Thought Leadership News

Originally posted on Business Post 10 October 2021.   Our circumstances today share numerous parallels with 1991, when Albert Reynolds delivered the first ever televised budget speech Corporation tax receipts up by an unexpected 40 per cent, inflationary pressures driving a bigger social welfare package, a two-tier corporation tax system, and disputes over pension payments. No, not 2021, but 1991, when the late Albert Reynolds delivered his budget speech, televised for the first time. This Tuesday will be the same. There will be an economic update and forecast along the lines of “not too bad, but could be better”, a helpful reminder of the wonders achieved by the government in the previous 12 months, and some tinkering with tax bands and reliefs along with some social welfare enhancements and spending commitments. Is the budget day equilibrium established by Reynolds 30 years ago still appropriate for a nation which has more than twice as many people employed as in 1991, more than two million extra citizens, and eight times the tax receipts? When it comes to tax policy, neither the Irish economy nor the Irish voter is particularly amenable to any type of radical change. Big initiatives fail. The universal social charge, for example, is little more than a way of squeezing more income tax from a system constrained by having only two tax rates, 20 per cent and 40 per cent. The guiding principle behind local property tax, meanwhile, seems to be that it should not raise too much money. Water charges, a tax in every respect other than their name, failed to get off the ground at all, while we still tinker with stamp duty rates in the hope they might have some impact on the behaviour of our property market. This is a triumph of optimism over experience. Since the Reynolds era, however, our control over interest rates and exchange rates has been surrendered to the EU. Last week, we conceded partial control over a third lever of economic policy, the setting of tax rates. To its credit, the government seems to have ensured that this concession on corporation tax was not made lightly. It would have been simpler for Paschal Donohoe to go along with the 130 or so countries which had already signed up to the OECD twin track proposals to tax the very biggest companies where they make their sales, and to tax the top tier of industry at a rate of at least 15 per cent. The 12.5 per cent rate had acquired totemic status here as an element of economic policy, but Ireland is not alone in having to abandon its totems. The European Commission surely had to take a deep breath when it signalled it would permit our application for a lower rate for smaller companies under the new plan. A twin-track tax system runs counter to EU states aid principles – favouring companies falling within a particular category over others was the reason we had to abandon the old, reduced rates of corporation tax in the 1990s. The allegation that Ireland offered preferential treatments is the rationale behind Margarethe Vestager’s pursuit of the Apple “tax as state aid” case. The commission should now do the decent thing and drop the appeal. The acceptance of the headline points in the OECD plan is one matter; how they are to be implemented is quite another. The European Commission will transpose key elements of the agreed position at OECD level into a directive for adoption by the EU member countries. Other aspects will be achieved through international treaties. That is a lot of ground to cover. Ireland’s active participation in these negotiations will be crucial, but Ireland will not be the only country with concerns. Estonia, another EU member, only signed up this week too. None of the changes announced on Thursday will have an impact on exchequer receipts any time soon. By pushing the corporation tax crisis out of the way for now, Tuesday’s budget can be formulated along more traditional lines. Though the shadow of the pandemic still looms across society and the economy, don't expect too much radical thinking. Rather than addressing the fundamental question of whether people are paid enough in this country, expect to see some tinkering with the tax bands. Rather than seeing pension funding being put on a model which reflects the nation's demographics, expect to see further tinkering with retirement ages and the benefits package. Ireland doesn't do alarms or surprises on Budget Day. With the prospect of a two-tier tax system for companies, the Reynolds equilibrium is being fully restored. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Originally posted on Business Post 20 June 2021. Given Ireland’s pandemic-related national debt, significant income tax cuts in the near future seem unlikely, but moving abroad to work remotely will not always result in savings either. As if it wasn't enough to have ongoing upheaval over corporation tax, events are now conspiring to push the income tax burden into the spotlight. Tánaiste Leo Varadkar has been warning that Ireland's personal tax rates are a major disincentive for attracting mobile workers. Highly paid workers, he believes, could avail of new remote working possibilities to move overseas. Any government minister should be wary of losing high-paid executives from this economy. Broadly speaking, Ireland operates the 80/20 rule when it comes to tax receipts from individuals – roughly 80 per cent of income tax is paid by the top 20 per cent of earners. In common with some other countries, Ireland has tax measures for foreign executives coming in on assignment. A special assignee relief programme, or SARP, allows people coming into this country to have part of their income ignored for tax purposes, provided certain terms and conditions are met. Numbers in the public domain suggest that just under 600 jobs were eligible for SARP in 2018. Given that there were some 2.7 million employees in the country before the pandemic hit in early 2020, SARP doesn’t appear to be making a huge difference either to overall employment, or to the overall tax take. Whatever about coming in, what about people who might leave the country because of the increased acceptability of remote working? Every other day, companies are announcing policies to permit their workers to work remotely from their homes for a proportion of the working week or working month. It's not clear, however, that this will translate to a mass exodus of largely white-collar, higher-paid workers from the jurisdiction. Except for company directors, who are always caught by the Irish tax system irrespective of where they live, taxing rights are usually determined by the employee’s place of residence rather than their place of employment. A worker in Mullingar who emigrates to Marseille, while still working remotely for their Westmeath employer, will be subject to French income tax and not Irish income tax on the earnings. The position of social welfare contributions (PRSI) and the corresponding entitlements is not as clear cut as that of income tax and may differ from country to country. The position also gets tricky if the work involves travel to meet clients, customers or suppliers. Tax-free reimbursement of travel expenses in Ireland is only permissible where the travel is from the normal place of work, which can become problematic for remote workers, even within the jurisdiction. Moving abroad will not always achieve tax savings. An OECD study of the income tax and social security paid by single workers on the average wage in 2020 shows that the tax take in Ireland is more or less in the middle ground by international standards. A person moving from Ireland to Germany or Belgium or Austria will have a lot less after-tax income to spend than if they had stayed put. The difference is mainly due to social security contributions. That person might fare better by moving to Australia or Britain or Canada, but only marginally so. Higher-paid workers may do better than their counterparts on average pay, but few territories offer workers a tax crock of gold. Any telecommuting move, of course, depends on a willing employer. A recently published study from the University of Chicago, analysing personnel and analytics data on professionals in the IT industry, found evidence that while the total hours worked by people working from home did increase, the average output did not significantly change. Not only that, time spent on coordination activities and meetings increased. In short, there seems to have been more management, but less productivity. It is unlikely that company employment and benefits policies will require significant adjustments if a person is to work three days from the house and two days from the office. However, if the person wants to move to another jurisdiction entirely, the chore of administering that employee’s insurance, terms and conditions becomes far more onerous and perhaps without much commercial benefit to show for it. There undoubtedly will be even more studies on the benefits or otherwise of telecommuting, but the University of Chicago findings will resonate with many people who have been involved in telecommuting since the start of the pandemic lockdowns. Part-time telecommuting opportunities may become a part of an employee benefit package, but it doesn't necessarily follow that those opportunities will routinely extend to permitting employees to work offshore. The pandemic has resulted in higher national debt and a bigger state apparatus to pay for. The pressure on taxes generally, and on social security contributions particularly, will increase if government finances are to recover. If corporation tax receipts are indeed under threat – though I suspect that the €2 billion plus estimates may be overstated – it will be difficult on purely budgetary grounds to make a strong case for income tax cuts as well. The threat of income tax loss from offshore working may also, I suspect, be overstated. While the grass may be greener, the tax benefits of offshore working are not black and white. Originally posted on Business Post 13 June 2021.   Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

  Originally posted on Business Post 13 June 2021. Corporation tax might be dominating the headlines now, but environmental matters are of more long-term importance to international finance. Ideas for what constitutes sustainable behaviour change over time too. Over a decade ago, motor tax on diesel cars was reduced here to reflect lower greenhouse gas emissions From the headlines you could be forgiven for thinking that the G7 finance ministers discussed nothing but multinational corporation tax last week. Accounting standards rarely deserve such coverage, but the G7 statements about how businesses should account for their environmental behaviour will have repercussions long after the tumult over tax has subsided. The fundamental issue considered by the G7 finance ministers is that there is no universally accepted standard to measure claims by a business that it is conducting itself in a sustainable way. Misleading impressions are getting created. When it comes to food, for example, there is much talk about the environmental impact of shipping produce from far afield. Yet, as the chief executive of Bord Bia pointed out last week, transport accounts for only about 3 per cent of the carbon footprint of Irish produce. This figure is undoubtedly valid, but without agreed standards, her counterpart in another country may be doing the same calculation a different way and getting a different result. Ideas for what constitutes sustainable behaviour change over time too. Over a decade ago, motor tax on diesel cars was reduced here to reflect lower greenhouse gas emissions. Now there is a pushback from some quarters on the role of diesel cars on the grounds of high particulate emission. If all this confusion makes sustainable consumption choices difficult for the consumer, the problems are even greater for fund managers looking to make planet-friendly returns on behalf of the individuals, unit trusts and pension funds for whom they act. These investment choices are really what prompts the G7 concerns over the lack of generally recognised accounting standards. The idea of obliging companies to report on their sustainability agenda activity is not new. Since 2014, an EU directive on non-financial reporting has required large businesses to report not only on their financial results, but also on things like their approach to human rights, steps to take against corruption and their promotion of diversity in the workforce. It is estimated that perhaps 20,000 companies across Europe have been including this material in their published reports and accounts, some of whom volunteer to do so. The system is not without its drawbacks. It is only a legal requirement for the very largest businesses and it allows companies to choose whatever reporting standards they feel appropriate. This makes it difficult to form objective comparisons between companies. Nevertheless, the directive has promoted the key idea that sustainability reporting needs to be seen in two ways. First it has to show how sustainable conduct contributed to the value of the business – the euros on the balance sheet. Then it has to show what impact the company’s performance has on the broader environment. This idea is known as “double materiality” in the jargon. Persisting with the notion of double materiality will be crucial to any fair measurement of a business in terms of its environmental impact. There are already at least five voluntary consortiums involved in devising reporting standards and the EU now wants to establish yet another standard for itself. The G7, however, seem to be saying that the work should be given to the International Financial Reporting Standards (IFRS) Foundation, the organisation which sets the existing accounting standards to calculate profits, losses and balance sheet values. That approach seems logical, but it is also problematic. The IFRS Foundation will have to develop expertise in sustainability matters. It took well over a decade to devise the current financial reporting regime, but that kind of timeframe surely cannot be repeated if proper sustainability reporting is to be part of a meaningful response to the climate change crisis. These initiatives will affect more than just large multinationals. To be credible, larger entities will have to be able to show that their supply chain also operates with good sustainability credentials. That in turn means that smaller enterprises will have to develop similar credentials to secure their position in supply chains, even if they are exempt from formal reporting themselves. All this will come at a cost. Currently, the relatively modest requirements of the EU non-financial reporting directive drive average costs per company of some €150,000 a year. While such costs would be only a tiny fraction of the total operating costs of a large manufacturer or insurer, they are certain to become proportionately higher as the reporting requirement increases. In addition, there will be training costs for staff, and new systems to be implemented. It's one thing to meter the number of items processed on a production line, but quite another to meter, for instance, the energy consumption per item. The piece missing from the G7 approach is that it is all very well for them to mandate more regulatory change cross their own industries in their own territories, but climate change is a global problem. Regulatory compliance is not always a top priority in every country across the world. The current tax proposals have teeth because the US is threatening to discriminate against countries that don’t apply the proposed 15 per cent minimum rate. There will have to be similar sanctions for countries where their major industries do not have to account for what they are doing to the planet.   Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland