The independent report, which was commissioned earlier this year following the Apple ruling, tells us that the current corporation tax system in Ireland is fair, sustainable, competitive and transparent. While the report mostly recommends that Ireland continue as it has been doing, it does detail a number of proposals to bring the corporation tax code more in line with international policy on limiting base erosion and profit shifting (BEPS) and makes three key recommendations.

Transfer Pricing

The report recommends that transfer pricing should be extended to small medium enterprises (SMEs) in Ireland. It also suggests that the transfer pricing rules in Ireland should be updated to follow the current OECD guidelines. These among other changes should be implemented by the end of 2020.

Intellectual property (IP) regime

To facilitate smoothing of corporate tax revenues, the report recommends a restriction on the amount of IP allowances granted to a company to 80 percent of income, with the balance available for carry forward. It’s unclear whether the cap will apply to all IP or IP acquired after a certain date in the future.

Territorial tax regime

In a move to maintain Ireland’s competitiveness on an international stage, the report recommends that Ireland should adopt a territorial tax system where a country collects tax only on income earned within the country. This means that dividends received from foreign subsidiaries are typically exempt from tax in the domestic country. As an alternative, the report suggests simplifying the foreign tax credit regime.

Some of the proposed measures may very well increase the tax take from companies in Ireland. Furthermore expanding transfer pricing to SME companies is likely to increase the administrative burden for such entities and may not have the desired effect of modernising the tax system.

Minister for Finance, Paschal Donohue announced a consultation process of the measures contained within the report, see the Budget 2018 commentary earlier.

In a widely reported press statement, the Institute commented that the Coffey report into Corporation Tax policy in Ireland was born of political necessity, but government should be careful to use its recommendations to modernise the system, rather than as a justification to levy new taxes on business. The Institute believes that if adopted the net effect of the proposals would be to increase the tax take from the corporate sector.

Ireland is already unique among developed nations in the high proportion of corporation tax collected relative to other taxes. While some of the recommendations in the report are worthwhile and will align the country even more closely with best international practice, suggested measures impacting on the Small and Medium Enterprise sector will merely increase the burden of paperwork without significantly enhancing the integrity of the system. Proposed changes to the regime of allowances for intellectual property – patents and the like – will increase the tax yield from the multinational sector.

Each proposal, whether concerning transfer pricing, the extent of profits taxable or the quantum of allowances has to be judged on its own merits. While it is important for Ireland to operate in line with best international practice, our Corporation Tax system must tax correctly all companies and branches within the charge to Irish tax. This should be in a manner appropriate to the needs of the Irish Exchequer and sustainable by reference to the structure of the Irish economy. We do not have to blindly adopt proposals advocated by other nations which compete with us for business and investments.

The report’s focus on the implementation of proposals within a specific timeframe is positive however, and will reduce the inevitable ambiguity associated with a tax system in transition. Other recommendations concerning cooperation in the recovery of taxes across jurisdictions are also positive. The Institute will engage fully with any necessary consultations or research arising from the recommendations of the report. Mr Seamus Coffey is to be commended for his thoroughness in this significant piece of work.