New global corporate tax regime will directly affect Ireland for years to come

Many Irish people might feel that this flurry of attention on an OECD project about the taxation of companies is irrelevant in the run-up to the budget on October 13.

New global corporate tax regime will directly affect Ireland for years to come

At one extreme, people could say it doesn’t really matter, who pays attention to OECD reports anyway? At the other extreme it will be argued that this so-called base erosion and profit-shifting (BEPS) project is merely a smokescreen to hide political decisions.

I don’t think either view is correct.

There is a lot of talk about how much Minister for Finance Michael Noonan will have to spend next week, particularly as tax receipts for 2015 are racing well ahead of the official estimates at budget time last year.

The main reason for the 2015 overshoot is that corporation tax payments by companies are well ahead of target.

Any policy or proposal to change the company tax rules now will have a direct knock-on effect on the nation’s finances, and hence on the amount of income tax we pay and the services we receive.

Another reason to pay attention is that so many people in this country are employed by multinational enterprises.

The fear is that any changes to the tax status of multinationals could prejudice existing Irish jobs, or limit our capacity to attract new employment opportunities.

BEPS is focused on the multinational sector. Unlike individuals, who are usually taxed where they work, companies are taxed where they are managed rather than where they operate in the ordinary sense.

Also, many companies operate in groups across more than one country and make payments among themselves, dividends, royalties, interest, and sales.

They try to ensure that when these payments are made, they don’t end up being taxed twice in two different countries.

If you add to that mix that different countries have different sets of tax rules for companies, a chaotic situation exists where multinationals can, and do, work the international rules to suit themselves best.

They can legally take profits out of the charge to tax altogether (base erosion) or move money around within the multinational group so that more profits get taxed in low tax jurisdictions (profit-shifting).

The Australian government described this a few years ago as a “leaky bucket”, echoing the concerns of many of the governments which decided to sponsor this OECD project. Hence BEPS.

There are dozens of proposals coming out of the BEPS project which were finally announced yesterday.

Three areas where future tax rules could be changed merit closer examination.

First, the principle that companies are taxed where they are managed, rather than where they operate, will be less absolute. More profits will be taxed in the country of operation.

That is good news for countries with large markets and large imports; not so good for the likes of Ireland with a small domestic market and large exports.

Secondly, the rules for where cross-border payments between companies in the same group are taxed will get a lot tighter.

These are known as the transfer-pricing rules. This change could work in Ireland’s favour, because our corporation tax rate of 12.5% is lower than in most other countries.

And the larger multinationals will have to make comprehensive country-by-country reports to our Revenue Commissioners, and to the revenue authorities in all the countries in which they operate.

The idea here is to allow revenue authorities to take a much more co-ordinated approach when dealing with the tax affairs of multinationals.

The Revenue Commissioners are well geared up to deal with all this information in comparison with many of their counterparts elsewhere.

This year’s Finance Act will put into Irish law at least two of the BEPS proposals.

The country by country reporting process will become an Irish tax compliance requirement for any large multinational operating in this country.

A new Knowledge Development Box promised in last year’s budget, which is a special tax incentive for companies developing and using high tech methods for new products, will be put into law in a “BEPS compliant” way.

So BEPS is far from irrelevant.

It will directly influence current and future tax law for companies operating in this country and abroad and indirectly influence income tax law if income tax has to be adjusted upwards to compensate for a corporation tax shortfall.

This year, we are seeing corporation tax surpluses. There is no guarantee that will continue post-BEPS.

Brian Keegan is director of taxation at Chartered Accountants Ireland

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