Tax

Sunday Business Post, 30 June 2019 The Summer Economic Statement (SES) was published last week.  The SES is the first element in an increasingly labyrinthine Budget process, and it is (like all the summer economic statements before it) short on detail.  You won’t find next year’s tax rates here.  Rather, it’s broad brushstroke stuff – an assessment of how the economy has performed and how it might be expected to perform in 2020.   But this SES differs from its predecessors in one significant regard, in that it puts forward two Budget Day scenarios.  One scenario projects what 2020 might look like with an orderly Brexit, and another what the economy might look like after a disorderly Brexit.  ‘Orderly’ and ‘disorderly’ in this context mean very specific things.  An orderly Brexit refers to the UK having signed up to the Withdrawal Agreement and the Backstop, and all the other paraphernalia that ultimately cost Theresa May her job.  For us, an orderly Brexit therefore means that the Ireland/Britain trading relationship more or less continues on as before until December 2020, because under the terms of the Withdrawal Agreement, the UK remains a de facto member of the European Union until then.  There would be no tariffs or quotas on our imports from or exports to Britain next year, no border controls and no restrictions on the movement of people.  For 2020 therefore, an orderly Brexit, while not business as usual, would be something very close.  That’s not to say that an orderly Brexit would not involve disruption.  As we’re already seeing this year, many businesses are making preparations or deferring investment decisions in anticipation of the UK’s departure from the European Union.  Contrast, however, an orderly with a disorderly Brexit.  That's the scenario where the UK leaves the European Union with on 31 October without an agreement with the EU.  Tariffs begin to be charged on 1 November 2019 and restrictions on access to the EU single market kick in.  Clearly, the orderly Brexit situation is considerably more favourable to the economy of this country than this disorderly, no deal scenario.  The SES figures sharply illustrate that.  Yet neither scenario tells the whole story.  For all kinds of reasons, we don't do multi-annual budgets in this country.  If ever there was a year where multi-annual budgets might be useful, this is one of them.  Brexit is not just for 2020; it’s for keeps.  The orderly Brexit withdrawal scenario just gets us to the end of 2020.  What lies beyond December 2020 is down to whatever can be agreed between the EU and the UK on the future relationship beyond December 2020.  Recent evidence that any comprehensive agreement can be secured in a reasonable time frame is not good.  A multi-annual version of the SES, including 2021, would show that the 2021 picture for an orderly Brexit and a disorderly Brexit would be very similar, I suspect.   Short of the UK revoking its Article 50 notification and deciding to remain within the EU after all, there really is no circumstance in which Brexit will not have a lasting detrimental effect on the economy of this country.  The extensive trade between our two nations will be circumscribed by import and export tariffs, and quotas, which are fundamentally designed to thwart cross-border trade rather than facilitate it.  We will lose shared permissions, standards, regulations and licences that facilitate cross-border trade in services, and on the face of it as soon as 31 October next.   That gives the timing of Budget Day, being October 8, a significance beyond what is usual.  (The date of October 8 is a creature of EU law, which mandates that Budget Day cannot be later than 15 October.)  Budget Day is a mere three weeks away from hard Brexit Day.  In the course of the National Economic Dialogue, a meeting of civil society groups and government ministers and officials this week, it became apparent that the Irish Budget will not just set the fiscal agenda in Ireland for 2020, but will also be a statement of intent to our EU partners about how we handle the UK’s departure.  We have all acquired Brexit fatigue over the last several months.  The SES presents a real message now that Brexit will have deadly serious consequences for the future of the Irish economy.  The gloves are coming off.  Dr Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland

Jul 01, 2019
Thought leadership

The Sunday Business Post, 23 June 2019, I awoke the other morning to hear Fianna Fáil’s environment spokesman Timmy Dooley, on RTE’s Morning Ireland, calling for tax increases.  Hearing any politician call for tax increases rarely constitutes a good start to the day.  The call was of course prompted by the discussion on the latest Government Climate Action Plan.   Just like everything else, taxes can come and go out of fashion.  Currently it’s quite acceptable for a politician to call for carbon taxes, because it is now generally accepted that climate change needs to be addressed.  Equally, however, the shortage of reasonably priced rented residential accommodation needs to be addressed, but it is deeply unfashionable to suggest any tax remedy which might go some way towards help sorting that problem out.   The age old problem with fashion is that it costs money to be fashionable.  It is easy for a politician to sit in a radio station calling for carbon taxes, on the back of election results which suggested that the electorate might be becoming more environmentally aware.  It is a different matter for a government to levy an additional tax and deal with the backlash.   From a political point of view, additional carbon taxes have one very attractive feature.  Like the greenhouse gases themselves, they are largely invisible to the electorate.  Taxpayers get up in arms about tax hikes affecting their pay packet, but tax increases which add to the cost of purchased goods or services get a strangely muted reception.    In 2012, for example, the government added 2 percentage points to the standard rate of VAT, increasing it from 21% to 23%.  At the time the move elicited almost no public response.  That VAT increase is still with us.  Those extra two percentage points currently bring in some €1bn of extra VAT from taxpayers each year.    Even better from a political perspective, carbon taxes would be applied to fuel-stuffs whose price is already as volatile as their composition.  The proposed fourfold increase of the carbon tax charged on home heating oil would increase the cost of 1,000 litres of kerosene to the householder by roughly €150.  Price fluctuations of that order, perhaps due to currency fluctuations or mere cussedness on the part of the oil producing countries, are already frequent occurrences.  Stage such an increase over a period of years, as Timmy Dooley suggested, and how many voters would really notice?    Whether such an increase is equitable is a different matter.  VAT takes no account of ability to pay, and the parent who earns €100,000 per year gets the same reduced rate of VAT on children’s clothing as the parent who relies entirely on social welfare benefits.  Carbon tax is equally indifferent to a person’s ability to pay, unless relief can be channelled through the social welfare system.   Carbon tax is only one element of the environmental approach.  Because of the structure of the Irish economy and our emphasis on food production, the contribution of agriculture to greenhouse gas emissions is much higher relative to other EU countries.  There’s a lot of science behind the options to mitigate greenhouse gas emissions within the industry, such as changing animal feeding approaches and fertiliser use.  The less high tech approach is to use land for something else, notably forestry.   As it happens, income from forestry has enjoyed a significant tax break for many years.  Generally speaking income from commercial woodlands is tax exempt.  But forestry is a long term play, with some timber crops only        producing their yields after twenty years or more of tending and waiting.  It is possible to arrange a modest stream of income from the forestry investment during such a timeframe, but a better tax incentive would involve frontloading relief for the investment through refunding tax already paid from the farming business.  There’s little prospect of that though, given that the chapter in the Climate Action Plan doesn’t even mention the existing tax relief, let alone talking about improving it.   One front ended relief which does get mention is a proposal to introduce a government car scrappage scheme in 2020.  Previous scrappage schemes were designed to get older, less safe, cars off the road.  The idea now seems to be to get petrol and diesel cars off the road, scrapping them in favour of electric vehicles.  This is not an action item in the plan; it is an idea for consideration.  This, to my mind, is the problem with the overall plan.  It’s full of interesting analysis and policy ideas, but it’s hard to discern what the real action points will be.  Doing is not the same as considering.   Maybe that’s why so much of the focus has been on the carbon tax hike, which does seem to be a definite proposal even if we don’t know the final shape of its implementation.  Government might be well advised to finalise that.  And finalise it quickly, before the idea of a carbon tax goes out of fashion.   Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland

Jun 24, 2019
Tax

Sunday Business Post, 16 June 2019 “I mean the windmills, the turbines…, I mean the things that look like some hideous Venusian invasion marching over the moors and destroying the dales”.  Not everyone apparently is comfortable with the infrastructure needed to protect the environment while at the same time providing the energy required for modern living.  If for no other reason, a quasi-Joycean description of wind turbines merits its inclusion in an article published on this Bloomsday.  Its author is one Boris Johnson, then Mayor of London when he made his observation back in 2013 about such infrastructure.  It's almost hard to credit, but the green agenda has even muscled its way into the Tory leadership contest across the water.  Everyone knows that something needs to be done, and that includes our own Finance Minister whose department launched (yet another) public consultation on taxes this week.  Unlike most tax consultations, this one has a slight wrinkle to it in that its focus is about how carbon tax revenues should be spent, rather than primarily about how they might be collected.  I've argued here before that carbon tax should be used as a prompt for choices to be taken.  However consumer choices are not available without prior investment to provide more carbon efficient options. The Department of Finance now seems to want views on a wide range of carbon tax spending options.  Should the social welfare fuel allowance be increased to compensate poorer households as they meet their energy needs?  Or, at the other end of the commercial spectrum, should businesses be rewarded for moving away from the use of fossil fuels? Hypothecated taxes, that is taxes which are earmarked for a particular purpose, leave themselves open to particular challenge.  These challenges might not be on the grounds of the fairness or otherwise of the tax itself, but could be based on the premise that people don't like the way the monies collected are being disbursed.  Countering such challenges may be part of the rationale behind having a consultation like this.  The Minister needs to be able to say that at least he asked, because concerns over how a carbon tax might be received by the general public are well founded.  Over a decade ago the UK set up its own research resource specifically to examine policies in relation to climate change and the environment.  This facility, the Grantham Research Institute, published a report some 18 months ago which identified some of the reasons why individuals dislike carbon taxes.  They found that individuals don't believe that carbon taxes will be effective in reducing greenhouse gases.  Perhaps more significantly the researchers noted that individuals tend to distrust government, and thus tended to view carbon taxes as a backdoor way of raising government revenue rather than as an incentive to reduce emissions.  These negative outcomes aren’t helped if the government communications about carbon tax are too statistical and data heavy.  People rarely change behaviour solely because of data from official sources.  Instead they need to be told about the personal and public wins because of the reduced use of fossil fuels following the imposition of additional taxation.  There is room for the persuasive explanation of associated benefits because of reduced air pollution and traffic congestion. As with any tax, not all of the outcomes will be positive.  It needs be made clear how the production and delivery costs of goods will be affected by carbon taxes.  The Grantham Institute recommended that all communications be carried out on an ongoing systematic basis.  That has not been a feature of the Irish carbon tax regime to date, and communication of the issues doesn’t even feature as a potential spending item in the current public consultation. Aside from the environmental objectives there is the pressing problem for government of fines being imposed for failure to meet EU 2020 climate targets.  The chair of the Public Accounts committee Sean Fleming is highlighting the tens of millions of Euro being spent on purchasing carbon credits from other, more carbon efficient countries, so that we can be seen to be meeting EU targets.  It doesn't seem sustainable that we can continue to buy our way out of the excess fossil fuel usage consequences indefinitely. That’s particularly so when it’s pointed out how little carbon taxes currently cost us, relatively speaking.  Householders in a well-insulated small home pay a €20 per annum carbon tax premium on the kerosene they use to heat their homes.  That would equate to about 10% of the typical LPT bill.  It’s estimated that a motorist driving a petrol engine car pays a €55 per annum carbon tax premium.  That would equate to about 10% of the typical car insurance bill.  Building the kind of windmills that Boris Johnson so disliked is not listed within the current consultation.  Nevertheless it’s that kind of highly visible environmental development that might persuade a sceptical public that the additional carbon tax being levied is being appropriately spent.  Just don’t charge us more tax on petrol or kerosene or coal when we still have no alternatives to their use. Dr. Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland. 

Jun 17, 2019
Tax

Sunday Business Post, 9 June 2019  The French philosopher Roland Barthes spent perhaps more time than is good for anyone looking at advertisements.  Some sixty years ago he was trying to understand and explain what parts of an advertisement (he focused on an ad for pasta) made consumers want to go and buy the item.  Barthes analysed the particular details in the advertising campaign that seemed to catch peoples’ attention and imagination, whether they fully realised it or not.  It sometimes happens that a particular word or phrase captures the public imagination for a particular reason that is hard to define.  We all want something that does exactly what it says on the tin, even though no one recognised the power of that phrase until it was used by Ronseal.  The current US president has a particular knack for the comment that grabs attention.  Donald Trump's apparently careless observation this week that a future US/UK trade deal might encompass the British National Health Service (NHS) may change the British political discourse quite dramatically.  That’s despite his seeming to row back on the matter subsequently. Thanks to Trump’s comments during his UK State visit this week, trade deals have ceased to be unequivocally good things in many people’s minds.  His reference to the NHS has prompted serious consideration of what might have to be given away.  Would the UK have to surrender more trade control and autonomy than it already has done by virtue of EU single market and customs union membership? Usually trade deals are regarded as arrangements between countries which suspend or mitigate tariffs and other controls on goods crossing the borders between parties to the deal.  The acme of trade deals almost anywhere in the world is the trade deal among countries of the EU.  The EU treaties permit the flow of almost all goods (and many services) without hindrance across borders.  Trade deals however often also mandate governments to make contracts for goods and services available for tender to foreign suppliers in trading partner countries.  That is why many Irish government tenders must be open to suppliers and contractors within the EU, and not just Ireland.  Donald Trump's off-the-cuff remark about the British NHS raised the hare that the future trade deal between the US and the UK might involve US businesses tendering successfully for fulfilment of British government health service contracts.  No wonder politicians and commentators on the other side of the Irish Sea got so antsy about it. In February of this year, the US authorities published specific trade negotiating objectives for a future deal with Britain.  The policy statement notes that the British decision to leave the EU creates a new opportunity to “expand and deepen the US – UK trade relationship”.  However it also notes that there should be exceptions for some types of government procurement and those exceptions should include procurement to protect human health.  That would seem to suggest that American goods and services providers would not necessarily have automatic access to the coffers of the NHS in the future.  So far so good.  However British observers have plenty of other grounds to be worried over the shape of a future transatlantic trade deal.  It is clear that the Americans are committed to concluding any negotiations with “timely and substantive results” for their own consumers, businesses, farmers, ranchers and workers “consistent with US priorities”.  Even if areas such as healthcare are excluded from a deal, the aspiration is that American business should have significant opportunities to avail of British government contracts.  There will be no free ride for British industry when it is outside of the EU tent. What could be of even wider concern is that an official document setting out priorities for negotiations between America and Europe was published last January, just a month before the US/UK objectives were published.  The documents are almost identical.  It seems that all else being equal, the American starting position is that they have no particular reason to grant Britain any special deal over and above what could be achieved with the EU.  Yet all else is far from equal.  According to the US authorities, two way trade between the EU and the US amounts to $1.1trillion per annum; two way trade between the EU and the UK is less than a quarter of that amount. The realisation may be dawning within the British political establishment that trade negotiations will be tougher from being outside the EU than being from within.  If that is so, it is due to Trump’s Barthes-like use of the NHS as the item that catches the attention.  Just as the Brexiteers did three years ago when they promised more funding for the NHS on the side of their infamous campaign bus. Dr Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland

Jun 10, 2019
Tax

Sunday Business Post, 2 June 2019  There’s a saying that it is better to light a candle than curse the darkness.  Judging from the outcome of the European and local elections where the relative success of Green party candidates is being taken as a strong hint to all of us to stop burning fossil fuels, is it now actually better to curse the candle than light the darkness? There can be absolutely no doubt of the need to reduce the volumes of CO2 being released into the atmosphere because of how it disrupts climate.  However you don’t have to listen very carefully to hear the rattle of bandwagons being boarded as first the Taoiseach, followed by IBEC, leap on the notion of climate action.  As all too often happens, the nebulous sense of a need to take action of some description is crystallising around that most stable of all government policy weapons, a tax. Some time ago, a developed Western economy put in place a relatively modest charge with the aim of better managing and supplying a limited natural resource which is used by everyone.  Expressions of public outrage at the charge went so far as to involve assaults on workers putting equipment in place to operate the levy.  After two years of unseemly political wrangling, the new charge was shamefacedly and quietly dropped.  Many people had ignored the charge; those more civic minded who had already paid it were refunded.  This particular environmental tax was called “Water Charges” and of course they were introduced here.  Despite the utter rejection of that particular environmental charge, five years on there is almost a sense of eager anticipation surrounding carbon taxes.  So what has changed? Maybe attitudes have changed because of our newly regained (relative) prosperity.  Last weekend the BBC published a striking map of Europe showing the countries where there had been a resurgence of support for Green politicians and where there had not.  The green tide only hit the shores of the north-western Europe, an area more prosperous than the south-east where the resurgence was not evident at all. This suggests to me at least that environmental awareness is somewhere close to the top of the hierarchy of human needs, and only felt when more basic issues like job availability have been addressed.  If that is correct, this could be a better time to introduce carbon taxes towards moderating the impact of climate change, and that they might land better than the ill-fated water charges of five years ago.  What is not clear though is what a carbon tax will be designed to achieve and if political thinking on the matter is aligned with the view of the ordinary taxpayer.  If a carbon tax is intended to change consumption patterns, alternatives to the use of high carbon taxed fuels must be provided.  There are already carbon taxes in place in Ireland, but how many of us choose our energy or transport needs by reference to the amount of carbon tax being levied?  How many of us actually know how much tax carbon tax is levied on petrol or diesel or home heating oil?  (It’s about 5 cents a litre and upwards depending on the fuel) Even if we did, it wouldn't matter.  Many people don’t have access to a public transport infrastructure that offers a commuting choice.  Many householders will opt to buy expensive oil or gas rather than deal with the up-front cost of converting their home heating systems.  Nor can consumers decide not to heat their homes nor commute to work.  That would not be a change in consumption patterns; that would be just hardship.  Without choices, a “carbon tax” is simply a “tax”.  There is little encouragement to be taken from recent carbon management initiatives at official level.  The 2017 National Mitigation Plan is anodyne recommending as it does a “targeted balance” (whatever that means) between Exchequer-supported expenditure and fiscal, taxation policies and regulation.  It is hard to extract any challenging proposal from it.  In March of this year the Oireachtas Joint Committee on Climate Action seems to have achieved consensus on the need for carbon taxes, but then spent its time wrangling over ensuring how few of us will end up paying them.  The Committee also managed to make tax recommendations while admitting that it did not have enough financial information to choose the best way to spend the extra tax.  That is not reassuring. If setting a policy to raise additional carbon tax, government should remember the critical lesson of the water charges debacle.  Provide the environmentally sound alternatives first, and then charge for them later.  The Green tide could go out leaving the sharp edge of a carbon tax rock on which well-intentioned environmental policies will founder.  Carbon taxes can either prompt changes to consumption patterns, or support more environmentally friendly options.  If they don’t, they will fail as a policy instrument.  Yet none of us can afford to keep the existing candles lit.  We need to fix our reliance on fossil fuels, but setting a tax to do so should be the last step in the process.  Decide on and carry out the infrastructure spending first. Dr Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland

Jun 04, 2019
Tax

The Sunday Business Post, 26 May 2019  Students of the Irish tax system from overseas are often intrigued by how tightly the Irish tax system is integrated with business behaviours.  For example, Revenue verify on request that a taxpayer’s affairs as captured on their records are up to date.  This online system of tax clearance is by no means a feature in other countries, yet many Irish businesses cannot obtain the licences they require, or are barred from competing for contracts if they are unable to produce a tax clearance certificate. Part of the reason for this level of integration is that there has been a steady delegation of tax collection responsibilities from Revenue to the private sector over many years; primarily through VAT and PAYE.  PAYE and VAT bills often dwarf the mainstream income and corporation tax liabilities of business.  Sometimes when businesses are in trouble, satisfying these bills is among the earliest casualties of poor commercial performance.  The Public Accounts Committee investigated this point almost a decade ago, and found that businesses in failure could end up with colossal bills due to Revenue.  In their 2010 report, the PAC established that almost €1 billion of unpaid tax was in play over a 10 year period.  There were some legislative changes to beef up tax collection powers as a consequence.  Before that though a longer term weapon in the Revenue armoury has been its preferential status as a creditor in the event of a company winding up.  However much is left in a company, Revenue will get their share first before other creditors come into the reckoning.  That might seem unfair, except that in a sense, PAYE and VAT never really belonged to the company.  They are either income tax collected from employees in the case of PAYE, or a levy on the customers of the business in the case of VAT. Somewhat unusually (because in many respects the tax rules in our two countries are very similar), that entitlement to be a preferential creditor has not been available to the Irish Revenue's UK counterpart, HM Revenue and Customs.  They are now trying to make a claim to first dibs on the carcass of an insolvent company and the notion is currently a matter for public consultation.  What caught my eye however is that it seems this proposal will not extend to company liquidations taking place in Northern Ireland. A recurring motif of the Brexit debate, at least on the part of some northern politicians, has been an insistence of equal treatment between Northern Ireland and the UK in the context of a Brexit withdrawal agreement.  This has been at the heart of all the trouble over various iterations of the British backstop which if ever agreed to is supposed to deal with the tricky issue of how the border on the island of Ireland is to be managed.  This insistence ignores the fact that Northern Irish and British legislation have been drifting apart over the past several years. It's widely acknowledged that there are differences between Northern Ireland and Great Britain over social issues such as same-sex marriage.  However, this is only part of the story.  Legislation affecting commerce and trade is also impacted. The process of devolution has resulted in the Northern Ireland Assembly having legislative powers in areas including education, employment and skills, agriculture, and economic development.  There is now divergence in the laws between Northern Ireland and the UK because the Assembly has not been sitting, and some of these are not trivial differences either.  Differences in employment law for example touch issues such as gender equality, the powers of employment tribunals and civil service pay.  Sometimes too, a divergence of law could be to the benefit of Northern Ireland.  While the various countries in the United Kingdom have devolved powers in certain areas of taxes (for instance Scotland can set its own income tax rates and the Welsh have powers over some environmental taxes). Northern Ireland is in the unique position of being able to strike its own corporation tax rate of 12.5%.  Again this has not happened because of the absence of the Stormont assembly. Brexit aside, there is a job of work on hand for Northern politicians to ensure that Northern Ireland does not operate differently to the United Kingdom for business purposes.  The power to set a 12.5% Corporation Tax rate is an opportunity to be availed of.  Solutions to most of what is at issue lie within the power of the Stormont Assembly, once it is reconvened and Ministers are appointed.  The best reason for the re-establishment of the Stormont executive is of course to help ensure that further violence does not well up within the political vacuum.  Alongside such a reason, tax pales into insignificance.  But as so often happens, it is the wrinkles and differences in the application of tax and business laws that are highlighting the shortcomings of the current political approach.  Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland

May 27, 2019
Thought leadership

Sunday Business Post, 19 May 2019 Last week, the Revenue Commissioners published their 2018 annual report.  As a government organisation, Revenue were always ahead of the posse in terms of its production values.  They did glossy before anyone else; they used infographics before infographics were either profitable or popular.  The Revenue annual report is now very much like that of any private sector plc – accessible, clear, and striking a careful balance in its tone between diligent responsibility and mild self-satisfaction.   Yet despite the not inconsiderable progress in tax enforcement and collection reflected in Revenue report, the media coverage of it was dominated by a discussion of corporation tax collected.  The dismayed fascination with how much companies pay has become a persistent problem.  It is correct to point out that the corporation tax yield has mushroomed in the past 5 years and that by international standards we collect far more corporation tax as a proportion of total taxes than almost any other European or OECD country.  There’s nothing new here though.  Points of general interest are rarely kindled by mere economic facts, so what is the cause of the national obsession with how much companies pay?  Why should it be a problem for us that others are contributing so much to the Irish Exchequer?  One explanation may be that since corporate profitability and hence corporation tax largesse fell off a cliff in 2008, Irish individuals have been paying the price and will be doing so for a considerable time into the future as we pay interest and inch down the national debt.  It’s natural to be fearful of an overdependence on corporation tax receipts and wary of another cliff fall.  There may also be some degree of puzzlement that despite the attack on multinational tax-planning and profit-shifting across borders, spearheaded by the G20 in 2013, the initiative seems to have generated completely counterintuitive results for this country.  Why is a low tax rate regime now collecting more tax than ever?   It was instructive to hear the opinions on tax expressed this week by candidates for the EU Commission presidency during a televised debate in Brussels.  The current Competition commissioner Margrethe Vestager used the idea of a company tax rate floor for her platform.  During the debate European Regulation Commissioner Frans Timmermans, a Dutchman, sandwiched her remarks with a suggestion for an 18% minimum level.   While some European politicians still reserve their sharpest criticism for Irish corporate tax policy, they should remember that it is directly because of EU policy that we find ourselves in the current position of record corporation tax yields.  It was EU pressure which resulted in the setting of the universal 12.5% rate, so Ireland could prove it was not favouring one industry or business sector over another.  It was EU enthusiasm for the conclusions of the G20-led project to regularise international tax matters that has resulted in multinationals seeing Ireland as a safe and responsible location from a tax perspective.   The flipside of all this is the suspicion that the EU solidarity being shown to Ireland in the face of Brexit will come with a price tag, which could be capitulation on the 12.5% rate.  The theory goes that we should fear the Greeks (and the French and the Germans and the Spaniards and the Dutch and everyone else) when they come bearing gifts of solidarity, because our tax comeuppance may not be too far away.  I think this is unlikely because the other EU countries are at least as prickly about their sovereign right to tax as we areas evident from the cool response from almost all EU member countries to the recent Commission proposal that future tax decisions need not be unanimous.  Perhaps above all else, the crunch reason for the interest in corporation tax is that people don't like the idea of large companies, predominantly multinational and owned overseas, making very large profits and paying little enough tax.  That’s a simple enough question which gives rise to a moral maze of responsibilities and entitlements. If we are to find an exit to that maze, I think we need to acknowledge that every company, no matter how large or where it is owned, is an association of individuals with different types of stakes in the venture.  The more a company is taxed, ultimately the less individuals will have to show for their investment of money as shareholders, or investment of time and effort as employees.  Admittedly that difference, whether it shows in lower bonuses and overtime for employees, or diminished pension funds because taxation has eroded the values of the companies they invested in, may be very hard to see.  All these points are grounds for legitimate concern but not because of the current levels of corporation tax collection.  Rather the concern should derive from the lessons of how the money collected in the past was spent.  To my mind the greatest danger is that ultimately people will bore of the debate, just as they are bored of the Brexit debate now.  We must pay sufficient attention to how this government is applying tax largesse.  Given the seemingly endless funds being directed towards the new children’s hospital and rural broadband, the management of spending is a much greater long-term challenge and problem than the current embarrassment of riches flowing in as taxes from the corporate sector.  Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland

May 20, 2019
Tax

Sunday Business Post 12 May 2019 A business story which got buried in the tangle of the broadband debate this week was the announcement from the Department of Finance of a number of public consultations.  Three consultations on the operation of business tax reliefs are aimed mainly at the small to medium enterprise (SME) sector.  It's hardly surprising the announcement was buried by broadband, if you’ll forgive the mixed metaphor.  The Finance Minister is right in his assessment that rural broadband is actually a business issue with the potential for cascading (probably Exchequer) benefits.  The lack of broadband affects very many while at best, tax incentives for SMEs are a minority sport.  They don't cost the Exchequer much in revenues forgone (at least when compared to the €3bn broadband bill), and relatively few businesses claim them.  So are these tax consultations worth having? It is many years since a senior official remarked to me, perhaps in an unguarded moment, that if there were too many consultations, nothing would ever get done.  He may have had a point.  The consultation process on tax issues has, in the last few years, become something of a mini industry.  They emerge on a frequent basis; the Department of Finance website notes no less than fourteen over the past three years.  This very frequency is a cause for scepticism.  The role of government should be to set policy.  Any consultation on taxation policies invites comments from the audience which might benefit from them - the reverse of turkeys voting for Christmas.   Therefore the integrity of a tax consultation can only be preserved if it is about the mechanics of the relief at issue.  It should be about what elements of policy are workable and what are not.  A consultation should examine not whether a tax relief is necessary, but how, given that it is already government policy, the responses will help make it work better.  That kind of outcome is unlikely, given past experience.  Some tax consultations either fail entirely, miss the point, or layer a veneer of inclusiveness over official decisions.  There have been several Department of Finance sponsored public consultations to do with encouraging people to invest in and develop small Irish enterprise and to avail of tax breaks for doing so.  A review of tax and entrepreneurship four years ago examined precisely the same issues currently under review.  At the time, and many times since then, it has been pointed out by businesses and lobby groups that an investment in a small enterprise is by definition risky.  Where the certification process for eligibility for tax relief makes the investment even riskier, a tax incentive scheme is unlikely to be successful.  The consultation may have identified the problem but it has not been solved.  A 2016 consultation examined the way PRSI is levied on business people.  The official response from the consultation didn’t issue until 2018.  Mercifully, the social protection Minister, Regina Doherty, had better sense than to implement the conclusions the Department managed to draw from the responses and recognised that PRSI is not a tax, but an insurance payment which confers benefits.  She promised instead to re-examine the benefits available to the self-employed, most recently the announcement to extend job seekers benefit. At least this particular consultation prompted a solution to a different problem.  Perhaps the most egregious example of consultation malaise concerns the 2017 Coffey report.  The Coffey report was an examination of the operation of the corporation tax system.  It was commissioned to placate cabinet ministers.  Some in government were uneasy at the 2016 decision to appeal the European commission ruling that Apple had benefited from illegal State aid in the form of tax breaks.  Seamus Coffey's recommendations have been consulted upon in different guises three times since.   There are little grounds for hoping that any of the responses to the three SME-facing consultations now open are likely to bear fruit.  The very short timeframe assigned to the consultations, demanding responses by 24 May suits only those who are sufficiently resourced to respond quickly.  Given that these consultations are targeted at the SME sector, short timeframes make it harder for those businesses most likely to need the reliefs in the first place to make in-depth responses.  Nevertheless, many businesses and interest groups will make time to put in some form of response on these consultations.  Having channels for public input into official decision making is an important component within a democracy, even if those channels are shallow and meandering.  One improvement to the process could be the introduction of a code of consultation principles, similar to the one which operates in the UK which provides undertakings on time limits, responses and actions.  The UK code for instance would have prohibited the current consultations taking place because the response interval spans the local election campaign.   However, if government wants to secure proper engagement with the consultative process, it is not further consultations or codes that are required.  Rather, it is tangible evidence that the comments, observations and suggestions from the consultation process are being heeded. Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland

May 13, 2019
Thought leadership

The Sunday Business Post, 6 May 2019, Cars, I was surprised to read recently, are the EU's number one export to China.  Surprised, that is until I found myself in Beijing on a business trip some days ago.  There may indeed be 9 million bicycles in Beijing (if Katie Melua was right) but to this casual observer there are nearly as many Volkswagens, Skodas and Mercedes-Benz. While much of the focus in the Irish media in recent times has been on tensions between the EU and the US on tariffs and trade, and to a lesser extent on trade disputes between the US and China, it would be wrong to disregard the importance of the Chinese market to European interests.  The EU imports considerably more from China than from the US.  Conversely China buys substantially less from the EU than the US does.  The scale of the imports and exports is mind blowing, and their value is counted in the hundreds of billions of Euro.  It’s strange therefore that last month's trade summit between the EU and China passed off here with hardly any fanfare. By contrast the importance of international trade in China itself is quite literally well flagged.  Driving in to the city centre from Beijing airport, the lampposts are festooned with slogans.  Our lampposts are decorated with posters for the local and European elections; the Chinese lamppost flags promote the trade initiative known as Belt and Road.  Belt and Road is a confusing name for a simple idea.  Belt involves the construction of better infrastructure – rail links and roads primarily between China and its main markets.  Road doesn't refer to roads, but rather to sea routes, and involves the development of ports and ancillary infrastructure.  China lends money and construction expertise and manpower to countries to fund capital investment projects to develop their land and sea routes.  For foreign trade to take place, commodities have to be transported, and merchandise has to be shipped.  The expansion of trading links cannot happen without more efficient transport links and that requires new infrastructure. If their own cities are anything to go by, the Chinese are master hands at infrastructure development.  The metro system is exemplary in Beijing; the docks infrastructure in Hong Kong stretches as far as the eye can see, and that city is also building a third runway at its international airport to boost its existing capacity to deal with airfreight.  While it is not clear that all of this infrastructure activity is well directed, there is no question that the Chinese capacity to carry it out is there.  The April Sino-EU summit outcomes officially signalled that there would be synergies between the EU’s own infrastructure programme and the Chinese Belt and Road initiative.  Some EU member countries are already going further.  From speaking to the Hong Kong authorities, it seems there is a particular interest in establishing direct links with countries on the eastern fringes of the European Union; the likes of Hungary and Poland.  While this Belt and Road initiative is relatively new – it was unveiled by Chinese President Xi in 2013 – it has acquired greater prominence and significance due to the increased trading tensions between the US and China since President Trump took office.  Colleagues on that side of the world tell me that there is nothing in the Chinese media to suggest that relations between the two great nations are anything other than sunny, but local business sentiment may be quite different.  A recent study by accounting firm EY on attitudes within China's industry found that over 50% of businesses felt there was already either a significant or moderate impact of US trade actions on their business.  Perhaps more significantly, approximately the same proportion felt that the challenging trade actions will continue into the medium and long term.  This is prompting some businesses to restructure their Chinese operations.  Tax is of course a critical factor in any such restructuring programmes.  The Chinese tax code is relatively short and straightforward, but dealing with it in practice can be a bit trickier than its brevity might suggest.  There are multiple regions in China, along with other local authorities each with different degrees of taxing rights, and tax rulings change on a regular basis.  In addition, while there is little or no difficulty bringing money into the country, a tight system of exchange controls exist which necessitate pre-clearance for capital and some revenue outflows.  Just like knowledge of customs duties, managing exchange control has been a largely forgotten skill for many traders in this part of the world.  As protectionism continues to supplant globalisation, Irish businesses may well need to develop that expertise again. An ultimately successful Belt and Road programme would reduce China's dependence on US markets and therefore the risk of US tariff threats.  The programme has its critics, with some pointing to the increasing debt burden owed to China by developing countries in particular.  However, no more than as with Trump trade and tax policies, or Brexit policies, business will have to adapt and adjust to this further new dimension to the trading environment.  Future trading opportunities between the EU and China won’t be just about cars. Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland

May 07, 2019
Thought leadership

The Sunday Business Post, 28 April 2019, Some people think that they are an eyesore, but to me one of the most reassuring sights in the country are the election posters which began to appear this week.  They underline that we are living in a functioning democracy, with elected representatives at multiple levels of the administration.  They simultaneously communicate wishful thinking about the future while also being a link to the traditions of the past.  Election posters are immune from the hazards of manipulative social media and fake news.  They are what they are, existing because political candidates and their supporters aren't just keyboard warriors but activists who are prepared to climb ladders (or arrange to have ladders climbed) to communicate their message.   It seems to have become fashionable to disrespect the role of an elected member of the European Parliament.  Announcements of MEP candidate nominations are frequently accompanied by mutterings about that most un-European of sauces, gravy trains.  This does the candidates a disservice. It is true that the European Parliament does not have powers directly comparable with national parliaments but it is not toothless either.  For example, even if the UK government does manage to cobble together some form of withdrawal agreement acceptable to its own political system, that agreement still has to jump hurdles in the political system in Brussels.  The first hurdle will be the easiest to negotiate.  The European Council, made up of the heads of government of the EU member countries, will be the most stable of all the European institutions over the next several months.  Its composition is determined by national general elections rather than Europe-wide polls and therefore in political terms it is the most powerful.  The term of office of Council president Donald Tusk may be drawing to a close, but that's the main change.  It is unlikely to stymie any Brexit withdrawal agreement, partly because only majority agreement is needed in the Council but mainly because the various heads of state will be relieved to have an opportunity to get the withdrawal agreement off the agenda. But the withdrawal agreement will also have to be passed by the European Parliament; by the people we will be voting for in the next few weeks.  After the May elections, the composition of Parliament could look very different to the current make-up, where passing the agreement would have been pretty much a foregone conclusion. There are political groupings in the European Parliament, akin to political groupings in national parliaments.  For a political grouping to form, there must be at least 25 members representing at least one quarter of the European Union member countries.  While the groupings are divided along traditional political lines – largely liberal, largely conservative, mainly left wing or primarily, insofar as these groupings have tax manifestoes, they share remarkable similarities.  They are based on a federalist view of the way the world should work.    The groupings seem to see the EU citizen first and foremost as a consumer, able to choose freely between products and services supplied by companies competing on equal terms.  Tax policy is regarded as a way of funding EU projects and redistributing wealth rather than as a tool to stimulate the economy to provide jobs and to reduce welfare dependency.  The European People’s Party, currently the largest grouping of MEPs (and to which the Fine Gael MEPs belong) want “fair taxes for everyone”.  Big corporations should not get tax breaks or be allowed to take advantage of loopholes not available to everyone.  Corruption, they say, “must be found and removed, both in Europe and around the world, to protect the fairness and transparency of our own European tax systems”.  They go on to promise to “fight” for “fair tax distribution in the Digital Age... the digital giants of our world must pay their fair share of financing our digital infrastructure and future investments in Europe”. This, mind you, is from a right-leaning cohort but is almost indistinguishable from the Socialists and Democrats manifesto which states that “social rights for citizens must take priority over economic freedoms for big corporations… we want tax justice and will continue to lead the fight against tax evasion, tax avoidance and aggressive tax planning.”  In the European Parliament it seems, taxation policy is a war to be fought.   However, while this is all well and good, when it comes to tax the European Parliament only has an advisory role.  Tax is still a sovereign function of national governments, but that is not to say that MEPs do not influence the European approach.  Outgoing MEPs like Marian Harkin and Brian Hayes consistently offered a mature and considered perspective on Irish tax principles and policies during the last term of parliament. That role is perhaps the most underrated function of the MEP.  They are our ambassadors to the political wing of the EU, and to their peers in the parliament.  A European Parliament election is not an occasion to make a protest vote or make a careless choice in the belief that in some way an MEP’s task is unimportant.  Granted, neither the local nor the European Parliament elections have as much significance in this country as a general election, but the audience for MEPs is wider than the election posters might suggest.   Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland

Apr 29, 2019
Thought leadership

The Sunday Business Post, 14 April 2019, The gig economy undoubtedly has benefits, but it is not a universal blessing.  New ways of working and earning – gig, trading and sharing activity typified by the likes of eBay, Deliveroo, and Airbnb – mean different things to different people. They can provide better service and bargains for consumers, new opportunities to make money or a better return on property.  They also prompt a whole range of questions about issues like data protection, workers’ rights and of course taxation.  In developed countries, the taxman will never be too far away from wherever money changes hands. One of the functions of the OECD is a coordinating role, bringing together the heads of tax administrations of the OECD member countries to share knowledge and experience derived from what's going on in their territories.  This group meets frequently (it met last month in Chile), and among its current topics for discussion is the gig economy.  That’s not too surprising because revenue authorities always prefer formal arrangements and by definition, gig economy and sharing economy arrangements are relatively informal.  The companies offering the platforms and facilities are typically established, regulated and compliant and are not the issue.  The tax risk is where money is made by individuals participating in the gig economy, but who might not be registered for tax purposes anywhere.  Others using their spare time for gig economy activity are PAYE workers, where the responsibility for tax compliance on their wages largely rests with the employer.  That means that many participants in the gig economy may be unfamiliar with, or choose to be unfamiliar with, the tax responsibilities which arise when money is made.  Not only that, because some goods and services like accommodation are traded across borders, money leaks out of the local economy and ends up being taxed nowhere. Some years ago, the UK authorities dealt quite elegantly with these problems by simply declaring that earnings under £1,000 from the gig economy would be exempt.  But that, at best, is only a partial solution. Failing to tax the gig economy is not just a tax issue.  Untaxed commercial activity confers an unfair advantage over businesses which do account for and pay over their tax properly.  It's about creating a level commercial playing field.  The aspiration among the OECD revenue authorities seems to be to sort out the gig economy activities while they are still a relatively small part of total business activity.  Rather than looking at the activities of individual taxpayers, it seems that the revenue authorities propose to engage what they call the platform sellers – the coordinating organisations which provide the applications and the infrastructure to make the commerce happen.  Up to now, very few countries have introduced specific tax rules to catch gig economy activity, preferring instead to run advertising and awareness campaigns.  The power available to the Irish revenue to obtain information about people providing short-term accommodation through the likes of AirBnB is quite unusual.  The idea of targeting platforms and organisations rather than individuals is a tool to keep tax systems working.  Just as in the case of employment, where it is easier to deal with individual employers who are far fewer than individual employees, it is on the face of it far simpler for a revenue authority to target the big-name website than the individual on the bike or in the car.  This though is where the problems start to arise. The legal relationship between employer and employee is readily identifiable and clear-cut, but the relationship between the contractor and subcontractor is much more problematic.  Not just in Ireland, revenue authorities have been attempting for years to design regulations to ensure that contractor and subcontractor transactions are fully taxed.  The construction industry is a particular case in point with its extensive use of subcontractors – hauliers, plasterers, electricians and the like.  There remain problems across industries like entertainment and IT in establishing when an individual is an employee, or whether instead they are truly self-employed.  When we add into the mix the nature of a platform provider within the gig economy framework, where the organisation is often neither a contractor nor an agent but a facilitator, revenue authorities may rapidly find that their information gathering and policing exercises fall foul of legitimate data protection and privacy concerns.  Information garnered via untargeted information requests from companies, or trawling websites and online advertising won’t always provide the evidence that can make tax assessments stick.  Nor will “soft law” measures like asking gig economy providers to subscribe to a tax code of conduct likely be enough to provide robust tax controls for growing and sometimes unregulated sectors. While we’ve now got quite used to popular protest against tax avoidance and tax planning in the corporate sector, I suspect we are some distance from seeing campaigns mounted against the tax evasion possibilities of the gig economy and calls for “something to be done”.  The genesis of the problems being addressed by proposals for digital taxation to be paid by multinationals and the current work of the tax authorities marshalled under the OECD banner against the gig economy is exactly the same – technology has outstripped the capacity of 100 year old tax rules.  The next front in the battle for fair taxes won’t involve tax authorities challenging corporations working across many territories, but challenging occasional landlords, taxi drivers and couriers working in the gig economy.  Let’s see if that receives a universal blessing. Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland

Apr 15, 2019
Tax

The Sunday Business Post, 7 April 2019 It’s rare that a tax announcement offers reasons to be cheerful. Not for the first time, it strikes me that being a Minister for Finance can be a fairly thankless task.  Take the experience of this week.  The Minister announces that he's not going to revalue houses for the purposes of Local Property Tax in 2019, so our LPT bills will be the same next year as they are this year.  Surely this is good news.  On first principles, local property tax bills should go up because property valuations have gone up.  The current local property tax bills are based on the valuation of properties, arrived at during the absolute property nadir in 2013.  In 2019 those valuations are lower than they should be.  A 2019 revaluation could prompt local property tax bills to increase by 50% or even more depending on the area in which you live.  But who is thanking the Minister? Not the Opposition, apparently, who accused the Minister of playing politics with the tax system during what could be an election year.  Nor were there any rounds of applause from property sector pressure groups.  They could legitimately have welcomed a pause in the upward march of property taxation which could, among other things, drive up rents.  And perhaps, not even the Minister's own officials might thank him because he did not follow their advice.  The report of the interdepartmental group on LPT published this week actually recommended that a revaluation would take place this year, albeit with some compensating tweaks to try to ensure that a relatively limited number of taxpayers might react with outrage at the prospect of higher bills.  One of the concerns of the officials was the integrity of the manner of collection.  It’s not robust tax policy to enforce property taxes based on out of date information, hence the administrative need for a 2019 revaluation. Furthermore, while the Office of the Revenue Commissioners isn't usually disposed towards welcoming anything, Revenue officials must have breathed a small sigh of relief that they had one less thing to cope with in a year which could include Brexit.  Revenue have enough on their plate with additional customs and trade controls without having to work through the logistics of revised rates and revised valuations.  It’s much easier for taxman and taxpayer alike to recycle last year's files and deal with the same charges in 2020 as in 2019. The Minister had another option available instead accepting his civil servants’ report or deferring the LPT changes.  He could simply have abolished LPT entirely.  That would, I suspect, be quite a popular move and a fairly certain vote-getter.  This is not as crazy as it might sound.  LPT contributes relatively little in terms of the country's overall tax take – less than half of one percent.  Last year's take from LPT was less than €500 million.  The value of the changes to the universal social charge and to the income tax rate bands made in the last budget was about €300m. In a buoyant economy, abolishing LPT rather than tweaking the income tax system would be affordable, certainly if carried out over two years. From a tax administration perspective, the LPT system has provided Revenue with a wealth of information on the taxpaying public that it would not otherwise have had, and prompted the development of new ways to collect tax out of state payments.  That information and those methods would still be available even if the rate of LPT was nil.  LPT was part of the response to the troika bailout programme.  This month’s Exchequer returns underline that we are safely out of that.  However, retaining LPT (even if deferring necessary reforms) reflects some kind of government commitment towards keeping the tax base as broad as possible.  The idea behind a broad tax base is that some tax, no matter how little, is collected from as many people and businesses as possible.  It’s not safe to concentrate all the burden of taxation on relatively few taxpayers because if those taxpayers get into trouble, so do the Exchequer receipts.  The Minister’s own arguments in favour of a broader tax base in fact surfaced elsewhere recently, in a review published by his department on the Irish taxation system generally.  Nevertheless, the reality is that in the past few years we have narrowed rather than broadened the tax base by taking people out of the tax and USC system.  There are good social policy reasons for not demanding taxes from the low waged, but equally there are good public policy reasons for not becoming overly reliant on relatively few people.  The 80-20 rule still persists in Ireland – about 80% of the taxes are collected from about 20% of the population.  LPT redresses this balance a little, because it demands some contribution from more people in our society. Persisting with a property tax even though increases have been deferred is a significant signal of the importance of keeping a broad tax base.  It’s rare that a tax announcement offers reasons to be cheerful, but this is one of them. Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland    

Apr 08, 2019