In the media

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

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

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

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

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

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