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

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

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

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

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

  Originally posted on Business Post 21 March 2021. President Michael D Higgins is expected to soon sign a piece of criminal justice legislation to bring Ireland into line with EU initiatives to combat money-laundering. Successful approaches to criminality must tackle both the crime itself, ie, where the money came from, and serve to limit the use of the proceeds. There is no point in stealing or extorting money if it cannot be spent. Anti-money laundering initiatives are not new to this country. A need to “know your customer” explains why banks, which normally do their utmost to keep their customers at a safe electronic distance, insist on their physical presence and tangible evidence when opening a bank account. Similar responsibilities extend beyond the traditional financial institutions where a business handles perhaps unexplained bundles of money. There is no particular onus on individual businesses to identify the proceeds of crime, but the law creates a requirement to notify something that might be unusual. These “suspicious transaction reports”, as they are known, are the foundation for anti-money laundering initiatives. Reports are made both to the Gardaí and to the Revenue Commissioners. The new legislation will bolster the existing money laundering laws by widening and deepening the duties of care for the likes of tax advisers, letting agents, bitcoin traders and art dealers. Because of the multinational nature of organised crime, there is little benefit if only one country applies anti-money laundering laws. It is a good thing that the initiative is European-driven. We are merely applying approaches already agreed by all of the EU member countries in our national law. Britain has enthusiastically adopted this regulatory environment, claiming some credit for devising it in the first place, and promising to stay aligned. In this area, at least, the British seem unlikely to diverge from European standards. European regulation isn’t just about the law. It is also about whether the agency responsible for enforcement is located centrally, or is devolved to each of the individual member states. For instance, few of us had heard of the European Medicines Agency, which somewhat ironically had been located in Britain before Brexit, until we all developed a fascination with vaccines, but its work is key to the authorisation of medicines across Europe. By contrast, while anti-money laundering policy is coordinated, enforcement remains primarily the responsibility of domestic governments, at least for the time being. Any system of regulation imposes burdens on those who are asked to comply with it. The temptation will always be there to take shortcuts to save costs or, worse, to create an unscrupulous competitive advantage by failing to apply the law. The day-to-day operation of the current anti-money laundering legislation in the private sector largely falls to those “designated persons” who must make suspicious transaction reports. The designated person is more often than not a company or a firm, rather than an individual. Yet it is not a company as such which makes a decision to comply with the law, but rather the individuals who own or manage it. The anti-money laundering legislation, in common with so much of Irish business regulation, tends to penalise the business when things go wrong, not the responsible person within the business. The Central Bank has identified this as an obstacle in some of the regulatory work within its ambit, proposing an aptly acronymed “senior executive accountability regime”, or SEAR, as a remedy. Last week in this paper, Michael Brennan wrote on the difficulties for the government of introducing a SEAR which would migrate some of the penalty regime for corporate shortcomings down to the responsible executive. Removing the shield of employment within a firm for wrongdoing is a difficult area, but it is not a new one for our politicians. At the Dirt inquiry, more than 20 years ago, TDs were frustrated at the apparent immunity of bank officials to the consequences of their actions in not applying the correct tax on interest earned in deposit accounts. In the 20 years or so since then, little has changed in the way the Irish regulatory regime can reach behind the corporate wall to apply sanctions to individuals. Solid regulatory regimes which monitor wrongdoing, and sanction it appropriately, have to be effectively policed. Ireland is not an outlier when it comes to the application of anti-money laundering initiatives. Being a decent place to do business provides a competitive advantage, just as the strength of our international brand confers a competitive advantage. Having the rules in place, though, is not enough. We have to show we can enforce them effectively. We need to think more about how we sanction individual wrongdoers, rather than just the businesses in which they are involved. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

  Originally posted on Business Post 14 March 2021. Responding to questions on the operation of the Northern Ireland protocol in Westminster last week, Brandon Lewis, the Northern Ireland secretary, made repeated mention of the role of business. He hoped that Maroš Šefčovič, the EU vice-president with responsibility for Brexit, could “visit Northern Ireland more”. By implication, if Šefčovič really understood the issues affecting people and businesses in the North, he might be more positive about the British government reneging on the previously agreed trade controls under the protocol. This is not far short of victim-blaming. The wonder of the Northern Ireland protocol is not that there are problems with it, but that it operates at all. The same thing could be said about all types of trade in goods since the UK finally left the protection of the customs union and single market on January 1. Businesses are used to deadlines. Owners and managers are all too aware that they will face action from government statistical agencies, registrars of companies, revenue authorities, local authorities, health and safety inspectors and heaven knows who else, if compliance or payment deadlines are not met, and met routinely. This awareness of obligations and their consequences was underlined during the pandemic. Both jurisdictions on this island extended routine deadlines without penalty – and obligations to file, report or pay under a wide range of legislative provisions were postponed or deferred. Nevertheless, relatively few businesses availed of some or any of these extensions. If businesses can cope with a pandemic, they can surely cope with new administrative arrangements for imports and exports. It is not business that needed grace periods for the checks and controls imposed by Brexit and the Northern Ireland protocol. It is government and its agencies. The shape of the Northern Ireland protocol was well known long before the Trade and Cooperation Agreement between the UK and the European Union was finalised on Christmas Eve last year. The requirements of the protocol in terms of Vat and customs were well known and should have been understood over a year ago but government did not prepare for their implementation. It was known that the protocol created a dual status for the North, but the British government ignored the practicalities. There was no official indication of the British government’s intentions in handling the protocol until last May, stated in a so-called Command Paper. That paper noted that the protocol “enables tariffs to be collected on goods at risk of entering the EU’s Single Market at ports of entry, rather than at the land border that is the legal boundary between the UK and EU’s customs territories”. Yet three months into the operation of the protocol, no government system exists to manage refunds of customs duties due to traders where goods are subsequently found not to be at risk. This is not the fault of business. Again, according to the Command Paper of May 2020, the protocol “respects the pre-existing status, accepted by all parties, of the island of Ireland as a single epidemiological unit for food and animal health purposes, and provides for wider regulatory alignment on industrial goods on the basis of democratic consent”. So why does this checking process now have to be delayed at the expense of a breakdown of trust between the UK and the EU? Extending deadlines for the kind of checks which have given rise to last week’s legal action by the European Commission against the UK does nothing to address the underlying problem which is that the British government simply failed to be ready to implement the protocol in good time. It now plans to further extend the light-touch approach on imports into Britain beyond the existing March 31 and June 30 deadlines. That announcement certainly benefits Irish exporters to Britain in the short term, but it is yet another attempt by the British government to postpone the worst of Brexit. What businesses need is coherent direction on customs and trade clearance, backed up by fair and efficient administrative procedures on both the EU and UK sides. It is the absence of these procedures, rather than the inability of business to cope with new rules, that is giving rise to the current crisis. Unfortunately these repeated extensions also dull the advantages of the protocol for Northern Ireland. This is not to downplay for a moment the difficulties created by Brexit and the operation of the protocol for businesses both north and south of the border. Instead, it is to point out that businesses on the island of Ireland are remarkably adaptable, provided that they know what they need to do and how to do it. In this regard, the British government has failed miserably in its obligations. There is now no excuse for the British government dragging its heels on full Brexit implementation. Undermining the protocol by having lax management arrangements in the North undermines the value of its participation in the customs union. Further grace periods for checks and controls will not ultimately facilitate businesses on this island. They merely offer a sticking plaster to mask how unready the British government was to get Brexit done. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

  Originally posted on Business Post 7 March 2021. When Nigel Farage and Boris Johnson were campaigning for the Brexit vote, did they have it in their script that the first post-Brexit British budget would raise business taxes? Business tax hikes don’t seem to gel with their vision of a promised land, free from EU shackles. To be fair, neither they nor their political opponents foresaw the impact of a pandemic coinciding with Brexit. Nor for that matter could anyone have envisaged how effective Johnson would turn out to be at tackling a vaccine rollout in his country. The latter success story was among the few positives for Rishi Sunak, the British Chancellor of the Exchequer, as he presented his budget last Wednesday. The British economic experience has been considerably worse than that encountered by us on this side of the Irish Sea. Last year, the British economy shrank by 9.9 per cent, according to the UK’s Office of Budget Responsibility, a body comparable to our Fiscal Advisory Council. By contrast, the Irish economy did not shrink in 2020 but seems instead to have recorded a modest increase in growth. A contraction of the economy in the order of 10 per cent inevitably disrupts the national tax take. By and large there is a direct relationship between economic performance and the performance of tax receipts. There is an estimated fall-off in tax receipts of around 5 per cent in the UK when pre-pandemic receipts are compared to current receipts – the UK’s financial year runs to March 31, not December 31. Yet this link between economic performance and tax performance does not account for all of Sunak’s problems when it comes to funding bigger health and social welfare programmes. The UK system is far less progressive than the Irish system on taxing individuals. Higher income Irish taxpayers pay a greater proportion of the total income tax collected than their British counterparts. This means that when low-paying jobs disappear, as has unfortunately been the case as a consequence of the pandemic, a significant proportion of the income tax take in the UK is at risk. The need to broaden the tax base by getting more people and more companies to pay, instead of asking those who already pay to pay more, became a mantra for many politicians in recent years. It now seems that when it comes to having resilient tax receipts to deal with pandemics, a narrow tax base is better. Currently in the UK, income tax figures are holding up largely because of the effect of the coronavirus Job Retention Scheme but these receipts are projected to fall off when the job retention programmes end. Apparently in response, the British chancellor signalled that income tax bands and allowances for individuals would be frozen. This approach increases tax yield over time because of a phenomenon known as fiscal drag. As wages increase, some income exceeds the exemption thresholds and becomes taxable while even more income falls into higher taxpaying brackets. Freezing allowances and reliefs in this manner has been a tactic here for years. The personal tax credit for an individual was reduced in 2011 from €1,830 to €1,650, and hasn’t budged since. Pandemic supports have created an expectation that social welfare benefits will be more broadly available than in the past and therefore more costly to deliver. Sunak has recognised this by heralding very significant increases to British corporation tax rates, ultimately to 25 per cent or twice the Irish rate. Individual British businesses can only mitigate this additional tax bill by making significant capital investments. Tax increases only work from an exchequer standpoint if there are profits being made by companies to tax, but the UK’s Office of Budget Responsibility is practically cheerful about the Brexit impact on trade. The fiscal problems facing both British and Irish governments as we exit the pandemic are largely the same; it’s just that the British have had to confront them sooner because of their budget date. Yet Sunak’s actions are redolent of an Austerity 2.0 approach. Corporation tax increases are always easier for an electorate to accept. Freezing income tax reliefs looks innocuous. The less obvious a tax increase, the less politically damaging it is. This week there was a 2 per cent hike here to our standard rate of value added tax. Did you notice? Unfortunately, Wednesday’s British budget signals a direction of travel on tax increases which Irish governments may have to take in the coming years. As Paschal Donohoe, the Minister for Finance, pointed out last week, it is unrealistic for us to expect foreign lenders to indefinitely fund our social spending aspirations. The correct approach to the current crisis is to borrow and spend, but that has its limits. Though Irish ministers will be working off a much better economic base than their British counterparts when it comes to the next Irish budget, they would do well to examine what Sunak did last week. The policy decisions will be different and in particular no finance minister here should contemplate for a moment a corporation tax rate increase. But by the time the Irish budget decisions are made in October there will be plenty of insight on how the tax hikes in Britain played out politically and economically. No more than Johnson or Farage in 2016, few politicians are ever keen to campaign on a platform of tax increases. In a week when British political decisions on the Northern Ireland protocol did us no favours, their budgetary decisions may serve us later in the year as examples of what not to do. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

  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