The commission has been prompted into this politically ambitious move by public outcry over big, usually American, companies avoiding tax in the EU.
With the ‘LuxLeaks’ scandal around special tax status given to certain companies, such as Amazon in Luxembourg, came the realisation that certain EU governments themselves had been weakened by their complicity in making deals with multinational corporations.
Sensing this new dynamic, and the division among the EU’s members that has been caused by loss of local tax revenue to more haven-like regimes, the commission has moved swiftly.
The proposals are largely being pushed by France and Germany, which want to see the EU shut down tax havens set up by smaller countries. The commission has said corporate tax avoidance schemes cost the EU billions every year in lost revenue. Ireland’s 12.5% tax rate is the lowest in the EU. It is, therefore, in the firing line.
This is not the first time that EU pressure has been brought to bear on Ireland. The so-called ‘Double Irish’ tax loophole with the US, which allowed companies to establish subsidiaries in Ireland that pay no corporate tax, has had to go.
In October 2014, Finance Minister Michael Noonan announced that he was changing residency rules to “require all companies registered in Ireland to also be tax-resident”.
Apple is among the companies affected, although the changes will not take full effect until 2020.
And, in another move, the European Commission’s competition authority is investigating Ireland’s tax treatment of Apple to see whether it constitutes illegal state support in exchange for jobs and investment in Ireland.
While the Government and Apple are adamant that there is nothing wrong with the deal that was cut, the company did say in March this year that any finding against their tax treatment could have a “material” impact.
Similar investigations into countries’ tax treatment of multinationals are under way against deals with Starbucks in the Netherlands and against Amazon and Fiat in Luxembourg.
Pressure on Amazon has already led the company to change its approach; it says it will now declare its retail sales in each respective market rather than centrally in Luxembourg.
The extent to which Ireland will be impacted by this pressure is likely to depend either on corporate reputation decisions taken outside of the country, or on the regimes in other countries.
Multinational corporations are facing increasing scrutiny on governance and taking seriously their responsibility to act as good corporate citizens. Acting within the law is no longer enough, and indeed several companies have already welcomed the EU tax plans.
At the same time, however, some multinational corporations will see the EU’s crackdown as an opportunity to shop around for alternative low-tax jurisdictions.
As long as revenues earned though avoidance schemes remain non-taxable in the US, for example, American companies have no tax incentive to change their behaviour.
So the OECD/G20 work on limiting tax base erosion and profit sharing (BEPS) will be good for Ireland.
Assuming it leads to the closing down of ‘letterbox companies’ in certain tax havens, Ireland stands to gain as the new home for these multinational corporations, based on its reputation as a fair-playing, English-speaking, attractively taxed hub.
This is why Ireland is one of several countries opposed to EU moves on corporate tax. It says tax is an issue best dealt with at national — or international — rather than European level.
So, the initiative in the European Commission’s Action Plan for Fair and Efficient Corporate Taxation that causes Ireland most concern is the proposal to introduce a mandatory common consolidated corporate tax base.
In a European single market for goods and services, the idea of closing loopholes and making it easier and cheaper for companies that operate across borders in Europe to use a single set of rules to calculate their taxable profits is not a bad one. It is also not a new idea.
The commission first proposed it in 2011 but it has been stalled for some time amid significant opposition led by the Government.
This time, a two-stage process will be on the table within 18 months: First an attempt to agree a common tax base; and only then, if possible, to agree on consolidation of profits and losses across borders.
Dividing it into two may well make its passage easier. While there is no plan to set minimum tax rates or to harmonise them, stage two is a no-go zone for the Government. Its challenge will now be how to resist stage one, which it sees as the thin end of the wedge. The 12.5% rate remains sacrosanct.
In addition, the commission’s plan will take a carrot and stick approach to Patent Boxes (special tax regimes for intellectual property revenues), such as Ireland’s Knowledge Development Box (KDB), which is designed to make Ireland attractive to innovative and value creating companies.
The commission will provide guidance on how to implement the non-binding deal that EU governments agreed on last year to ensure fairer tax competition.
If the Government does not apply the new approach within 12 months, and the KDB starts to look like the Double Irish II, the commission will propose binding legislation instead.
The EU’s package of corporate tax measures remains politically ambitious, as all 28 EU countries need to give their unanimous agreement. The mood music on corporate tax in the EU is changing, and Ireland will need to stand strongly behind its right of veto over what it sees as a dangerously slippery slope for the Irish economy.
John Hume Jr is the co-founder of Hume Brophy consultants.