Irish Economy
Corporate Tax Reform: Ireland on sidelines as big countries make big moves
By Michael Hennigan, Finfacts founder and editor
Dec 4, 2014 - 7:04 AM

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George Osborne, chancellor of the exchequer, and Danny Alexander, chief secretary to the Treasury, leave the Treasury, Whitehall, London, for the House of Commons, Dec 03 2014.

Corporate Tax Reform: From two years of denial as progress on reform of the international business tax system accelerated, policy makers in Ireland may well be in panic in response to the recent initiatives by the big countries in Europe, in advance of completion next year of the Organisation of Economic Co-operation and Development's (OECD) Base Erosion and Profit Shifting (BEPS) project.

1) Last month the UK and Germany agreed that so-called patent box incentives including a low single rate of tax on income from research and development activities should apply to substantial activities not a legal transaction transferring IP (intellectual property) to a jurisdiction. On Tuesday, David Gauke, a Treasury minister, gave a written summary of the agreement to the House of Commons and they are seeking that it be adopted by the BEPS project.

2) Last week, the finance ministers of Germany, France and Italy, called on the European Commission to produce a draft proposal on anti-tax avoidance measures. Germany’s Wolfgang Schäuble, France’s Michel Sapin and Italy’s Pier Carlo Padoan wrote in a joint letter to the European Commission: “Since certain tax practices of countries and taxpayers have become public recently, the limits of permissible tax competition between member states have shifted. This development is irreversible.”

They called for transparency on tax rulings or letters of comfort to companies such as the more than 340 that were given by Luxembourg to cut tax rates for multinational companies to below 1% in some cases. The revelations last month from a trove of almost 28,000 leaked documents that came from the offices of PricewaterhouseCoopers (PwC) in the Grand Duchy, also resulted in a commitment from Jean-Claude Juncker, the new president of the commission, who was an architect of the tax haven as Luxembourg prime minister in 1995-2013, to give priority to tax reform

3) In the House of Commons on Wednesday in the Autumn Statement, George Osborne, chancellor of the exchequer, said:

Today I am introducing a 25% tax on profits generated by multinationals from economic activity here in the UK which they then artificially shift out of the country.

That’s not fair to other British firms. It’s not fair to the British people either.

Today we’re putting a stop to it.

My message is consistent and clear. Low taxes; but taxes that will be paid.

Britain has led the world on this agenda. And we do so again today.

This new Diverted Profits Tax will raise over £1 billion over the next 5 years."

Osborne said Northern Ireland can set its own corporation tax rate if the parties in Stormont can agree and show that they can handle the financial implications.

Today I announce that we recognise the strongly held arguments for devolving corporation tax setting powers to Northern Ireland.

The Treasury believes it can be implemented provided the Northern Ireland Executive can show that it is able to manage the financial implications.

The current talks will see if that’s the case. And if it is, the government will introduce legislation in this Parliament.

In Wales, we are working towards a cross-party agreement on further powers for next March.

I confirm today that we have reached agreement with the Welsh government on the full devolution of business rates. This is a great opportunity to grow the Welsh economy.

The government last week supported the proposals of Lord Smith’s Commission on Scotland.

These will lead to the devolution of income tax rates and thresholds and ensure the Scottish government is responsible not just for spending money but for raising the taxes to pay for it.

We will publish the draft clauses in the New Year."

On Tuesday at a tax conference in Dublin organised by the Institute of International and European Affairs, Michael Noonan, finance minister,  said he would welcome moves to allow Northern Ireland to lower its corporate tax rate to 12.5% from the 21% UK rate to better compete with the Republic and he also implausibly welcomed the Luxembourg tax leaks while at the same time warning about the impact of some of the proposed reforms on small countries.

In his speech he said in relation to the Anglo-German agreement on patent boxes as he prepares to launch a “knowledge development box” next year, that it appeared qualifying for the tax break would be determined by whether a certain percentage of a company's research and development staff worked locally.

"This approach on the one hand fits into Ireland's core value of attracting substance," he said.

"However, on the other hand, I do have concerns that such an approach, if designed too tightly, would have the potential to limit the scope for use by smaller countries.

"Would this represent a fair reform? I don't think so. Further discussion is both planned and necessary."

The challenge for Ireland is that less than one-third of IDA Ireland clients spend money on R&D and few do research of significance that merits patenting.

On Luxembourg, Noonan said: "I welcome the role that the International Consortium of Investigative Journalists have played in uncovering the information behind the recent Luxembourg tax leaks stories.

Ireland’s 12.5% rate is one of the lowest in the OECD and we do not hide it, in fact, we broadcast this rate as the defining element of our corporate taxation system.

The Irish tax regime is fully transparent as our rules are clearly laid down in statute."

So transparent that Apple could operate Irish companies from cork that were both offshore, onshore and latterly stateless! Wonder would Noonan also welcome leaks in Dublin of copies of past tax rulings?

Noonan also said: that "his first concern is that BEPS must not be about advantaging big countries over small countries and equally must not be used to single out US multinational entities.

Pierre Gramegna, Luxembourg finance minister, also said on Tuesday, according to The Wall Street Journal, that he hadn’t been asked to sign the letter that had been sent to the European Commission by the finance ministers of Germany, France and Italy but that its content went in the right direction.

“The initiative [of the three ministers] shows that there’s consciousness of the need of an international solution,” he said. “The three minister are encouraging the commission to go on and we can also only encourage it.”

Changed times and it was only this year that Luxembourg agreed to automatic exchange of bank account information.

The fact that in Juncker, a former poacher is now the gamekeeper in Brussels, and has to be seen supporting reform, also makes the challenges for Ireland, the Netherlands and  Luxembourg - the main providers of corporate tax haven facilities - more difficult.

So in addition to corporate reforms, the prospect that the three devolved governments in the UK may be able to set their own corporation tax rates, adds further challenges for Ireland.

Related tax links

Germany, France and Italy call for EU directive on tax reform

Germany and UK agree to restrict 'patent box' tax incentives to local R&D

Architect of tax "racket" to commit EU to fight against tax fraud

Hidden Taxes Report: Kenny denies Irish special Apple tax deal despite contrary "evidence"

Luxembourg Leaks: Irish Government's guff on tax system exposed; "Racket" needs to stop

Luxembourg confirmed as massive facilitator of tax avoidance

Bono struggling again as anti-poverty campaigner and tax avoider

Apple says it may have to pay Ireland back tax; Foreign tax rate at 4.4%

Double Irish tax scheme axed; Conventional wisdom wrong again - Part 1

Replacing the Double Irish with Knowledge Development / Patent Box - Part 2

Ireland's small gain from Apple's possible EU tax probe payment

European Commission: Apple given special tax deals by Ireland

Apple's foreign tax rate tumbled after 2007 Irish 'advanced opinion'

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OECD proposes biggest reform of global business tax rules since 1920s

Finfacts submission to Department of Finance consultation on corporation tax reform

OECD BEPS Project submission from Finfacts: Ireland should embrace corporate tax reform - - includes analysis of underperforming indigenous tradable sector.

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