Main Recommendations

Tax transparency is an important aspiration in formulating tax policy. The legislative measures already undertaken by Ireland to implement and fully operate multiple international standards demonstrate our commitment to tax transparency. The CCAB-I suggests that Ireland’s tax transparency policy is currently operating at optimal levels. Ireland needs now to focus its resources to support corporates and businesses as we advance towards economic uncertainty brought about by Brexit.

The evidence advanced in this submission shows that corporates make a substantial contribution to tax revenues, which in fact, is high in comparison to tax paid by corporates in a number of our fellow EU member states. The consistent and substantial contribution by corporates is overlooked by many national and international critics of Irish tax policy and Ireland’s prized 12.5% rate.

We can’t lose sight of the fact that Ireland is heavily dependent on FDI. BEPS and CCCTB could in their most extreme form seriously damage the Irish corporation tax base. Ireland also needs to diversify its tax strategy to implement effective tax law to support indigenous companies and business.

Question 1

What additional legislative measures, if any, should Ireland take to achieve the highest international standards in tax transparency, having regard to the benefits which may accrue to developing countries from enhancing global tax transparency?

International standards in tax transparency have been progressively incorporated into the fabric of Ireland’s tax laws over the past number of years. Ireland is a member of the Global Forum on Transparency and Exchange for Tax Purposes and has been to the fore in implementing legislation recommended by the OECD’s BEPS project to achieve greater transparency. At this juncture, it is more appropriate to consider the impact of Ireland’s tax transparency policies in terms of the corporate taxpayer, the non-corporate taxpayer and developing countries to assess if further legislation is indeed necessary.

The Corporate Taxpayer

The desire by Ireland’s policy makers to be the first to implement international standards in transparency is understandable given the volume of unfair international and national commentary directed at Ireland. However the outcome is that Irish resident corporates could be at a competitive disadvantage. For example, Ireland introduced the first OECD-compliant preferential tax regime in the world with the Knowledge Development Box regime following the “modified nexus” approach endorsed by the OECD. In practice the modified nexus approach makes Ireland’s KDB offering less attractive to companies outside the indigenous sector than equivalent tax reliefs operated by other jurisdictions which do not follow the modified nexus approach.

Perhaps it is now time for Ireland to pause and allow other states take the first steps in implementing new international tax transparency policy initiatives from the OECD and the European Commission particularly since the European Commission appears to be duplicating many policy measures originating from the OECD.

Non-corporate Taxpayers

The key questions here is whether corporates make a fair tax contribution in this country compared to non-corporate taxpayers and are corporates held to high standards of transparency?

The contribution made by corporates is measured in corporation tax revenue generated for the exchequer which has increased year on year since 2011. Corporation tax accounted for [1]6.5% of GDP in Ireland in 2014 which is more than double the percentage of corporation tax to GDP in Germany and the UK of 2.4% and in France where corporation tax as a percentage of GDP in 2014 was 2.9%. A substantial portion of PAYE and VAT revenues are generated by corporate taxpayers also.

The corporate taxpayer is subject to the same tax obligations as the non-corporate taxpayer. The same rigors of audit and the same rules on penalties and interest for non-compliance apply to the corporate taxpayer as apply to the self-employed and individuals with investment income. High standards of corporate governance are required of corporates as a consequence of new rules introduced by the Companies Act 2014 and the Revenue Commissioners have extensive power to pursue tax debt from a company.

Outside of the 12.5% rate of corporation tax, therefore it is fair to conclude that the corporate taxpayer is not given any preferential treatment under the Irish tax code and is subject to even higher standards of transparency when company law obligations are considered.

This is a time of disruption for all of Ireland’s taxpayers as Britain’s exit from the European Union becomes a reality. The key focus of Irish corporation tax policy should be to fulfil our obligations as a good tax citizen of the world but priority must be given to optimising our tax laws to support businesses both corporate and non-corporate.

Developing countries

Is Ireland’s corporate tax system doing what is necessary in terms of international tax transparency policy? In this regard we are reliant on the findings of the July 2015 IBFD research commissioned by the Department of Finance which suggests that the Irish tax system on its own can hardly lead to significant loss of tax revenue in developing countries. Ireland is actively involved in progressing automatic exchange of information within the EU, the OECD, and on a bilateral basis. Ireland implements the EU Directive on Administrative Cooperation in the Field of Taxation which provides for the exchange of data between tax authorities. Ireland has adopted tax laws to exchange information with over one hundred states under the OECD Common Reporting Standard. Ireland also operates the Foreign Account Tax Compliance Act with the United States to exchange financial account information. Ireland as a developed economy is therefore operating multiple international standards for tax transparency.

In the context of developing countries, there is a perception that these countries are entirely dependent on corporation tax yields. A functioning economy needs to generate tax revenue from as many sources as possible not just from corporates. A functioning tax system needs to be able to collect tax for redistribution by government for the good of all its citizens.

Much of the lobbying for tax justice in the developing world promotes the idea that full transparency is the solution to ensuring that tax revenues are rightfully allocated to the benefit of the citizens of the developing world. Even if the highest possible standards of transparency are achieved by the international community, developing countries have a duty to put infrastructure in place to fairly and efficiently collect taxes for redistribution and benefit of all its citizens.

Question 2

What additional legislative measures should Ireland take to further implement the actions of the OECD initiative to combat BEPS?

The BEPS project has entered into the operational phase of its life cycle. Ireland through Finance Act 2015 and 2016 has introduced changes to domestic law in support of BEPS changes. We understand that currently Ireland is focused on negotiations of a multi-lateral instrument which seeks to apply many BEPS proposals through the global and simultaneous amendment of tax treaties. Ireland needs to tread carefully before adopting measures that might potentially affect the international competitive position of our tax regime. We suggest that government representatives working on the multi-lateral instrument negotiations should take soundings from tax practitioners and businesses before finalising Ireland’s approach to this phase of BEPS.

The next challenge for Ireland is to hold firm on the measures agreed with the OECD and our fellow member states. The OECD states agreed on minimum standards and best practices but these are already being conflated by measures supported by the European Commission such as the Anti-Tax Avoidance Directive.

An EU centred solution will not tackle BEPS in any event as BEPS is an international phenomenon. We believe that the Commission is pursuing a tax policy in Europe which is very close to an encroachment on the tax sovereignty of member states. Ireland, along with many of its fellow member states, already operates advanced mechanisms in domestic law to combat tax avoidance. This fact needs to be asserted by Ireland in its dealings with the European Commission.

Question 3

What legislative measures, if any, should Ireland take to maintain the competitiveness of the corporation tax code and deliver tax certainty for business in the context of the ongoing implementation of internationally agreed measures to combat BEPS?

The 12.5% rate is only effective in the context of a properly functioning network of double tax agreements. The current negotiations involving double taxation agreements should therefore ensure that the end product of these changes is not that of uncertainty.

Proposed measures for the spontaneous compulsory exchange of rulings under Action 5 on the BEPS Plan are similar to the European Union’s automatic exchange of tax rulings between taxing authorities of EU Member States which came into effect on 1 January 2017. Factors such as the exchange of tax rulings among EU member states, and the EU State Aid decision in the Apple case, although currently under appeal, could well result in less certainty in the future for taxpayers. These factors could result in revenue authorities across Europe becoming less willing to provide opinions on the tax treatment of complex transactions either due to reputational or to future State Aid concerns. Tax rulings and opinions serve a very important purpose in providing certainty for taxpayers. Policy in this area needs to be reconsidered before uncertainty in Ireland becomes a negative in the decision making process of the foreign direct investor weighing up international investment options.

Question 4

What is your view of sustainability of corporation tax receipts over the short to medium term?

The corporation tax yield has increased each year since 2011 with a yield in 2016 of €7,351 million representing over 15% of the total tax revenue. Corporation tax in Ireland in 2014 accounted for 8.3% of all tax revenue which is considerable when compared to other European States (in Germany, corporation tax accounted for just 4.8% of all tax revenue and in France corporation tax accounted for 5.1% of tax revenue for 2014)[2].

Approximately 80% of corporation tax paid in Ireland is derived from foreign-owned companies, particularly US-owned companies. In addition to corporation tax, US companies on average pay €6 billion in wages, make €3 billion’s worth of investments and purchase €4 billion of goods and services in Ireland each year. Foreign-owned enterprises generated 26% of GDP in Ireland between 2008 and 2012. In its most extreme incarnation therefore BEPS and CCCTB influenced changes to the rules on the taxation of corporate income could potentially have serious consequences for the tax base and tax revenue in Ireland. It is important that this fundamental threat remains in focus in any discussion on the sustainability of Irish corporation tax receipts.

The data on Ireland’s dependency on foreign-owned companies also highlights the need for innovative use of the tax code to encourage and support indigenous companies and business. This has been a recurring theme of CCAB-I pre-Budget submissions in recent years where we have advocated, inter alia, the re-examination of the Three-Year Tax Relief for Start-up Companies which is ineffective because the conditions placed on qualification for the relief are so onerous that few companies fit the qualification criteria and the general exclusion of professional services companies from mainstream corporation tax treatment.

1. Taxation Trends in the European Union, statistics on tax revenue and GDP.

2. OECD Tax Revenue Statistics 2016