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