Thought Leadership News

  Originally posted on Business Post 23 May 2021. The Common Consolidated Corporate Tax Base is getting a new title— Befit. But a lack of real change suggests a naïveté and mission creep on the part of the European Commission There can only be two motives for tax. The first and most obvious is fiscal, the second is purely political The word “fair” was on almost every page of the short European Commission communication to its political masters last week. Modestly titled Business Taxation for the 21st Century, it sets out the Commission’s current policy on company tax issues. Unlike regulations or directives, which have legal and binding effect, a communication ranks fairly low in the hierarchy of EU pronouncements. But it is rash to overlook them, because they often serve as harbingers of future mischief coming down the tracks from Brussels. There can be really only two motives for having a tax policy. The first and most obvious is fiscal – the necessity to raise taxes to pay for government and its services. The other motive is purely political. Such tax policies are intended to drive behaviours, or at least to signal official concerns at emerging behaviours in an economy. Last week’s imposition of a 10 per cent stamp duty rate on houses purchased by investment funds is a good example. The new levy won't raise a lot of additional money for the exchequer. It is noticeable that the additional amount that might be collected has been largely absent in the debates. The EU itself will have a pressing need for additional taxes in the coming years as the costs of the pandemic response programmes, funded by Brussels, come home to roost. At the moment, EU costs are mainly met by direct national contributions along with elements of customs and Vat, but that is likely to change. While ideas on how to do this are touched upon in the document, EU funding is not its main focus. Rather, the emphasis is on ensuring that member countries play fair with their business taxes. The political motive for raising taxes is sometimes used to cloak a more unpalatable fiscal motive. This is true of recent US tax announcements for their multinationals. It's appealing to American voters to promise to raise taxes to ensure companies pay a fair share, but the real drivers are the multitrillion-dollar investment and recovery programmes planned by the Biden administration. It's hard to know if the Commission document is genuinely about using taxation as a lever for economic reform, or merely about taking in more money. The question might be easier to answer if there was any new thinking evident in the Commission’s proposals. In fact there is not. It notes that it is following the OECD agenda on corporate tax reform, but that has long been the case. The ideas for a revised approach to calculating corporate profitability across the 27 member countries are not original either. A project to do that called the Common Consolidated Corporate Tax Base has existed for more than 20 years. Now it will have a catchier title – Befit (Business in Europe: Framework for Income Taxation). A name-change doesn't necessarily make something work better, however. This name-change is illustrative of a curious air of naïveté about the whole process. The Commission’s thinking feels like a textbook economic exercise which doesn't recognise either commercial realities or the different needs of its member countries. It may well have a point when it says it wants to migrate the corporate tax system to favour equity funding rather than loan funding, but it is the market that has prioritised loan funding over equity funding, not the tax system. The emphasis on formulaic approaches to calculating the distribution of corporate profits across the single market is not realistic, given the disparity of economic requirements across the European Union. For instance, the economy of Malta is radically different to the economy of Germany. How can a single apportionment formula work across such differences and offer a fair result? As the Commission points out, such apportionment methods are used in the US to help determine taxability between states, but the US is a country. It is not an economic bloc. When it comes to taxation policy, the Commission appears to be looking in the wrong direction and succumbing to mission creep. It should be focusing on what it can control rather than what it clearly wants to control. Both customs policy and Vat policy are entirely within the control of the EU institutions. Europe's external trade policy is controlled by customs and Vat. Trade policy is at least as important as an internal policy on company taxation, yet external trade does not feature in a communication purportedly about business taxation for the 21st century. Maybe external trade does not fit in with the Commission's vision of what needs to be fair. The communication bemoans that only 7 per cent of taxes collected in the EU come through corporation tax. It’s a complaint that rings hollow for a country like ours, where the corporation tax contribution to the total tax take is closer to 20 per cent, with a tax regime that underpins our employment and industrial strategy. Maybe this too is unfair in the Commission’s eyes? Beware of anyone who promotes fair taxation. Ultimately, it might be you they are after.   Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

  Originally posted on Business Post 16 May 2021. The wholesale purchase of estates is a serious problem, but there are many reasons for the high cost of homes, and the most important is lack of supply Beware of name-calling. Pension funds, clearly, are good; so-called cuckoo and vulture funds, clearly, are bad. However, pension funds, vulture funds and cuckoo funds are all versions of the same thing. Large investments call for the large-scale pooling of resources, or otherwise the investments could not happen. That can be done by the state, or by the private sector and one way for the private sector to do it is to form a company. The company raises money through issuing shares, corporation tax is paid on the profits and whatever is left gets taxed a second time when dividends are paid to the shareholders. Another way is to create an investment fund where the income from the investments gets taxed only once. That is when the returns are paid out to the unit holders of the fund. This is undoubtedly a big benefit to the unit holders. Yet if property investment funds did not have this kind of tax arrangement, it is likely there would be less capital in the Irish property market to build houses, just as if pension funds did not have such tax arrangements, putting aside money for retirement would be even more expensive than it is now. This is not to suggest that the wholesale purchase of housing estates, as highlighted by this newspaper, isn’t a serious social and political problem. An investment fund, by definition, will have far more purchasing power than any individual first-time buyer. The purchasing power of Irish Real Estate Funds (Irefs) and Real Estate Investment Trusts (Reits) was most evident in the commercial property sector up until relatively recently, but that has changed. Foreign investors in the Irish property market who use investment funds are more likely to pay tax in their home country rather than here, which is also a legitimate cause of unease. Nevertheless, the cost of housing is a result of many factors, the most important being supply. The behaviour of investment funds in the Irish residential property market is not purely because of tax incentives. It is because the Irish residential property market is currently a solid investment opportunity. Not only is it a good bet now, but it is also likely to remain a good bet over a five- to ten-year horizon because it will take time for supply to ramp up. If tax policy has not created the current problems, it is unlikely to fix them either. Successive Irish governments have aggressively used tax policies in attempts to manage the residential property market since the early 1980s. That we still have supply problems shows how futile these attempts have been. We started in the 1980s with capital reliefs for investment in residential property. The supply improved, but the quality arguably did not. The availability of cheaper money in the mid-1990s resulted in a rapid rise in property values, leading to the then notorious Bacon report which called for increases in stamp duty and reductions in tax reliefs. After all that, we still couldn’t avoid a property crash in 2008, but now changes to the property tax regime are on the government agenda yet again. Based on the experience of the last 40 years, tax measures on their own will be ineffective in resolving the current crisis. Over the decades, the costs of construction have gone up for a myriad reasons. Construction standards are far higher than they once were and having planning permission is no longer a reliable signal that construction can commence. Additional taxes, either on property purchases or on rental property returns, may well swell government coffers in the short term but they won’t do anything to bolster supply. It is worrying to hear opposition parties call for tax increases and restrictions on the activities of investment funds with apparently little thought for anything other than the political optics of the situation. A primary reason for the introduction of the Reit was to attract new sources of non-bank financing to the Irish property market. If that was the case at the time of its introduction, in 2013, it is even more the case now in the context of the withdrawal of Ulster Bank and KBC from the Irish market. Any tax policy changes should be aimed at promoting supply by reducing development costs rather than punishing investment, whether those investments are made by investment funds or, for that matter, anyone else. A tax payment holiday for developer PAYE and Vat costs could be offered until a housing development is fully completed and sold. There might be merit in allowing enhanced tax deductions against the cost of training workers in the construction industry or for providing safety equipment. An upfront tax deduction for the capital cost of the heavy plant and machinery required in the industry, as operated in the 1980s, could also be reintroduced. Such tax changes can only help, but not completely solve, the dilemma of providing affordable housing. The ultimate answer lies in either directly providing additional state funding for property development, or the state facilitating its supply; one such model is the government’s Home Building Finance lending facility. It does not lie in name-calling investors, nor in short-term tax hikes to quieten political opponents. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

  Originally posted on Business Post 2 May 2021. We can’t afford to be fatalistic as the OECD negotiations unfold. There are plenty of reasons to hope we won’t end up €2 billion out of pocket. Last week, writing in this newspaper, the Minister for Finance noted, perhaps with some fatalism, that changes in the international tax environment might mean that the Irish corporation tax take could drop by as much as €2 billion a year. At this early stage in negotiations, fatalism may be inappropriate. Other competing jurisdictions may have higher rates, but they also have generous tax breaks. A low-tax rate jurisdiction is not the same as a low-tax jurisdiction. This fact is often overlooked by our international competitors – which is understandable – and by some of our domestic pundits – which is unforgivable. Neither coterie tends to notice either that the prevailing rate of corporation tax on investment returns from financial assets and property is 25 per cent, and the rate on capital gains is 33 per cent. In 2019, the application of these higher rates accounted for some €2.5 billion of total corporation tax receipts. While these facts reinforce the economic validity of the Irish approach, they cut little ice in the political debates with our international competitors. The minister’s comments were of course prompted by the renewed impetus given to OECD-sponsored discussions on the future cross border tax regime by US president Joe Biden’s ‘Made in America’ tax plan. There were signals last week that the German, French and Canadian governments might not be hostile to the new US proposals, but that isn’t the only cloud on the horizon. The EU coronavirus recovery fund, valued at anything up to €800 billion, will have to be paid for in some shape or form. The European Commission has been toing and froing on some proposals for new taxes to be paid directly to the Brussels coffers. These are the extension of the carbon-trading scheme, a carbon border adjustment mechanism, and a digital tax. The common denominator is that if one or more of these were to gain any traction, they would land at the door of the corporate sector. Then there is the domestic problem of how to compensate for losing up to €2 billion in corporation tax receipts. The overall tax take in this country cannot be reduced, in the foreseeable future, mainly because of the additional pressures on our social welfare system, our health system and debt servicing costs. We cannot just keep borrowing. Put bluntly, if we collect less tax from companies, we have to collect more tax from individuals. The 20 per cent income tax rate would have to go to 23 per cent, or the USC rate for everyone would have to be pushed up to 9 per cent to find €2 billion. But maybe the problems can be avoided. The last time the deck of international tax rules was shuffled under an OECD project, Ireland was a winner. So far, the Irish position has been successfully defended against EU encroachment on tax sovereignty. A narrative was emerging that Ireland’s position on tax matters within the EU is more feeble with our traditional ally in such matters, Britain, having left the bloc. But what did Britain do as soon as it got out from under the apron strings of the EU, but raise its own corporate tax rate. Even without Britain, the Minister for Finance is not without his supporters and allies. Are we underestimating the importance of having the chair of the Eurogroup of Finance Ministers and the clout that can bring to international economic discussions? We may also be underestimating the possibility that an international pushback against the Biden proposals might develop despite the early signals. One potential alternative is to take the discussion of a special corporate regime for digital companies – the Googles, Amazons and Facebooks of the world – off the agenda and instead apply a special levy on the top 100 or so entities worldwide. If this was to happen, it might take some of the heat off the US multinationals as US-headquartered companies would almost uniquely have been the target of a digital tax regime calculated by reference to where products and services are sold. Still, the US is home to one third of the top 100 companies on the Fortune 500 list. So any such revised approach might also push the likes of Volkswagen of Germany and Total of France into a putative higher tax spotlight. This may not entirely suit the Germans or the French, not to mention the Chinese authorities whose companies make up one quarter of the top 100 companies on that list. Higher tax rates are a double-edged sword. Here in Europe we tend to think of the US as an investment supplier, but in fact the US is among the world’s biggest destinations for foreign direct investment. With its proposed higher rates, the US will be a much less inviting place for a foreign investor, unless a universally applied minimum effective tax rate across the world, which is another wing of the Biden proposals, takes hold. That is a very big ask for any country, even the US, to make. The US will surely not want to become less competitive as an investment destination. Similarly, for the sake of the 2.4 million people employed by companies in Ireland, we cannot become less competitive either. We cannot afford to lose any employment and we cannot forego tax revenue of the scale of €2 billion. Fatalism has no place as the corporation tax negotiations unfold. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland