majority of cases, the tax bills will be relatively small, in the order of hundreds rather than thousands of euro. But few things sting like a tax demand. Secondly, most of the workers affected will not be used to dealing with the Revenue directly, as their affairs are handled by their employers via payroll. Most will, and should, opt for the back tax to be collected on the drip over four years through the PAYE system. This lingering tail of back tax over the next four years will either dilute the benefit of future tax cuts, however unlikely, or accentuate the impact of future tax increases. Thirdly, some cases can only be successfully resolved by the worker filing a return of income, and a universal obligation to file income tax returns is now a real prospect for the future. Up to now the legal obligation to file a return has been largely confined to the self-employed and businesses. Additional bureaucracy may be a lasting legacy of the pandemic. The only saving grace is that the position of everyone, not just the direct beneficiaries of TWSS and PUP, would have been much worse if the subsidies and payments were not introduced. TWSS and PUP supported business activity while bolstering consumer spend. The tax problems they are causing are a by-product of how rapidly they were introduced. That, however, may be cold comfort to those seeing their tax statements of account this week. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

  Originally posted on Business Post 10 January 2021. Whether despite of or because of the pandemic, 2020 has seen radical changes in the way we expect the business world to behave. There were negative interest rates, but there were also negative oil prices. Contrary to all expectations, Irish property prices did not collapse. And amid the chaos, one particular class of asset, bitcoin, is worth four and a half times more now than a year ago. As I write, one bitcoin is quoted at €33,640. That is, if bitcoin can be regarded as an asset at all. It is one of around 2,000 forms of crypto currency which exist in a computer file to which their owner has access. A record of their validity is distributed across multiple databases on different computer platforms on the web. This so-called blockchain approach ensures that a bitcoin cannot, for instance, be duplicated or used for multiple transactions with multiple vendors. It seems that 2020 was the year when some serious investors got over bitcoin’s twin barriers of intangibility and technological mystique. There are reports that several established funds have begun to regard trading in the cryptocurrency as a component of their investment strategy, just like trading traditional currencies such as the dollar, the euro or sterling. As happens so often in the markets, the decision to legitimise investment in bitcoin has been a self-fulfilling prophecy. Declare an asset to be of value, and it will become so. Bitcoin investments are taxed much like any foreign currency. When you use euro to buy foreign currency, say US dollars, you are acquiring an asset. You can gain or lose on that asset depending on the relative value of euro to dollars when you go to sell it. The same goes for bitcoin. Gains are taxable, losses are allowable to offset future gains. While 2020 was a good year for bitcoin investment, it’s not for the faint-hearted. The value of bitcoin has peaked before in 2017 only to fall back to a mere fraction of its peak a year later. Treating bitcoin as an investment is not what its inventors apparently intended back in 2009. The original white paper which proposed the system set out “a purely peer-to-peer version of electronic cash [that] would allow online payments to be sent directly from one party to another without going through a financial institution”. Bitcoin was supposed to take financial institutions out of the payment loop. Instead it is becoming an asset for financial institutions to trade, yet its point of interest for governments and regulators still derives from its original purpose of facilitating the transfer of value from purchasers to vendors. Where bitcoin really differs from other types of currency is that it dispenses with the need for an independent institution, like a bank or a credit card company, to verify its issue and use. That makes it tricky for the likes of the Revenue Commissioners or the Criminal Assets Bureau to trace, certainly far harder than tracing euro, sterling or dollars which tend to end up somewhere in some bank account to which the police or fiscal authorities can request access. Bitcoin, along with other cryptocurrencies, can be convenient tools for money laundering, blackmail, drug purchases, terrorist financing and bogus investment schemes. Law enforcement agencies may have to think about the ways of tracing bitcoin-derived activity, for example, by tighter regulation of businesses that convert bitcoin to and from the more traditional currencies. It would be incorrect, however, to regard the use of bitcoin and other forms of cryptocurrency as the sole preserve of criminal behaviour. Illegal activity tends not to advertise itself so it is difficult to accurately gauge the extent to which cryptocurrencies have a role. One recent estimate by a US cryptocurrency consultancy Chainalysis puts the share of cryptocurrency in illicit use at less than 2 per cent of the total in circulation. Even if that estimate is on the low side, it does suggest that much of cryptocurrency use is entirely legitimate. Where bitcoin is used for legitimate trading purposes, most of the normal tax rules apply. The Court of Justice of the European Union held some time ago that bitcoin constitutes a currency for Vat purposes. Companies making profits or incurring losses when trading with bitcoin are taxed in the normal way, except that despite the Court of Justice ruling, they cannot make up and submit accounts denominated in bitcoin to the Revenue. The submissions must be in euro or in another traditional currency. The online payments environment has become increasingly sophisticated in the 12 years since bitcoin was invented. Online payment processing and anti-fraud tools such as those offered by PayPal and Stripe are now in widespread use. The EU’s Second Payment Services Directive has resulted in much more mandatory authentication and verification of online payments via financial institutions. Bitcoin now has more competition as a payment method. The events of 2020 may also have changed how bitcoin is seen. It may become less a payment method than an investment. Such a shift in expectation has happened before with that most tangible of assets – gold. It just took a lot longer. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

  Originally posted on Business Post 20 December 2020. Twice in the past decade, Northern Ireland business has missed out on opportunities for preferential trading arrangements, The first missed opportunity had to do with a reduced rate of corporation tax. After years of political and technical manoeuvring, London consented to the application of a 12.5 per cent rate of corporation tax for companies based in the North, on condition that the Northern Ireland Executive could formulate a balanced budget. The three-year suspension of the executive over the renewable heat incentive scandal, which only ended at the start of this year, put paid to that prospect. Over that same period, international moves to curtail multinational tax planning resulted in a corporation tax and investment bonus for legitimate low-rate regimes. Ireland benefited. Northern Ireland could have, but did not. Then there was Theresa May‘s ill-fated Brexit withdrawal agreement, which contained the so-called backstop provision. The irony here was that the flimsier the ultimate trade deal between Britain and the EU, the greater the backstop advantages would have been for the North in terms of EU single market access. Under Boris Johnson’s leadership, the post-Brexit backstop was replaced by the Northern Ireland protocol. Was opposition to the original backstop arrangements such a good idea, at least from a business perspective? Johnson’s agreement could still offer advantages to businesses based in the North. One of the certainties now surrounding the whole Brexit process is that the protocol will in fact come into operation on January 1. In crude summary, the protocol positions Northern Ireland as a de facto member of both the UK and EU customs territories, and as a member of the EU Vat regime as it applies to goods. This sleight of legislative hand will result in there being no need for controls and checks along the land border on the island of Ireland. In so doing, it achieves its primary objective, thankfully. It also means that Northern businesses will have unique ease of access for goods to both the EU and UK markets. Given that Britain and the EU are going to be separate territories for all trade rules, there will have to be checks and controls on goods somewhere as they move from one territory to another. How these will operate next year became clearer in recent days. The UK tax authorities have published details of how customs requirements on goods travelling between non-EU member Britain and non-EU member Northern Ireland will operate in practice. The new system is based on the notion of some goods transiting between Great Britain and Northern Ireland being “at risk”. British goods or British foreign imports going into Northern Ireland are “at risk” if they end up being consumed somewhere in the EU without EU customs duties being paid. Northern Ireland importers will have to decide whether a product being imported is “at risk” in this sense or not. This judgment call will not be available to all. It can only be made by Northern Ireland businesses which have registered with the British tax authorities under a special scheme to be known as the UK Trader Scheme. That registration must be made before the end of this year, which is a tall order for any business operating in a Covid-blighted environment over the Christmas period. By delegating the primary policing of customs administration to local traders, introducing other rules such as an exemption for smaller industry from some customs requirements, and allowing initial periods of leniency for compliance with new procedures, both the British and the EU authorities are closing one eye to the normal conventions and rules which apply to customs enforcement. In the long term, this attitude can only be sustained if a no tariff trade deal is in place. If things go well on the negotiation front and principles can be surrendered without white flags becoming too obvious, the challenge next week will be the ratification of an agreement text by the British and European parliaments. On the EU front, any trade deal agreed by Michel Barnier, the EU’s chief negotiator, and David Frost, his British counterpart, must be agreed by the heads of state of the 27 member countries and then voted on by the European parliament. This process took place in microcosm last week with the ratification of emergency Brexit land and air transport measures to apply from January 1, but a Brexit trade deal is of a totally different order of magnitude. Elected politicians, with some justification, don’t like being taken for granted or bounced into tight timescales by officials. There are signals that MEPs may become mutinous, and they are already saying that they will not vote on a Brexit deal before the end of the year unless an agreement is struck by this evening. Next week, the preferential trading status for Northern Ireland which the protocol delivers will not be in the hands of politicians there, but in the gift of MPs in Westminster and MEPs in Brussels. After the missed opportunities of a low corporation tax rate and single market access under May’s backstop, it may be third time lucky for Northern Ireland business. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

  Originally posted on Business Post 14 December 2020.  As the Brexit clock ticks down, and bizarre discussions about sausages and the like fill the airwaves, you would be forgiven for thinking that Britain is still a nation of shopkeepers. It is not, nor has it been for some considerable time. According to a 2019 briefing provided by the House of Commons library, Britain has enjoyed a trade surplus in services every year since 1981. Over the same period, it ran a trade deficit in goods every year. The services sector covers a wide range of activities. There's the obvious stuff, like legal, accountancy and financial services, along with the important but perhaps less prominent service sectors such as higher education, construction, transport and tourism. The money earned from every tourist that visits Britain counts as an export of services. All these activities account for some 80 per cent of Britain’s economic output. Pre-pandemic, the EU was also Britain's largest export market for services. The main reason perhaps that services have not achieved such prominence in the Brexit debate is that the EU's approach to trade in services is not nearly as cohesive as its approach to trade in goods. The EU has a common policy of customs controls and inspections applying to goods coming in from outside its borders, no matter which member country is the destination. This is not true for services, where future restrictions on service provision will be much more based on the local law and practice of the destination country. The lack of a common approach across EU member countries does not mean that there won’t be barriers to trade in services as there will be for trade in goods. Many of the automatic entitlements critical to successful cross-border trade in services will be deleted or removed altogether for British businesses after the transition period ends. This dilution of entitlement is a certainty, irrespective of the status of current negotiations. Currently, any British service provider has an automatic right to establish an office in any EU country. That automatic right will be gone after January 1, 2021. Restrictions on freedom of movement of people will reduce the availability of qualified workers for the British services industry. It will be a particular challenge for that sector to hire lower-skilled and thus lower-waged employees, because restrictions on entry to work in Britain being applied to all EU nationals (except Irish nationals) are tied to a salary expectation of £25,600. More qualified British workers may find it difficult to establish their credentials in EU markets, because their rights to automatic mutual recognition of qualifications and accreditation will be eroded. When the EU protections and entitlements are removed, EU member countries can find any number of ways to make life difficult for British service exporters should they so wish. The no-deal transitional measures for transport and aviation published last week by the European Commission are relieving measures for a six-month period in 2021. The very need for them is a stark illustration of what could happen when recognition within the EU of licences, permits and authorisations of British carriers cease. They are intended, in the Commission’s words, to avoid “serious disruptions including in respect of public order”. All of this, of course, presumes that EU businesses won't want to avail of British established services next year and beyond. That is unlikely to be the case. Britain runs a trade surplus in services because British industry is good at services. Deal or no deal, that fact is not going to change. The problem in the longer run for British industry may not be about demand for services, but rather about its capacity to supply them. Businesses operating in countries such as the US and Canada, where the labour market is choked from visa restrictions on immigrants, must wonder at the British willingness to take itself out of a pool of skilled workers. Future skills shortages may not just be confined to the trade in services, but will spill over into trade in goods, because increasingly it is difficult to separate the two. Trade in modern commodities brings with it a tail of services to enhance the product, from guarantees and warranties, to R&D and design know-how, to logistics and fulfilment. Europe will be a poorer place because of restricted access to British services. Ireland is among both the top ten export markets and the top ten import markets for British trade in services. Unlike the imminent damage to the trade in goods due to customs and standards requirements, the impact of the fall-off in the trade in services is likely to be more drawn out. As the Brexit negotiation pantomime draws to a conclusion, the story up to now has been one of trade. But the legacy will be felt most within the services sector. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

  Originally posted on Business Post 6 December 2020.  The exchequer figures published last week confirmed that, as a nation, we are spending vast sums to deal with the consequences of the pandemic. We have spent €10.5 billion more than was planned for in 2020. The bulk of this overspend, by a considerable distance, was not in the health budget but in social protection, dealing with the fallout from work stoppages and redundancies. Not as much tax materialised as was expected either, but lurking in the background is tax of some €2 billion, deferred from this year and not showing in the exchequer returns but still due from Irish industry. Not only that, the income tax yield from the self-employed normally shows in November. That wasn’t the case this year, because the tax payment date for most self-employed people was in effect pushed out by a month. Money usually due to be paid in November is not due this year until later this week. During the Great Recession, tax receipts from the self-employed fell off a cliff by about two-thirds. Because the tax yield from the self-employed reflects the activity of the professional services sector along with many tradespeople and smaller indigenous businesses, it is a real bellwether of the state of the SME sector. We probably won’t know their tax figures, and thus by extension their profitability, until January next. That information will be a real indicator of the resilience of the Irish economy outside our very large multinational and public sectors. The postponement of tax collection across all businesses has been a characteristic of the government response to the pandemic. Since March, businesses have generally been permitted to defer tax payments initially without paying any interest, and later on (depending on the timing) at a preferential rate of 3 per cent until the Covid-19 tax debt is repaid in full. This opportunity for deferral of tax payments runs counter to the traditional wisdom that in business, whoever else you owe money to, you shouldn’t owe it to the Revenue Commissioners. For a start, interest on unpaid tax debt normally runs to as much as 10 per cent per annum. Unlike other interest payments, interest on revenue debt is itself not allowable for tax purposes, so for a self-employed person the de facto rate is closer to 15 per cent. The Revenue possesses a particularly sophisticated debt collection mechanism, supported by techniques such as notices of attachment which ensure that a taxpayer’s debtors pay the Revenue instead. Supporting business through the pandemic by deferring the collection of tax debt, a technique known as tax warehousing, makes sense on several levels. First of all, it allows the government to get money into struggling businesses quickly by the simple expedient of not taking it from them in the first place. Secondly, it has saved the Revenue a lot of effort which might otherwise be misplaced. Why chase struggling businesses for cash which they might not have, when it might be easier to recover more after the worst throes of the pandemic have abated? Last month Joe Howley, the Revenue’s Collector General, wrote to 100,000 businesses to remind them of the opportunities of tax debt warehousing. This was, no doubt, primarily motivated by a desire to support business through a lockdown. It may have been prompted by the findings of a recent survey conducted by the Department of Finance which suggested that only 60 per cent of SMEs were aware of tax debt warehousing. The mailshot also has a pragmatic edge. Warehousing offers the exchequer a better chance of tax collection in the medium term as prospects improve post-pandemic. Generally, businesses have been reluctant to get into debt during the pandemic, not wanting to substitute a liquidity crisis for a future debt crisis. Optimism for a better 2021 has to be tempered by Brexit uncertainty and the knowledge that, trade deal or not, trade with Britain will be hampered following the expiry of the transition period next month. This optimism should be tempered further by the knowledge that the estimated €2 billion or more of warehoused tax debt will ultimately have to be settled. There is no need for businesses availing of the tax warehousing facility to panic, but they do need to start thinking about how the debt will be repaid or refinanced. It is clear from the November exchequer returns that, insofar as possible, Irish business has been doing the right thing throughout the pandemic. Tax yields may be down, but it is evident that many businesses kept paying their way as best they could during 2020. There is now a reasonable expectation of some upturn during 2021 which, in turn, will lift the national finances. The business resilience shown during 2020 deserves some reward. It might start with the government helping to refinance, or even forgive, some of the €2 billion in warehoused tax debt. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

  Originally posted on Business Post 29 November 2020. Last week, Tánaiste Leo Varadkar called for what he termed a “grown-up conversation” on increasing employers’ and employees’ PRSI to fund a reformed social insurance system. Varadkar, who is also Minister for Enterprise, Trade and Employment, may be overly optimistic. It is unusual to hear anyone who has been in government for the last ten years call for a grown-up conversation when it comes to increasing taxes. It's not something we are good at in this country. Nevertheless, one of the lessons from the pandemic is that its impact has been vastly different on various cohorts of our society, whether it’s young people, pensioners or workers in different sectors. These lessons must inform how we manage our social welfare system in the future. One of the most striking aspects of Ireland’s economic fortunes over the past nine months is how robust tax receipts have been. At the end of last month, there was an exchequer deficit of €11.6 billion. This deficit was created primarily by increases in health and social welfare spending, not by a fall off in tax revenues. This is both a cause for optimism and a cause for worry. It is a cause for optimism that we have a robust private sector that can continue to trade profitably in goods and services regarded as essential at home and abroad. This was by no means certain back in March, when many Irish businesses completely overestimated the negative impact of the pandemic. It is, however, of little consolation to the very many businesses, primarily in the hospitality, personal services and travel industries, which have been affected and in some cases, damaged to the point of no return. Nor is it of assistance to the unemployed now relying on the pandemic unemployment payment, or to the underemployed whose jobs require support through the wage subsidy schemes. Currently, the majority of PUP recipients are workers in the accommodation, food, wholesale and retail sectors. Many of the jobs in these sectors are relatively low paid. What becomes of these workers post pandemic? Should the self-employed still be able to earn a modest income without jeopardising their PUP entitlements as is currently the case? What happens when it is no longer possible to fund the €100 million per week which the payment costs, yet the jobs that were there before March 2020 have not returned, perhaps gone for good? One approach to this question is contained in a report of the Arts and Culture Recovery Taskforce which was presented to government last month. The report, called Life Worth Living, recommended, among other supports, a universal basic income. Artists and other cultural workers could opt into an unconditional state payment at the level of the national minimum wage for three years, and the payments would not be means tested. Working out at €325 a week for perhaps 7,000 or so individuals, this does not seem like a huge ask on any government, particularly one that uses its arts sector as a cultural beacon to command the attention of the world. The broader question is why a universal basic income should be confined only to arts and culture workers. The very idea of a universal basic income, also sometimes termed a citizens' income, attracts all kinds of objections. It might direct scarce public money to people who don't need it. It might result in people not looking for paid work. It wouldn't solve all problems such as the housing crisis. All this before even working out how much it could actually cost. Up to now there has been little evidence to disprove or prove these assertions. Three years ago, the social welfare department of Finland paid 2,000 unemployed persons a basic income for a time regardless of any other income they may have had or whether they were actively looking for work. That study concluded that the scheme made small improvements in people's quality of life while not seeming to deter the recipients from looking for work. It may be dangerous to infer direct parallels with countries where there are cultural differences, and the Finnish survey sample was small. Yet, this year, we have paid a large cohort of Irish people what in effect was a universal basic income via the PUP. As well as providing much-needed support to individuals, it has surely helped support domestic economic demand. There are far fewer numbers of those availing of PUP during the second lockdown, which suggests that receiving it was not a major disincentive to seeking or resuming employment. The relatively large PUP payment rates meant that some lower wage sectors found it difficult to engage staff, yet the tapering of PUP rates seems to have, in part, addressed this challenge. We cannot sustain the levels of borrowing currently required to indefinitely fund what after all was an emergency measure. Yet, thanks to the prospect of effective vaccines, the end of this pandemic is in sight. There is now some evidence that a more generous or liberal welfare system post pandemic, perhaps involving a universal basic income for some sectors at least, should not be rejected out of hand. If we are to have a grown-up conversation about a reformed social insurance system as the Tánaiste has suggested, it has to be about how to create a new social welfare contract for a changed world post pandemic, and how to fund it. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

  Originally posted on Business Post 22 November 2020. The incessant “will they, won't they” speculation over a deal between the EU and the UK is distracting attention from the business disruption that we do know for sure will happen on January 1, 2021. Even though hopes of a free trade agreement, however limited, are fragile, such an agreement was only ever going to mitigate rather than eliminate the upheaval caused by Brexit. The principal focus of any free trade agreement is the movement of goods, but more than that is at stake. From January 1, there will be restrictions on the movement of people between the UK and the EU. This, thankfully, will be among the least of the problems encountered by people on this island due to the common travel agreement which pre-dates the accession of either country to the EU. The situation for goods movement is equally clear-cut, but a lot more dismal. Free trade agreements deal with customs duties and quotas on goods being imported and exported, but tariffs are not the only taxes levied on cross-border trade. Vat is a truly European tax established by an EU directive which all member countries must follow. Having a Vat system is a condition of membership of the EU. While individual countries are permitted derogations and some flexibility from Brussels‘ rules, such as reduced rates of Vat for the hospitality sector, by and large the rules are rigid. Vat treatment differs between goods traded within the EU and goods traded outside the EU. From January 1, the Vat system will make no distinction between goods imported from Britain and goods imported from Brazil. While this will affect all importers and exporters on this island, trade deal or no trade deal, the changes will be felt especially in the North. There should be no doubt in anyone's mind that doing business in and with the North will be a lot harder after January 1 than it is today. Under the Northern Ireland protocol, the region will operate the EU Vat system for goods but not for services, while still applying UK rates for both. This particular fudge has been necessary to ensure no hard border is needed on the island of Ireland to police goods moving North and South. As with all fudges, the arrangement solves one problem but creates others. In practice it will be impossible to police the tax charge on goods moving between Britain and the North if their ultimate destination is somewhere in the EU. Vat is charged on the value of goods together with any customs duty which has been paid on them. In short, without knowing what the customs duty should have been, the correct Vat cannot be charged. Without a free trade agreement which reduces tariffs between the EU and the UK to nil in most cases, the Northern Ireland protocol cannot work in practice. There will be additional problems for UK groups with branches in the North. Group companies can be treated as a single entity for Vat purposes but from January 1 next, Northern Ireland companies in a UK Vat group must be treated as separate entities with their own Vat bills and responsibilities where goods move into that company from Britain. Separately, smaller businesses in particular will feel the loss of a pragmatic margin arrangement for dealing with Vat on second-hand goods which will lapse in the North after January 1.This will present real difficulties for businesses such as car dealerships which routinely pay their Vat on the profit margin, rather than working through the Vat ins and outs and timings of when cars are bought and sold. We have become accustomed to Brexit threats being batted away or postponed by political wishful thinking. Vat problems will not evaporate in this fashion, because governments are so dependent on Vat revenues. Vat is the largest amount of tax paid in Northern Ireland, some £3.4 billion according to official estimates for last year. In comparison, £2.8 billion was collected in income tax. Last week there were straws in the wind suggesting that EU compensation schemes might be available for regions particularly badly affected by Brexit. While some Northern Ireland interests are already addressed via the protocol to the withdrawal agreement, it is far from clear that there will be any special arrangements forthcoming from Brussels for a former region which is no longer a member of the European Union. Time and again, a successful trade deal has been held out as a solution to the worst commercial challenges of Brexit. No trade deal can resolve the additional costs associated with dealing with businesses outside the EU Vat system. Like tariffs, Vat is a protectionist tax. Unlike tariffs, Vat will not be magicked away by any trade deal, even if there is one. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland