| Pascal Saint-Amans, head of the BEPS project and director of the OECD’s Center for Tax Policy and Administration, at the launch of global corporate tax reform proposals, Paris, Sept 16, 2014|
OECD & Tax: As recently as two years ago the small number of people including myself, who dared to question the wisdom of Ireland facilitating massive corporate tax avoidance, were either ignored or guilty of the bubbletime sin of "talking down the economy." Now in Ireland's Republic of Spin the official eco system - - policy makers + business interests - - ostensibly embraces dramatic proposals to overhaul international corporate tax rules while highlighting "opportunities" and "considerable potential upside for the Irish economy."
There could be some upsides but the affliction of myopia will hardly give way to long-term vision.
What is missing in analyses in the mainstream media and the narratives of the spinners is what Finfacts has highlighted ad nauseam - - when misleading data is presented as fact and believed internationally, it's not a pretty situation to then reveal: output and exports are much lower than previously reported; competitiveness/ productivity/ innovation indicators were crap and the balance of payments surplus has evaporated.
Remember when Irish economists used to welcome surging computer services exports as evidence of "moving up the value chain"? - - it was as durable as a leprechaun's gold!
Conventional wisdom was that the EU veto on tax harmonisation and political gridlock in Washington DC would protect the Irish tax regime but the level of abuse had become so extensive that with Google booking 40% or more of its global revenues in Dublin, which became Irish output and services exports, a blowback was inevitable.
The G20 group of leading developed and emerging economies in 2013 asked the Organisation for Economic Co-operation and Development - - the Paris-based think-tank for 34 mainly developed countries - - to produce proposals for reforming international business tax rules that have evolved since the 1920s.
The OECD said on Wednesday that the Committee on Fiscal Affairs (CFA), which besides the OECD's 34 countries includes 2 candidate nations, and 8 emerging economies, including China, India, Brazil, Russia, Indonesia and South Africa, have agreed on a new template for country-by-country reporting by companies, which will require them to report the amount of revenue, profit and tax paid in each jurisdiction, as well as their total employment, capital and assets used in each location.
The OECD/G20 Base Erosion and Profit Shifting Project (BEPS) also deals with the abuse of tax treaties through treaty “shopping” which will prevent multinationals using Irish "brass plate" companies in Dublin and in island tax havens such as Bermuda where there are no real activities other than tax avoidance.
The measures also tackle “hybrid” structures, that rely on arbitrage to minimise tax bills by exploiting differences between countries’ tax rules and in addition it was agreed to counter harmful tax practices by ensuring that transfer pricing outcomes related to intangibles are in line with "value creation" and to provide for re-examining transfer pricing documentation.
While some governments may be reluctant to implement the recommendations, they will have an impact.
"The OECD's initial guidance…, if adopted by key OECD member countries and observers as expected, will have a significant impact on US multinationals with overseas operations, whether or not the US makes changes in regulations or practices as a result of the recommendations," said Manal Corwin, national leader of International Tax at KPMG LLP and a former deputy assistant secretary for tax policy for international tax affairs at the US Treasury Department, according to The Wall Street Journal.
The right to tax “has been threatened and undermined by the way multinationals use and abuse the existing international tax framework,” Pascal Saint-Amans, head of the BEPS project and director of the OECD’s Center for Tax Policy and Administration, said on a conference call. He referred to the use of letterbox subsidiaries in tax havens such as Bermuda and Grand Cayman: “You multinationals stand ready, it’s over.”
Michael Noonan, finance minister, is unlikely to make any significant corporation tax regime changes in Budget 2015 next month as the Government's propaganda machine would be seriously challenged to explain in the lead-up to a general election why half the value of services exports or almost €50bn went up in smoke.
Also on Wednesday Noonan's department published its monthly 'Ireland: Economic and Financial Snapshot' [pdf] report and page 14 has a chart with a caption: "Continued competitiveness boost through reduction in unit labour costs with a 20% relative improvement forecast against the euro area average" - - which is an existing example of Ireland's fairytale economics.
Ireland will retain some key FDI (foreign direct investment) advantages including the corporate tax rate at 12.5%.
There will be some downsides: one of the EU's most expensive economies; Dublin office rents heading back to boomtime levels and handy earners for the big law and accountancy firms disappearing.
“ Ireland is fully engaged with this process. We can gain from the opportunities that will arise from this,” Richard Bruton, enterprise minister, said in response to the OECD's BEPS launch. “I think our tax base will grow as businesses move away from tax havens,” he added.
This is a ridiculous statement as Ireland, Luxembourg, the Netherlands and Switzerland, do not consider themselves tax havens and business from places like Bermuda or the Isle of Man are unlikely to create many jobs.
Peter Vale, Grant Thornton tax partner, said the OECD proposals offered a “significant opportunity” for Ireland, in that one of the key aims was to align taxable profits with substance.
“Ireland is perfectly placed to benefit from such a new global regime as the large multinationals here all employ significant numbers. This puts us at a considerable advantage, in the longer term, compared with competing jurisdictions that have built regimes less reliant on actual substance,” he said.
This is wishful thinking.
Despite existing incentives, FDI employment at end 2013 was below the level in 2000.
The big services companies employ 70 to 80% of their payrolls from overseas; US pharmaceutical and medical devices firms account for about 60% of Irish merchandise exports and their direct employee level has been in the low 40,000 for a decade.
About forty American firms account for two-thirds of Irish headline exports.
As for the potential for new investment, there have been several surveys suggesting that Ireland's attractiveness does not rank highly.
Dublin's International Financial Services Centre (IFSC) has also plunged in reputational rankings in recent years.
Crucially, indigenous exporters accounting for 10% of headline exports, have higher direct employment than the FDI exporting sector.
What will be positive with clean national accounts and economic indicators that reflect reality is that the era of fairytale economics will be over and at long last, the real reality of the challenges will be laid bare.