Tax

In the rural Midlands where I grew up there was a strong folk memory of the 1930s economic war between Ireland and Britain.  A refusal by the Irish government under DeValera to pay the land annuities, which were essentially loans that had been made to Irish farmers under the various Land Acts to buy their holdings, led to the British in turn imposing tariffs and quotas on Irish agricultural produce.  Back then, the results of these tariffs on rural Ireland were calamitous, particularly for the Irish beef industry.  I was reminded of this folk memory when reading the latest Brexit report from the ESRI this week.  A large part of the focus of the report has to do with the impact of Brexit on the trade in goods between Ireland and Britain.  A disproportionate share of goods which attract tariffs are traded between our two countries, relative to the trade between Britain and other EU member countries.  Just as was the case during the economic war of the 1930s, it is the Irish agriculture and food sector which is most vulnerable to tariffs and which could suffer the most when the World Trade Organisation rules start to apply. The closer we get to Brexit, the easier it becomes to identify the precise shape of the possible outcomes.  The ESRI research distinguishes between the consequences of a Brexit with a deal, a Brexit without a deal, and a disorderly “off the edge of a cliff” type Brexit where there is an absence of planning and phasing.  Many of the consequences make for depressing reading, but this piece of research is not all doom and gloom.  In particular, it identifies two aspects, neither of which received much by way of headlines in the media coverage perhaps because they are not gloomy enough, but which really deserve more attention. The first of these is the impact of Brexit on foreign direct investment into Ireland.  In a clever piece of analysis, the ESRI identifies the sectors in which the UK is particularly good at attracting investment from abroad.  Chief among these are banking and investment services followed by professional and support activities, food production, mining and manufacture.  The underlying assumption, and it is a fair one, is that by virtue of losing membership of the EU, the UK will also lose some of this foreign direct investment.  The ESRI then maps these sectors against the sectors where Ireland punches above its weight in terms of attracting foreign direct investment relative to the other EU 27 member states.  The mapping suggests where Ireland might be best positioned to take up some of the losses. The conclusion drawn by the ESRI is that manufacturing, pharmaceuticals, administrative services and professional activities in Ireland could do well from the Brexit fallout.  To support these activities there is also the suggestion that, relative to its newly non-European neighbour, Ireland could become a very attractive place for skilled migrants to locate.  I have spoken to several executives in the US and Canada in recent weeks who cannot understand why Britain is seeking to cut off a ready supply of people skills from the European Union by restricting free movement.  The ESRI research echoes that sentiment. The second aspect that I think should be highlighted comes across almost as a throwaway comment towards the end of the document.  This is the assumption that there will be no reaction on the part of firms or government that could help to mitigate some of the economic impact of Brexit.  The analysis is based on business behaviours remaining static in the face of the new trading regime, but they are not remaining static. This is by no means to criticise the report.  The ESRI has drawn together several moving parts in both the British and the Irish economies to paint a coherent picture of likely outcomes. Their message that ultimately Brexit benefits no one, not least the British, is valid.  However it is equally valid to note the preparations which Irish industry is already making to mitigate exposure – from relocating warehousing and manufacturing plants, to relocating employees, to establishing new supply chain arrangements.  Many businesses are already engaged in this kind of activity, but equally many have not taken such steps preferring instead to wait and see the outcome of the political debates.  They do this with some justification, as restructuring costs which may turn out to be unnecessary are a waste of money.  For the same reason, industries which have already restructured in anticipation of Brexit will not reverse their decisions, investments and spending if Brexit turns out to be soft, or in name only, or does not happen at all. From the point of view of the national finances, the biggest risk signalled in the report is the impact of Brexit on jobs growth.  Employment has been the key driver of government finances since the recovery started.  This nation pays its way from PAYE, VAT and excise receipts, all of which grow at times of growth in employment.  When the tariff barriers went up between our countries in the 1930s, less than £5m sterling per annum in land annuities were at stake.  Now the stakes are very much higher, but the economic relationship is also far more complex.  Ireland can manage the damage of Brexit in the 2020s much better than we could the damage of the economic war in the 1930s.  Brexit is not a repeat of past history. Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland

Apr 01, 2019
Tax

The Sunday Business Post, 24 March 2019, Being in New York City around St Patrick's Day, little enough local news gets an airing compared to the wall to wall coverage of the Parade and the celebrations.  Successfully breaking through the wall of shamrock though were comments by the New York Mayor Bill De Blasio about the use of incentives to attract business.   Cities and states across the US compete aggressively with each other for jobs and investment using tax incentives, infrastructure undertakings and grant packages.  In the US, local government really means something and local authorities and mayors have significant resources and significant control over how resources are deployed.    It was big news here a few weeks ago when Amazon decided to pull out of building a major headquarters in New York despite a very generous package of incentives.  Making the news this week was a project called Hudson Yards, a new 28 acre complex of office buildings, apartment blocks and shops on the site of a former railway yard on the west side of Manhattan.  According to the New York Times, the tax breaks and other government assistance for Hudson Yards have reached nearly $6 billion.  A big part of that was to do with extending a subway line to the new venue, along with some tax sweeteners for the companies promising to locate their businesses there.  The project is now largely complete, but while Mayor Bill de Blasio was initially a supporter of the Project, he is now talking about re-evaluating state and local economic development programs.  It is as if the incentive regime has gone too far.   He may have a point.  The kind of government largesse which New York City can dole out can really only be dreamt about on the island of Ireland.  That's because, even in a post Brexit situation, neither the UK nor the Irish administrations will be inclined, either by law or by temperament, to provide tax breaks for any one development or any one company.  The main reason for this is of course the EU rule which curtails providing selective state aid.    State aid is all about having a level playing field across Europe for all citizens and companies.  The playing field cannot be level if all the playing field is located in one particular EU country or city.  Even though, at the time of writing, the eventual departure date for the UK coming out from under the EU umbrella of rules and regulations is still in doubt, it strikes me as unlikely that the UK will want to wander too far from EU expectations and norms as it tries to hammer out its future relationship with the EU.    It can't be stated often enough that the EU/UK withdrawal agreement would be better described as an extension agreement – providing a window of opportunity for the negotiation of the future relationship.  In the context of such negotiations, a UK government offering New York style incentives say for Liverpool would not go down well with representatives of the EU governments who can't put in place similar incentive packages for Limerick or Lyon or Lisbon.   Nor is it just the State Aid rules which have a bearing on what EU countries can and cannot do.  Some EU rules become almost invisible, because in many respects they are profoundly uninteresting.  Included in this category are directives which pasteurise and homogenise the approach to taxing companies across Europe.  Some EU tax plans do make headlines – like the attempts to put in place an EU wide corporate tax system called the Common Consolidated Corporate Tax Base, or the proposals on how to tax high-tech companies in the so-called digitalised economy.  But in tax terms the real success of the EU in recent years has been getting cooperation and collaboration between its tax authorities on the one hand, and between the Departments of Finance and Treasuries on the other.   There is one potential problem with all this worthy initiative at EU level.  It may not be in the best interest ultimately of EU citizens.   While the authorities in New York were busy working away at extending rail lines, the EU Competition authority vetoed the proposed mega-merger of Germany’s Siemens AG and France’s Alstom SA’s rail businesses last month.  Disquiet at this decision in French and German government circles is understandable.  It seems legitimate to point out that such a merger was more about challenging competitors from outside the EU than about preserving competitive advantage within the EU itself.   Nor is this a new phenomenon.  It is almost 15 years ago the Irish government was obliged to withdraw a grant offer to a major US multinational because of state aid rules, even though it appeared at the time that Ireland was the only country within the EU in play for the investment.  While free for all competition is not always a good thing when it comes to some goods and services, particularly social services such as transport, having too many restrictions on competition is not good.    There is a balance to be struck between overzealous competition regulation, and overgenerous subvention of the type which is now causing concern to Mayor De Blasio.  The evidence from the past month is that authorities on both sides of the Atlantic are not getting that balance right.   Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland  

Mar 25, 2019
Tax RoI

The Sunday Business Post, 17 March 2019 The British Government’s post-Brexit customs proposals published this week are little short of bizarre.  Unilateral decisions on a tariff regime fall some distance outside international trading conventions.  If the proposals were ever implemented, Britain could wave goodbye to any prospect of new trade deals with other countries post Brexit.  While one of the great promised advantages of Brexit was a new British capacity to strike its own trade deals, no established economy will agree tariffs and quotas with Britain while the land border on the island of Ireland is so ill defined. However, this focus on the movement of goods may mean we are looking in the wrong direction.  The local narrative on these islands has been about the disruption to the flow of goods across borders, and the impossibility of carrying out rigorous checks while still holding an open border on the island of Ireland.  The success of the EU as a single market has been far more pronounced in goods rather than services, but it may well transpire that the services market will be the defining issue for the UK as it comes to terms with its brave new world post Brexit. On the West Coast of the US, businesses are wondering above all else why the UK is choosing to restrict free movement of people.  This perspective, from business representatives I spoke to in the San Francisco Bay Area this week, may be more clear-sighted than our local concerns.  The sharpest consequence of Brexit for Britain might have less to do with trading in goods than the curtailment of that nation’s capacity to export services by choking the flow of immigration. Freedom of movement of people within the EU has never been about the mere lifting of passport controls at borders between member countries.  Rather, it has been about the entitlement of individuals to secure work, or to secure social benefits like unemployment benefit, family assistance or housing.  Of course there are obligations associated with providing these benefits, both for the recipients and for the host countries that provide them.  Those obligations are worthwhile in modern economies which are far more service-oriented than goods-oriented. When it comes to the challenges for business around the Bay Area the recurring motif is all to do with the availability of staff.  There is no apparent shortage of work, particularly for qualified people.  When a services industry is choosing to locate or expand, the availability of workers is often more important than access to markets or tax breaks.  Services can be delivered without necessarily having to be local to the market which consumes the service.  But services have to be generated somewhere.  Britain will point out, and with some justification, that it has a coherent immigration policy which is designed to attract the kind of workers that the government considers most appropriate.  Generally speaking, migrant workers have to be skilled, have a sponsor, some independent means, a knowledge of English and the wherewithal to apply for a work visa in the first place.  An immigration policy is vital as choking off the supply of labour at a time of practically full employment makes no economic sense.  Neither does it make sense for a government to decide, almost arbitrarily, that only workers capable of earning over a set amount (in the UK that's approximately 30,000 sterling) are the kind of workers that the economy requires.  Using measures like salary to discriminate between who should and shouldn’t work in a country is a fairly blunt instrument.  For instance there is no point in having a series of tax incentives for companies to locate in your country if those companies cannot attract workers.  From speaking to executives in Silicon Valley, the main challenge they now see when it comes to expansion is about workers willingness to move, rather than the tax advantages of one country over another as was the case for so many years.  As one executive put to me, for her business the tax planners no longer steer the foreign investment decisions.  Increasingly it is down to the human resources personnel. In a hard Brexit, many EU workers (though not Irish workers apparently) will have to apply for settled status.  Even if the proposed immigration restrictions are lifted, how confident will workers from Europe be about remaining in, or relocating to, the UK?  Many will also be concerned about the prospects for their families or dependents.  This is bound to have a knock-on effect on the British export services industry. It will also have a knock-on effect on the Irish services industry.  It has been noted in Washington this week that a hard Brexit means that we will be the only English speaking country in the EU with unfettered access to workers from the other 26 member countries.  That may turn out to be a colossal competitive advantage for this country. It is correct to be profoundly pessimistic and worried about the consequences for Irish trade in goods, particularly agri-food, post a hard Brexit.  The trade in services is a different matter entirely. Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland.

Mar 19, 2019
Tax

Sunday Business Post, 10 March 2019 Almost all of the current Brexit diplomatic and negotiation efforts, at least as they are being reported, centre around the issue of the backstop and whether or not the UK will ever be able to finally cut its ties with the EU of its own volition.  If only that were the only problem. The preoccupation with the backstop has gone beyond dangerous.  Rather than selling the overall withdrawal agreement, all the political narrative has been all about securing a piece of paper from Brussels which will contradict the November advice of the UK attorney general Geoffrey Cox.  He raised the red flag that the backstop provisions in the Withdrawal Agreement might endure indefinitely.  Even if, in the alarmingly short period of time still available, that piece of paper can be obtained from Brussels, will it be sufficient to secure the passage of the withdrawal agreement? This focus on the backstop which is an element of the withdrawal agreement that might never be implemented has deflected attention from the contents of the withdrawal agreement itself.  For the period of the withdrawal agreement, the UK will be signing up to what in effect is taxation without representation.  Britain will have to agree to the rules and tenets of the European Union just as before, except without any democratic say in the process of their continuance or creation.  That is a woeful position for any country to find itself in, even if it is only for a temporary time-limited period.  It is only viable for one reason, and that is that the alternative – to leave the EU without an agreement – is far worse. While some Brexiteers regard the European Union as an enforcer of undemocratic control, it is equally valid to argue that the European Union is permissive.  It permits free movement of people, of goods, and of capital across borders.  It permits planes to land, professionals to practice in countries other than their own, and licenses for everything from busses to pharmaceuticals to be recognised across the boundaries of the EU countries.  Whether British politicians realise the extent of the disruption when these permissions cease is in large measure down to the work of their civil service. On Tuesday last, the chief executive of the UK revenue authority HMRC told the Westminster Public Accounts Committee that he simply did not have enough staff to deal with a no deal Brexit.  With three weeks to go, that is a shocking admission because it is the work of the revenue authorities which largely keep the EU trade in goods flowing for all practical purposes. While HMRC have published plans aimed at keeping roll on roll off trade moving at three key ports (Holyhead, Dover and the Channel Tunnel) those plans rely on importers and exporters doing exactly the right thing at the right time.  Those UK plans also rely on what can only be a temporary easing of some customs controls and restrictions with the goodwill of other EU member states.  This week, French customs officers showed us what happens if that goodwill is lacking.  A work to rule resulted in queues of lorries, some of up to 7km on both sides of the English Channel.  One customs officer on the continent with a bad attitude can quite literally stop the cross channel flow of goods. Furthermore, nothing has been published which will cover how the UK revenue authority will police the border on this island.  One explanation for this is that there is an unwillingness to prejudice discussions and negotiations around the withdrawal agreement.  As the deputy head of HMRC Jim Harra observed, again to the Westminster Public Accounts Committee, the policy steer is lacking.  But another explanation is that they simply don't know how they can do it. There were stark warnings from the head of the Civil Service in Northern Ireland, David Sterling who warned of increases in unemployment, serious risks to business and a disruption to civil society in the event of a no-deal Brexit. Business is struggling with the issues too.  Wednesday’s Construction Industry Federation report suggests that more than two out of every three construction businesses have not undertaken any form of Brexit impact assessment or urgent preparation plan.  Because 29 March is imminent, the focus on short-term fixes and bridging solutions like temporary extensions to the Brexit deadline is understandable.  However the broader context has not gone away and is far more serious.  The withdrawal agreement is itself designed to create breathing space for the negotiation of a stable future trading relationship between the UK and the remaining 27 by extending de facto British membership of the EU to 31 December 2021.  But if there are such difficulties with the withdrawal agreement with 21 days to go, how does that augur for a comprehensive future relationship being agreed in 21 months? It seems that the British civil service is becoming as vocal as business in its warnings over the consequences of a no-deal.  We will know next week from the proposed Westminster votes if the politicians are on the same page.    Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland

Mar 11, 2019
Tax RoI

Sunday Business Post, 3 March 2019  One of the many unintended consequences of Brexit is its creation of a catechism of cliché.  A government must be “strong and stable”.  A backstop can only come in one flavour – Irish, even though the backstop is in fact British.  The Irish Government’s “Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Bill 2019”, designed to keep the administrative show on the road should Britain leave the EU without a deal, is being described as a “mammoth bill”.  In fact the Bill, better known as the Brexit Omnibus Bill, which was published last week is not particularly big.  We’ve seen something like it before.  The change of currency and the change of tax year at the start of this century prompted a similar flurry of bureaucratic legislation in the 2001 Finance Bill.  That year, along with the usual Budget rigmarole, the Finance Bill was used to change references to punts to references to new-fangled euros in the tax law.  It also changed the start of the tax year from 6 April to the more sensible date of 1 January.  All of these ideas – changing the currency, moving the tax year, correcting for a no-deal Brexit - are easy to articulate.  But articulating them in such a way as to ensure the enforcement of the law of the land is a different matter.  Finance Act 2001 ran to 410 pages.  By comparison the Brexit Omnibus Bill is a 72 page weakling.  15 of those pages deal solely with tax. Because of our shared membership of the EU, and therefore our shared participation in the freedom of movement of goods, capital, services and labour, almost every tax incentive and relief available in Ireland must also be made available across the European Union.  There are EU rules which prohibit one member country favouring its own citizens and businesses over those of another member country, and these too have a bearing on our tax law.  Post Brexit, some of the links in Irish tax law to Britain have to be fixed. Just to take one example: the transfer of a farm on the death of its owner can attract a lower effective rate of inheritance tax for an Irish taxpayer.  But because of the way EU rules work, it doesn't matter whether the farm is located in Limerick or Lincolnshire, the tax relief still has to apply.  One of the considerations for the officials drafting the Omnibus Bill was to determine which tax reliefs currently available where EU assets and interests are concerned should continue to apply to British assets and interests.  Should a farm in Lincolnshire still qualify for Irish inheritance tax relief? By and large, the Omnibus Bill is quite generous in this regard.  It ensures payments to Irish taxpayers from some British public compensation schemes remain exempt.  Irish employees of British entities will retain an opportunity for tax relief on their shareholdings.  Reliefs for seafarers will remain even if they are working on British registered ships. On the other hand, anyone looking for new reliefs in the Omnibus Bill is going to be disappointed, but with one very important exception.  In the event of a no-deal Brexit, businesses importing from Britain will be able to deal with VAT on their purchases in just the same way as if Britain had not left the European Union.  If anything, the surprising feature about the omnibus Brexit bill is that it is so short.  We spent over 40 years removing much of the bureaucracy in the way we deal with the other EU member countries.  Two years ago, the bureaucracy involved in dealing with Britain was added back in by the pencils of 17.4 million British voters in the Brexit referendum.  These 72 pages are designed to curb the worst excesses of that rediscovered bureaucracy. Nor has our legislature sought to smooth our future relationship with Britain by allowing government ministers to fix things as they go along, as UK legislators have tended to do.  The main British legislation addressing the practical realities of Brexit is known as the EU Withdrawal Act and contains so-called Henry VIII clauses.  These confer great power on the British Minister of the day, with less recourse to Parliament.  I am in the chorus of people hoping that the Irish Brexit Omnibus Bill will never have to be applied in practice, because a deal will be struck between Brussels and Westminster which will make its implementation unnecessary.  But even in that event I suspect the work in putting together the Omnibus Bill will not have been totally wasted.  No agreement on any EU/UK future relationship can be as comprehensive as the existing EU treaties, regulations and directives which govern the current relationship.  There will be gaps to be filled in as we continue to deal with our nearest neighbours and most significant trading partners.  No matter what the final outcome of Brexit negotiations, there are elements of this Omnibus Bill which may have to be pressed into service at some future date.  After all, as the cliché goes, Brexit means Brexit.   Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland

Mar 04, 2019
Thought leadership

When the history of the early 21st century is being written, I wonder if commentators will identify the rise of protectionism as a phenomenon.  We have seen a dwindling of confidence in liberal trade values in the last decade.  This has made it difficult to get the likes of TTIP, the proposed new US/EU trade agreement across the line.  CETA, the trade deal between the EU and Canada, almost fell at the final hurdle when it came to be ratified.  By contrast in the preceding decades, liberal trade values resulted in international conventions and trade deals being drawn up which facilitated rather than restricted cross-border trade, both in goods and services.  The financial crash in 2008 undermined confidence, not just in the financial sector but also in the global industrial model.  There is no longer a general acceptance that industry will give the right results for most people, most of the time.  The growing dominance of protectionism as a form of control over the business sector is manifest in new employment law, data security law and privacy rules.  None of these developments are necessarily wrong in themselves, but everything from Brexit to the threatened and actual US trade sanctions, to the General Data Protection Regulations are all the facets of the same intent to keep the corporate sector properly in its place.  However, protectionism has been built into tax systems from the start.  There are the obvious examples like customs and excise, but national interests are also built into mainstream business taxes. One of the longer standing controls over multinational business is now up again for review.  This week the Department of Finance announced a public consultation on the anti-transfer pricing tax rules. Anti-transfer pricing rules are designed to ensure that multinational groups of companies producing and selling in multiple territories cannot tweak their own profit margins, thereby ensuring that their overall group profits accrue mainly in countries with a low tax rate.  It makes commercial sense to have the bulk of profits in a group accruing in a territory where they will be taxed more lightly. Transfer pricing is not a new phenomenon.  Rules to tackle it have been in existence for a century.  Here in Ireland, we didn't introduce anti-transfer pricing legislation until about a decade ago.  There was a simple reason for this.  Countries with low corporation tax rates tend not to need anti-transfer pricing legislation, as profits are rarely shifted out of low tax-rate jurisdictions so that they can be taxed in high tax-rate jurisdictions.  Nevertheless, partly to ensure a level playing field, anti-transfer pricing rules have been in effect here since 2011.  In common with most cross-border tax rules in recent times, they have been subject to scrutiny from the OECD and the EU, and changes have been proposed to ensure they remain fit for purpose. At first glance, this shouldn't present a particular problem for Ireland.  But even though our 2011 rules were introduced in accordance with international standards, and indeed linked directly into those international standards, standards and thinking have changed.  Some of the changes now proposed came from the Coffey review of Corporation Tax conducted some years ago. Going through the consultation document, I think that there are two main issues where Irish business should have concerns.  First of all, anti-transfer pricing has typically been regarded as a cross-border problem, where groups of companies operate in countries with varying tax rates.  Now on the agenda is what should happen if a country charges one rate of tax on one particular type of activity, and a different rate of tax on another.  That's the case in Ireland, because so called “passive” corporate income (investments, interest, rents and the like) is taxed at 25% whereas trading and manufacturing income is taxed at 12.5%.  Moneys paid between Irish group companies taxed at these different rates could now come under scrutiny, without there being any cross-border element to them. The second issue is scale.  Generally speaking, anti-transfer pricing rules don’t apply to small and medium sized enterprises.  Those are companies with less than 250 employees and with relatively small turnover and balance sheets.  There is a proposal that this de minimis threshold is now to be removed.  That would be a significant new compliance burden which would be costly on smaller entities. The timing of this particular consultation is not ideal.  Irish businesses have much more to contend with in the face of a potential no-deal Brexit than having to wonder about whether they might be caught under new anti-profit shifting rules.  Ironically the thinking that underpins anti-transfer pricing legislation is precisely the same kind of thinking that underpins some UK government statements this week, threatening tariff barriers on agricultural imports post Brexit to protect its own agriculture sector.  In the same way, anti-transfer pricing is all about keeping commercial activity and the tax that accrues on it within national borders.  The transfer pricing issue arises most of all where there is free cross border trade.  Anti-transfer pricing law is an expression of protectionism.  Transfer pricing is one of the very few tax problems which protectionism actually helps solve. Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland

Feb 25, 2019
Tax RoI

Sunday Business Post, 17 February 2019 Businesses take a keen interest in any rule change which might impact on their income and how they collect it.  The same holds true for governments whenever changes are proposed at an international level on the cross-border tax system. Details of such proposals materialised this week in the form of an OECD consultation on the taxation of the “digitalised economy”.  The OECD, under an initiative sponsored by the club of wealthy nations, the G20, has been looking at the issue of how to tax companies operating in the digital economy for quite some time.  The issue was a strand of their Base Erosion and Profit Shifting project (BEPS) which commenced in 2013.  BEPS has driven many changes in the international tax landscape, not least the outlawing of some of the more egregious devices used by multinationals to move profits into low tax jurisdictions, or take them out of the charge to tax altogether.  However BEPS was inconclusive on how the digital economy might be taxed.  This consultation is part of a second attempt to work it out.  In effect it’s BEPS 2. It's useful to bear in mind how the current tax system works to better understand what BEPS 2 is about.  At the moment, companies are taxed, like individuals, based on where they reside.  Sorting out where an individual resides is usually straightforward – you count the number of nights spent in a country and if a particular threshold is passed, the individual is deemed to be tax resident there.  It’s a question of fact.  The tax residence rules for companies are little different, and have to do with where the company is incorporated, where it is managed and controlled, and the extent to which it might have a physical presence (like a shop) in another country.  These rules still work fine for the most part.  If I buy a product from a company in Ireland, the profits arising to the company on the sale of the product are taxed in Ireland, and that is the end of the matter.  But trade in a digitalised economy is not so straightforward.  Consumers in Ireland can buy products locally, or can order online from companies in almost any corner of the globe.  Not only that, some services can be purchased and delivered entirely online.  Do the tax residence rules for companies still give all the right answers for the exchequers of countries where the business is being done? Some think not, and that companies should be taxed more by reference to where their markets are, rather than where they might have a management or physical presence.  That's an attractive proposition for larger economies with larger markets (and remember the OECD work here is sponsored by the larger economies).  For smaller countries such as Ireland, this line of thinking might not be such a source of delight.  However, the experience of BEPS 1 has not been negative for this country.  Corporation tax receipts are solid and make up some 18% of the country’s overall tax take, which is high by international standards.  There are lessons from BEPS 1 which may be usefully applied in considering the taxation of the digital economy under BEPS 2. The first lesson is that countries which don't play ball with the OECD process quickly fall out of favour.  I've yet to see compelling evidence that BEPS 1 resulted in multinational companies paying more tax overall, but what is clear is that the manner in which the tax was distributed across countries changed.  Countries like Ireland which adopted BEPS initiatives quickly, thereby granting some certainty to companies and their investors, seemed to fare better.  Whatever else we do about the BEPS 2 process, we have to engage with it. The second lesson is that even acknowledging when changes are necessary, individual countries will jealously guard their own interests.  No government will willingly surrender national revenues in the interests of achieving a nobler international tax system.  In practice, that means that changes to tax law as a result of BEPS have tended to be incremental rather than radical, and that in turn should mean that companies will be able to cope with many of the possible future outcomes.  And finally, the approach of the US to BEPS 2 is critical.  I believe that the previous Obama administration may have been less enthusiastic about the BEPS process than the current Trump administration.  As one observer put it this week, albeit in a different context, “America First” doesn't necessarily mean “America Only”.  As well as reducing the headline corporation tax rate, the US Tax Cuts and Jobs Act of 2017 also carried out some heavy lifting towards eliminating cross-border tax arbitrage.  US Treasury officials certainly regard their new company tax rules as BEPS compliant.  Whatever steer or leadership the US provides to BEPS 2 will be key to its success or otherwise. Perhaps the main concern that Irish businesses should have about BEPS 2 is the increased compliance burden to cope with future tax rule changes, and the costs that will inevitably follow.  On past experience, much of the additional work of dealing with cross-border corporation tax will be devolved by revenue authorities to taxpaying companies.  That overhead will offer little commercial benefit to the companies affected.  If only for that reason I'd encourage any company with international trade of any scale to take a look at what the OECD is proposing, and offer some comment.  These proposals are of interest, both from a commercial standpoint and nationally.  It would be a shame if the BEPS 2 outcomes hamper Irish interests simply because we failed to engage. Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland  

Feb 18, 2019
Tax RoI

The Sunday Business Post, 10 February 2019, Governments love PAYE.  Most workers are caught in the vice of the PAYE system.  Not only is the yield predictable but PAYE tax hits the government coffers in a steady stream during the year.  It doesn't come in in big unpredictable lumps like corporation tax payments or income tax paid by the self-employed.  As this week's exchequer returns showed, it is a major component of the total tax take (in Ireland's case about 25% of the total) and therefore must be jealously guarded.  This is a large part of the reason why the Irish PAYE system was “modernised” in the last few weeks.  More employers now have to provide more information in more structured ways, using new upgraded payroll systems.  For smaller employers in particular, PAYE modernisation has had genuine nuisance value with little or no commercial benefit for them. If you are an employee of almost any description, the PAYE rules apply.  The obligation falls primarily on the employer to make sure PAYE is properly accounted for and paid over.  So tight are the rules that it is virtually impossible to wriggle out from under them.  But that hasn't stopped people trying, and one of those attempts in particular is causing significant grief in Britain at the moment where the PAYE rules are very similar to those which apply in Ireland. The gist of a UK tax planning scheme currently in the news is that, instead of paying money as wages, a complicated offshore structure was set up which provided the individual with loans instead of wages or salaries.  While wages are always taxable under PAYE, monies advanced via a loan are not.  As an employee, or even as a deemed employee, a loan isn't much good to you if there is an obligation to pay it back.  However the terms of many of these loans were such that the debts were unlikely ever to be repaid. If you take tax payable at rates of up to 50% or more out of the equation, such schemes become highly attractive.  Add to that the sidestepping of social insurance contribution obligations, known as national insurance in the UK, (a heavy debt for many employers), the apparent benefits to everyone except the British Exchequer are enormous.  A cottage industry sprang up in the UK to organise and facilitate these arrangements, with promoters taking a fee of as much as 20% per annum to set up the loan structures and keep all the paperwork and so on in place.  The schemes were apparently particularly attractive in the IT industry, which makes extensive use of subcontractors. For the PAYE system protection reasons I outlined earlier, the UK revenue authorities took a very dim view of these arrangements.  In Budget 2016 the UK announced that the law was to be changed with effect from 6 April 2019 to make it clear that these loan arrangements would no longer be effective for tax purposes and that redress would be sought via the imposition of tax, interest and penalties under the loan charge legislation.  The 2016 announcement created what in effect was a three-year opportunity for people to sort out their tax arrangements before the new legislation kicked in from April 2019.  The individuals had to either repay the loans they received from schemes (an impossible task for many given that some of these schemes had run for almost 20 years) or come to a settlement with the UK revenue.  It's reported that about 25,000 individuals have gone down the settlement route, but a large number have not.  When the three-year window closes in April, the total cost of final settlement arrangements could result in a tax charge at an effective rate of almost 80%.  That doesn’t leave people much to live on. Although drowned out somewhat because of Brexit chaos, there is debate in the UK over whether this UK revenue authority tactic is fair to the individuals involved.  The crux of the fairness argument seems to be that these individuals were engaging in tax avoidance (which is legal even if not acceptable or effective) rather than tax evasion (which is illegal), yet the settlement terms are more comparable to those which apply in evasion cases.    Another strand to the argument is that usually it is employers rather than workers who should come under scrutiny where there have been attempts to avoid PAYE.  The House of Lords Economic Affairs committee got in on the act and in a report at the end of last year criticised HMRC for treating individuals unfairly.  The UK revenue authority HMRC seems to believe that it is right to take the action it is taking as people should have known what they were doing wasn't normal and carried a risk.  Nevertheless, in the face of growing political pressure, the British government has signalled in the past few days that the approach being taken to tackle these schemes will be reviewed. There are points to be drawn from this episode for taxpayers and administrators alike.  For taxpayers, if a tax dodge is too good to be true, then it probably is.  But for tax authorities, if their action to tackle tax default comes across as too harsh or aggressive, they can't count on the unwavering support of the political system.  That’s the case, no matter how much a government might love the tax. Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland  

Feb 11, 2019
Tax

Sunday Business Post, 03 February 2019, As the drama of another Brexit debate was taking place in Westminster this week, more realistic business was happening quite literally across the street.  While the UK Parliament is seemingly oblivious to the fact that its 27 EU partners have ruled out the prospect of renegotiating the existing Withdrawal Agreement, its civil service is more pragmatic.  The UK Revenue Authority, HM Revenue and Customs (HMRC), last Tuesday convened a briefing for business organisations to set out exactly what they plan to do in the event of a no-deal Brexit.  HMRC's plans are important, because it is the tax system which enforces the mechanics of the customs union and much of the mechanics of the single market.  Customs duties, excise duties and VAT operate to ensure that countries within the EU trade with each other in the most favourable terms.  Whoever pulls the strings on these taxes is in effect working the drawstrings of Brexit. Nor was this a routine briefing.  The proceedings were opened by the UK’s minister for taxation, the Financial Secretary to the Treasury, Mel Stride MP.  The attendees were told that the briefing would cover what would happen with the trading arrangements between the UK and the 27 other EU countries.  Except for Northern Ireland, that is.  The briefing would only cover the trading relationship between Northern Ireland and 26 other EU member countries.  The enforcement of trading arrangements between Northern Ireland and Ireland in the event of a no-deal Brexit would not be presented.  The North is indeed a special case, but perhaps not in the way its politicians would like. It is quite clear that the priority of the UK revenue authority is to keep trucks moving after 29 March, and give priority to key links between Britain and Europe – via Holyhead, via Dover and via the Channel Tunnel.  The amount of new paperwork to comply with WTO rules will be phenomenal.  Existing customs arrangements and the rules for rapid transit, under what is known as the Common Transit Area, will be pushed to the limit.  The Common Transit Area is significant for this island because its smooth operation offers the possibility of Irish importers and exporters using Britain as a land bridge to Europe without multiple customs checks and charges.  All of the plans outlined in the briefing can, in theory, work.  But for them to work, every single trader using UK ports, whether in Britain or overseas, will have to cross all the t’s and dot all the i’s in their paperwork, declarations and payments.  Will this happen?  Not a chance. Up to now, the UK authorities had been operating on the basis that approximately 135,000 British businesses with EU customers and suppliers would be dealing with customs regulations for the first time.  We learnt on Tuesday that that estimate has been revised upwards to 250,000.  If even a small proportion of these businesses fail to do their customs homework right, their lorries will be stopped.  Once that starts to happen, queues at the ports will start to form.  And once that happens, supply chains will break down, deliveries will be missed and perishable goods will not be fit for market. There are two sides to every border.  The British “no deal” arrangements seem to assume maximum goodwill on the part of the remaining 27 EU countries.  I wonder.  Might, for example, the French authorities jib at goods coming in to French ports from the UK delivered on pallets which have not been properly certified?  That might sound like a trivial quibble, but the EU already insists that goods coming from EU friendly Norway (a member of the single market and a significant contributor to the EU budget) are delivered on approved shipping materials.  This is just one example of how it will be so easy for EU customs officials to find fault on the basis of paperwork and standards on anything moving out of the UK. The UK authorities are promising to implement some special tax measures for British traders on imports from the EU (and elsewhere) in the event of a no-deal Brexit.  There will be new rules allowing British traders to spread VAT payments on EU imports.  VAT and customs will be charged on many low-value parcel deliveries coming into the UK from abroad which were previously exempt.  The British government's notion is to protect retailers on their high streets.  That kind of protectionism won't endear the UK to suppliers from the rest of Europe. The UK will not “crash” out of the EU on 29 March without a deal as EU Brexit negotiator Sabine Weyand suggested during the week.  It will instead grind to a halt.  Those of us who attended that HMRC briefing were asked to spread the word about the information and resources on the various UK government websites which provide for a no-deal Brexit.  The briefing was neither foolish nor ill-advised.  These plans are devised by committed and talented civil servants, but who are facing an impossible task if their parliamentarians just 200 yards up the road continue to make reckless demands. A no-deal Brexit will end not with a bang, but with a whimper. Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland

Feb 04, 2019
Tax RoI

Sunday Business Post, 27 January 2019 A senior EU spokesperson, Margaritis Schinas, claimed earlier on this week that a no deal Brexit meant there would have to be a hard border on the island of Ireland.  Why was anyone surprised? A customs union is a political and commercial arrangement.  If it is to work, the borders of the countries of the customs union must be preserved in the same way as any individual country’s borders must be preserved, to secure the well-being of that country's own citizens, culture, interests and government.  You can't lease a plot of land without having established the boundary.  Similarly you can’t license greater access to a market, as a customs union does, without a clearly defined boundary to that market. The EU is right to view the possible dilution of any part of the customs union boundary with profound suspicion, as border security is fundamental to EU membership.  Accession countries cannot join the EU without undertakings to secure their customs boundaries.  Further, it's a condition of accession to the EU for a country to introduce the EU VAT system, which itself serves as a mechanism to protect EU businesses providing goods and services to consumers within EU boundaries.  If, for example, Italy were to decide to leave the EU, France, Austria and Slovenia, as the EU countries with land borders to Italy, would be expected to put border customs controls in place.  There is nothing personal towards the British going on here. This is a reality that cuts both ways.  Remember that the UK in large part wants to leave the EU customs union to do its own trade deals with the rest of the world.  The UK has little prospect of cutting trade deals with reputable trading countries under WTO rules unless it can show that its own customs border is secure.  If the UK wants to broker new arrangements with, say, the US, or Japan or Australia or New Zealand, it will have to show those countries that it can protect its own customs borders.  It may turn out that the main motive for establishing border controls on the island of Ireland will not come from the EU, but rather from the British themselves.  The only potential succour for any of us embroiled in this sad spectacle is to contemplate what a border really means for customs and tax purposes.  The key point is that a customs border does not have to be along a hard geographical line.  It may be easier to enforce if it is, but perhaps it's not an indispensable condition.  While the situations are not identical, think for a moment about how we police the income tax system for people coming in and out of the country.  Largely it's done by self-assessment.  Either the individuals themselves, or their employer declares that the person is within the charge to Irish tax when they're here, and pays up accordingly.  There is no one performing income tax residency checks as people enter and exit the country.  It is an oversimplification to say that similar self-assessment arrangements could operate to police the transit of goods from north to south on this island, but the fact remains that not all of the checking has to be carried out at customs posts at Newry or Strabane or Pettigo.  Judging by the comments of Revenue Chairman Niall Cody at an Oireachtas committee this week, self-assessment declaration arrangements subject to checks seems to be preferred approach of Revenue.  Much of the checking can be done by advance declarations, and customs checks taking place at factories and warehouses rather than at border crossing points.  Customs is an administrative procedure, and therefore a customs border can be enforced by administrative procedure in many cases.  (There are important exceptions to this, particularly where sanitary or health checking is required.) On the other hand, the suggestions that are mooted from time to time by politicians that the whole issue can be resolved through technology are foolish.  If it could, it would already have been done.  Consider the checks and controls between developed countries like Norway and Sweden, between the US and Canada.  If technological approaches could be applied to solve all customs surveillance requirements, don't you think they'd already be in place? One merit of the EU spokesman’s comments has been to focus attention on the real-life consequences of what the former UK Chancellor of the Exchequer, George Osborne, has described as the Russian roulette of a no deal Brexit.  This week's announcement by UK entrepreneur and prominent Brexiteer James Dyson that he is moving his company’s headquarters to Singapore is another such warning as was the announcement that Sony is to relocate its European headquarters out of the UK.  The business community is tiring of waiting for a political solution to problems with borders. We need to be clearer on the distinction between a customs border and border controls.  No deal Brexit means there must be border controls on the island of Ireland, imposed by the Irish to fulfil our EU obligations.  A free trading Britain also means that there must be border controls on the island of Ireland imposed by the British to facilitate their trade deals.    The controls are a necessary but a dreadfully wasteful application of time and resources both for the public sector and the private sector alike.  The EU spokesman Margaritis Schinas was right.  In a no-deal Brexit scenario the political process cannot eradicate the need for border controls.  Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland    

Jan 28, 2019
Tax

Sunday Business Post, 20 January 2019 I'm studiously trying to avoid any comment on the Brexit shenanigans this week on the other side of the Irish Sea.  It is not easy.  From travelling back and forth on a regular basis over the last two years, I've been struck by how difficult it is for many Brexiteers to articulate their reasons for wanting to leave using any kind of concrete examples.  They may claim they wish to take back control, but when it comes to the specifics of the controls they want back, often they are at a loss. Feeding that unspecified unease are the many ill-conceived initiatives European Institutions regularly dole out.  Some of these offer ample excuse to even the most committed Europeans to want out.   Whether it was with a keen sense of irony, or mere tone deafness to the political situation in Britain, the European Union gave us a new reason to dislike it this week on the same day as the substantive Brexit vote. When EU law is formulated, consent from all of the EU countries is required.   About 80% of all EU legislation is adopted through a procedure known as qualified majority voting or QMV.  As with everything EU based, there are some small wrinkles and exceptions under QMV, but in general 55% of the member countries have to agree, and the countries in agreement must represent at least 65% of the EU population.  For the other 20% of new rules, unanimity is normally required.  For instance all of the EU member countries must agree on the accession of a new country to EU membership.  Taxation across the European Union also fits in to the unanimity category, but unanimity is hard to come by.  Tax is a sovereign competence, closely guarded by national governments who quite rightly prioritise the needs of their own exchequers.  But the Commission is now proposing that taxation decisions be taken by QMV rather than by unanimous agreement. It seems to me that the Commission has been its own worst enemy in how it has justified this proposal.  They claim that citizens demand action in the fight against tax avoidance and tax evasion.  This ignores the very significant tax enforcement changes across the EU in recent years.  A large volume of cross-border information is now flowing between the revenue authorities in EU countries since the implementation of an EU directive on administrative cooperation which has been in effect since 2014.  Try opening a foreign bank account or buying a property in the EU without notifying Revenue, and see how you get on.  Another justification offered is that qualified majority voting on tax would in some way make for more democratic decision-making.  That’s not right either.  Every Finance Minister, Treasury Secretary or Chancellor of the Exchequer in every EU member country has to push their own tax legislation through their own national parliaments.  This is about as democratic as it gets. Nor is the Commission’s claim that QMV could lead to a stronger single market fully credible.  The single market is all about the capacity to compete, and the US experience bears this out.  No one would deny that the US is a colossally powerful single market, but there is no impediment to the states of that great country competing with each other to try and attract investment and jobs.  In fact, individual US state governments have a latitude for so doing that many a European finance minister could only dream of. One of the Commission’s pleas should ring alarm bells by virtue of its title alone.  Whenever you see “fairer taxation” offered as a justification, you can take it to mean that somebody else ends up paying.  The international tax debate has ceased to be about how much tax is paid, but is rather about where tax is paid.  Displaced taxation doesn't make for fair taxation.  Wrapping up the series of justifications is the expressed desire for the EU to become a “global leader”, whatever that means. A lack of self-confidence permeates the whole policy.  Moving the basis of EU tax policy agreement from unanimity to QMV suggests lack of confidence in the governments of the EU member countries to do the right thing when it comes to taxation.  The proposal also signals a lack of confidence in what has already been achieved.  There has in actual fact been significant progress made at EU level on taxation matters affecting all EU member countries.  EU directives on administrative cooperation, which mandates the tax information sharing I've already mentioned, are now supplemented by the Anti-Tax Avoidance Directive.  This newer directive is already taking hold and is extinguishing the opportunities for multinational companies to arbitrage tax regimes across Europe.  These directives got through the European system without any particular hindrance from the decision-makers in the various countries.  QMV was not required, as unanimity could be secured. The timing of the Commission’s QMV proposal is also suspicious.  While the current Commission only has months to run, late stage policies or thinking may be adopted and retained by the new Commission due to be formed towards the end of the year.  The great virtue of the current unanimity requirement is that it serves as a policy gatekeeper.  Only the most coherent strategies need apply.  Tax policies must fundamentally make sense, economically as well as politically.  Introducing QMV on tax matters invites the possibility of incoherent or deferred policy-making by the EU institutions.  And if you think that incoherent or deferred decision-making on key issues is ever a good idea, again look across the Irish Sea. Dr Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland

Jan 21, 2019
Thought leadership

Sunday Business Post, 14 January 2019, This week saw a continuation of the shutdown in government across the US.  It isn’t terribly unusual for US government offices, services and facilities to be suspended, curtailed or even temporarily shut down from time to time because Congress couldn't agree funding.  However, in the past, the political conflicts giving rise to the shutdown got resolved relatively quickly.  The building, or not building, of a wall on the southern US border which is the root cause of the current impasse may take a little while longer to sort out. A government shutdown at this time of the year also involves the shutdown of the US revenue authority, the IRS.  Shutting down a revenue authority, however gleefully the idea might be received by some taxpayers, ultimately suits no one.  That's particularly the case in the US.  Because of the vagaries of the US income tax-withholding system for employees, many workers find themselves having overpaid tax in the tax year.  My colleagues in the US tell me that about 70% of the 150 million or so income taxpayers in that country end up due a refund, and most US taxpayers get an annual rebate in the order of some $3,000.  That’s a substantial sum and refusing citizens that kind of money, or even delaying its repayment, tends to get governments into a lot of trouble.  So the system, as it does so often, heals itself.  There is a special rule which allows for the permanent appropriation of funds to ensure that tax refunds can be made by the IRS, even if other branches of government have been shut down.  As a result, the tax-refund process continues to operate as per normal even though many other government functions fall victim to the dearth of government funding. Perhaps it’s because of the coercive nature of tax that the governments of democracies, across the world, tend to tread carefully both in its administration and enforcement.  Unexpected tax changes rarely end well.  A hike in fuel oil tax in France provoked the reaction of the Gilets Jaunes in the past several weeks which resulted in rioting, tragic deaths and disruption and ultimately a policy volte-face from the French president Emmanuel Macron.  In the light of that experience, the French authorities would have grounds to be concerned at how the new PAYE system in France, introduced on 1 January last, might be received.  From this month French tax payers will, for the first time, be paying much of their tax via a PAYE system comparable to the one in operation in this country, rather than via a lump sum payment in the middle of the year.  It helps that due to a vagary in timing, many French income taxpayers will end up paying slightly less during 2019 than they might otherwise have done.  But in the French case the change involves the collection of €70 billion, as estimated by some sources, in income tax.  Getting something of that scale wrong is bound to give the authorities pause for thought. For these kinds of reasons, countries introduce new tax law gingerly.  In this country special provisions operate for Finance Bills to ensure that any new tax rules have particular checks and balances and the Minister for Finance of the day has particular control over the bill as it makes its way through the houses of the Oireachtas.  A similar system operates the UK, but as we saw this week, it is not sacrosanct. After more than 40 years of EU participation, it's hardly surprising that UK domestic tax law is heavily influenced and reliant on European rules.  Many aspects of UK tax law rely on European regulations to operate.  Of course, when the UK leaves the European Union, those regulations will no longer be valid.  This week, campaigning MPs targeted an innocuous clause in the Finance Bill currently going through the Houses of Parliament.  The clause had proposed that the UK tax authorities could fix any holes left in the rules because of EU law ceasing to operate.  Defeating this clause ensures that this kind of ad-hoc fixing can only be done when a Brexit deal has been made between the EU and the UK. You might say that seems, at best, to be a technical victory, but its significance derives from the fact that the amendment was made despite the protected structures of the Finance Bill process. The change was secured without the consent of the Chancellor of the Exchequer.  If measures in an Irish Finance Bill were overturned like that, there’d probably be a general election called.  It's yet another instance of how the orderly business of government is breaking down in contemplation of the impact of the Brexit decision. As the Brexit deadline looms ever closer, and the windows of opportunity become more compressed, there must be some in the UK establishment who would crave the kind of government shutdown being experienced in the US.  The shutdown has nothing to recommend it except that it is commanding public attention through public hardship, thus forcing political heads being knocked together and hard decisions being taken.  That is exactly what the Brexit process now needs. Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland

Jan 14, 2019