47 – 49 Pearse Street, Dublin 2

OECD BEPS Project in an Irish Context – Public Consultation
Fiscal Division,
Department of Finance,
Government Buildings,
Upper Merrion Street,
Dublin 2.

8 July 2014

By eMail to bepsconsultation@finance.gov.ie

Dear Sirs,

Introduction

Ford in Cork, Dell in Limerick, Digital in Galway. The devastation to the livelihoods of Irish citizens when these multinationals left Ireland are now part of our national memory. The use of Irish tax policy to foster Foreign Direct Investment has been fundamental to the creation of decent living standards for large numbers of our people. It is worth defending.

You have already acknowledged the work of the accountancy profession in engaging with consultations to date. Some of the material in this letter is already in the public domain as a consequence of this prior engagement. We hope it will be found useful to have it collated together within the response to the consultation.

The introduction to your consultation document makes much of the importance of reputation. We face reputational threats from three different sources.

Certain of our academics and other members of the commentariat, widely reported by certain of our news agencies, make inaccurate and damaging claims with regard to the way Ireland conducts its tax affairs. These claims must be discounted. Published explanations, for example those published by your Department concerning Ireland’s effective Corporation tax rates, dispense with such claims, which in any event have little traction with the fair-minded in the business community.

Secondly, the consultation document observes that “increasingly, tax reputation is also a key factor in winning mobile foreign direct investment”. According to a statement by the IDA on 7 July 2014 “over 100 investments were secured in the first six months of 2014, compared to 70 at the same time last year. Of the investments secured, 40% have come from companies investing in Ireland for the first time, with the remainder represented by expansions and transformations by existing companies.” This success suggests that reputational damage is not currently a factor among the investment decision-makers.

Thirdly, our representatives within the international community at governmental and other fora bear the brunt of allegations that in some way, Ireland is not playing fair in the international competitive tax arena. Those brokering Ireland’s position abroad need our full support and encouragement as they defend the nation’s reputation.

Question 1:

Which of the international tax issues identified in the BEPS Action Plan would need to be considered the highest priorities for Ireland for examination with a view to action?

Unfortunately our country’s tax regime has become something of a target in the discussion of global tax policy. This is unfair and unfounded.

Harmful tax practices are simply not a feature of the Irish tax landscape. Harmful tax practices, as and when highlighted either by the OECD or by the EU, were changed by successive Irish Ministers for Finance. The Irish system has already been through the mill of good practice scrutiny. That is why concepts such as the requirement to have a substantial presence in Ireland, anti-transfer pricing rules, and exchange of information between Revenue Authorities are features of the Irish system. We must always be mindful of our obligations under the EU Treaties when contemplating any changes to our tax system.

That is not to say that there is not still room for improvement. Tax legislation and best practice can and will evolve, not least because many of the rules which apply not only in this country but in other countries across the globe predate the growth in cross-border trade and the pre-eminence of intellectual property on the balance sheets of international companies.

There is a need to review tax treaties, but the concept of limiting their application to enterprises owned and controlled within the respective signatory states means that companies in smaller countries like Ireland could be frozen out of treaty access. Even some larger countries might face the same fate. The economies of most countries are by now interconnected and rely on foreign capital and foreign ownership to operate side by side with entirely domestically owned enterprises. This type of treaty limitation proposal mitigates against international trade.

The main question for the BEPS proposals is whether they should be evolutionary or revolutionary. From a business perspective, the change does need to be evolutionary, including dealing with perceived hybrid and treaty abuses, and considering the appropriateness of current transfer pricing standards. But a degree of certainty must be retained – constant changes to the framework or rules that are hard to interpret or subject to post event reappraisal simply add to an environment which degrades entrepreneurship and discourages business.

The rapidity of the BEPS process does add some further legitimacy to the work being undertaken by the OECD. Too often, the slow pace of reform has discredited otherwise worthwhile international tax initiatives. However, early adopters of BEPS proposals will endure at least a year of uncertainty, maybe more, during which time other countries will have more compelling regimes. While some of those other regimes will remain under the spotlight, they will still exist. It may well be better judged not to move too soon on BEPS proposals, perhaps not before 2015, by which time we’d have a better sense of the new parameters and options. Not all of the BEPS outcomes might be clear by Budget 2015 day, nor even by Budget 2016 day.

Question 2:

Are there other current international tax proposals that would be of concern to Ireland?

The three main tax themes of the Australian G20 Presidency are:

• BEPS
• Transparency both within the BEPS Action Plan and with greater international exchange of information to ensure investors pay tax on their income in the state where they are taxable; and
• Tax and the role it needs to play in the development agenda.

The latter point is being addressed, at least in part, by your Consultation on Spillover. We just wish to remark here that the scope for Ireland’s tax regime influencing the development agenda is a factor of our levels of international trade with developing nations. We note from the analyses provided monthly by the Central Statistics Office that such trade comprises a tiny fraction of our national imports and exports. It is therefore unlikely that any changes to Ireland’s tax regime, however well considered, will make any significant difference to the economic situation of developing nations. We simply do not engage in a sufficient level of commerce with them.

The transparency agenda is perhaps more pertinent. Here there are opportunities for Ireland which could lead the way on many of the transparency issues. The Irish Revenue is well ahead of many of its international counterparts in its capacity to garner information from financial institutions because of Acts of the Oireachtas, and then to exchange information, as necessary. Other countries are not as well developed in this regard.

Certain of the existing OECD proposals do not fully take account of existing arrangements under the EU Savings Directive, nor of proposed arrangements under the Automatic Exchange of Information Directive. This could be particularly disruptive to financial institutions which already have software and procedures in place for information sharing under the Savings Directive.

We would also need to see very robust safeguards in the area of Data Protection. Inadequate checks against the security of the data to be exchanged, and the purpose to which the information would be put, could lead to chaos. We would not want Irish taxpayers to be left out on a limb with information flowing that is not properly reciprocated. In making these observations we must reiterate that we have no difficulty with information exchange in countering tax evasion, in particular.

Question 3:

In a changing international environment, what’s the best way for Ireland to ensure that its taxation provisions, for example in relation to intangible assets, are competitive?

The BEPS initiative has much to recommend it, but it must be careful not to become a vehicle for protectionism and national self interest of just a few larger countries. Within the EU, there is some protection from excesses in this regard, including the four freedoms of movement of capital and people, and of services and freedom of establishment along with the state aid rules. These protections are of course expressed in national tax policy.

Fair tax completion is universally accepted. In Ireland’s case it is encapsulated in the 12.5% corporation tax rate and helps to offset the pull of the centre for jobs and economic development against the periphery. It is therefore a model for peripheral development.

To take a specific example, the standardisation of transfer pricing documentation is to be welcomed. But it should be on the basis that businesses are subjected to the same requirements around the world. If it becomes merely a minimum requirement to be added to by individual countries, this would eliminate any efficiencies gained. The net point is that to stay competitive, Ireland cannot become an outlier within the international rules.

Question 4:

Are Ireland’s company residence rules appropriate in the context of BEPS and other international tax developments?

The current global tax framework grew up piecemeal, responding to events as they happened, and with few guiding principles. National policies responded to national imperatives, sometimes accommodating, sometimes clashing with the national imperatives of other nations.

The tax policy approaches of some countries were based on encouraging outward expansion of their domestic businesses. Some were based on facilitating international trade, particularly where that international trade was with other countries which were former colonies, or otherwise within their sphere of influence. Some were based on the simple imperative of attracting international business investments and thereby providing jobs locally. Despite commentary to the contrary, Ireland falls squarely into the last category, with substantial operations employing thousands of people, and providing livelihoods for thousands more.

This concept of tax residence is fundamental to BEPS given that it determines the interaction of Ireland’s corporate income tax system with the rules and regimes in operation in other countries. Companies which are incorporated in Ireland, and are managed and controlled in Ireland, are tax resident in Ireland and subject to Irish Corporation tax irrespective of where that income arises. Sometimes overlooked is Ireland’s claim to Corporation tax on the activities of companies which are not resident in Ireland, but which are active here by virtue of a branch operation, or by having a permanent establishment in this country. Our corporation tax system is more transparent than other taxation systems which have higher headline tax rates but also provide for significant deductions to arrive at taxable income and taxable profits.

We are not outliers in terms of our tax rules; they are grounded in over a century of common law practice and interpretation. Our Double Taxation Agreements are based on OECD principles. In particular, Double Taxation Agreements are bilateral instruments; agreements between sovereign nations. Such agreements have to work for both countries involved, and they can be changed where they do not work.

At an absolute minimum it will be important to retain the concept of Irish incorporated companies not being tax resident in Ireland, at least as regards those companies managed and controlled within our treaty partner countries. We also have precedent in our unilateral relieving measures for double taxation to include countries that have signed up to information exchange treaties with Ireland. This may be one way of promoting good governance, and further enhancing the transparency of our tax regime.

Any changes which reduce some of our tax advantages without presenting clear alternatives will damage Foreign Direct Investment, our current corporation tax take, and employment prospects.

Question 5:

What are the critical considerations in shaping Ireland’s response to current international tax developments—either in general or with respect to particular issues?

Ultimately tax is a business cost for companies, to be predicted and managed. It carries responsibilities but also it must be managed in the same way as utility, distribution, employees and other costs must be predictable and manageable. If our tax regime were to be too closed and protectionist, Irish companies simply would not be able to trade abroad, nor would Ireland be an attractive destination for companies seeking to locate operations in this part of the world.

It might have been expected that the BEPS proposals would seek to address the more controversial types of tax planning noted in the public domain by some multi-nationals. However it seems to us that the proposals go much further. If followed through they could result in a fundamental change to the business model for many companies, major multinationals and smaller indigenous exporters of digital products and services alike.

Among the most challenging proposals are those which involve a redefinition of the current Permanent Establishment concept, for example the introduction of a “virtual” permanent establishment. The consequences would be that for tax purposes, company profits would move away from where value is actually created to the locations where products are sold or consumed. The bigger the market, the more Corporation Tax would be paid there. This is a major risk for Ireland.

Concepts in the BEPS discussion drafts concerning Treaty Limitation of Benefits tests which focus on local ownership would severely prejudice smaller economies. Companies operating in small economies must go beyond their geographical bounds to source both markets and capital. These ownership restrictions are only workable, even in the case of the largest economies, with considerable derogations and exclusions so as not to be detrimental to international trade. An extension to all countries, would, even with many of the exclusions adopted, effectively limit much trade to within the country. Again, this would pose a major threat to Ireland.

Question 6:

Are there any other priority areas or future challenges that should be considered as part of this process?

Measures taken in response to BEPS proposals might bring other areas to the fore. For example, the Special Assignee Relief Program (SARP) is a means of attracting highly skilled workers to Ireland who in turn will act as magnets in bringing more business and investment into the country. This can happen only if SARP can hold its own against competing jurisdictions. The relief should aim to be best in class or at least internationally competitive. The very low take-up of the relief suggests that it is neither at present, and we note the separate public consultation on its operation recently concluded by your Department.

However we strongly urge a continuing focus on the issues currently being presented, as discussed in this document.

About CCAB-I

The Consultative Committee of Accountancy Bodies – Ireland is the representative committee for the main accountancy bodies in Ireland. It comprises Chartered Accountants Ireland, the Association of Chartered Certified Accountants, the Institute of Certified Public Accountants in Ireland, and the Chartered Institute of Management Accountants, which represent a combined membership of some 40,000 accountants. Brian Keegan, Director of Taxation at Chartered Accountants Ireland (brian.keegan@charteredaccountants.ie, +353 1 6377 347) may be contacted if any further details in relation to this letter are required.

We note that this submission may be subject to the Freedom of Information Act. All CCAB-I submissions to government are notified to our members and placed in the public domain.

We will be happy to participate in any further consultations or meetings as required or appropriate in relation to this matter.

Yours faithfully

Paul Dillon, Chairman, CCAB-I Tax Committee

Source: Chartered Accountants Ireland. www.charteredaccountants.ie