A Trifecta of Change
2017 was a bedrock year in the changing world of international tax policy. Tax policy was once confined to the business sections of publications. It has now gone main stream and moved to page one.
This shift has been driven by scandals such as the Panama Papers and the emergence of household celebrity names being involved. Public pressure, combined with eroding public coffers, has spurred governments into action. Our geographical, political and economic relationships have placed Ireland in a position whereby it is being subjected to potential change on multiple fronts.
Our economic success is readily traceable back to Irelands foreign direct investment policies. While undoubtedly beneficial, this openness leaves us more susceptible to global change. 2017 was a tempestuous year between BREXIT and US tax reform. The third rumble of tax reform came in the guise of the EU’s resurrection of the common consolidated corporate tax base initiative. This trifecta has the potential to change the Irish environment in 2018 and beyond.
Much has been published about BREXIT. The only real certainty we have at this juncture is that the Irish UK relationship, from a tax perspective, will change. While the absence of a border is becoming more realistic, regardless, businesses will have to change their accounting and reporting systems. Depending on the final terms, there may or may not be customs issues, which would ultimately translate into cost and timeline issues. The BREXIT issue is clearly bigger than Ireland alone, however, it is important that we continue to engage and the issues and concerns of the business community to be heard. The issue of being “BREXIT ready” is often referred to in the media. What is worrying is that there continues to be a large percentage who have not considered the implications on their business. Those who are BREXIT ready will have an opportunity to grow at the expense of the unprepared who will stagnate and compromise their market share.
December 2017 witnessed President Trump sign the “Tax Cuts and Jobs Act” into law. This US tax reform was aimed at bringing business “home”. Continuing a strong inflow of foreign direct investment is vital for the continued growth of the Irish economy, however, it is probable that the economy will feel an impact of these US tax changes in some manner.
A single corporate tax rate of 21% effective from January 2018 was introduced. Unlike the personal tax incentives, this has no expiration date. While this is a significant reduction from the former top rate of 35%, the 21% does not include the state and local taxes which, increases the overall rate to just below the weighted average for the EU of 26.5%. When compared to the Irish rate, it is still double the Irish trading rate. Our commitment to the 12.5% trade rate has historically proven useful in attracting FDI.
The US law also introduced territorial tax systems, whereby only domestic earnings are subject to tax. This means that on a go-forward basis profits can be repatriated from Irish subsidiaries with no extra tax cost. This may likely result in offshore profits being repatriated to the US, and will potentially decrease reinvestment into the Irish economy.
The Irish corporation tax rate of 12.5% remains attractive with regards to the proposed reduced US corporation tax rate of circa 26.5%, inclusive of state taxes. Couple this with other competitive factors, such as research and development tax credit, knowledge development box shareholdings, effective zero tax rate for foreign dividends (12.5% tax rate on qualifying foreign dividends, with flexible onshore pooling of foreign tax credits), EU-approved stable tax regime, with access to extensive double taxation agreement network and EU directives, generous domestic law withholding tax exemptions, attractive reliefs for staff assigned from abroad, key staff working in R&D and staff carrying out work in certain countries, pro-business environment within the Eurozone; and highly educated, talented and flexible workforce and Ireland remains an attractive location for foreign direct investment.
Closer to home, the EU has resurrected the common consolidated corporate tax base initiative. Essentially, this initiative is seeking to consolidate European group profits and split them between member states. Suggested apportionment methodologies include the level of tangible assets in each jurisdiction. While the initiative is still a working draft, it is being supported by France and Germany. Not only is the proposal an affront to national tax sovereignty, but it is also going against the recent extensive work undertaken by the Organisation for Economic Co-operation and Development (OECD) in the guise of the base erosion and profit shifting (BEPS) project. The work of the OECD has not been fully enacted and the benefits yet realized. This additional layer of EU complexity is likely to only create uncertainty and even potentially tax avoidance opportunities – the very thing trying to be combatted! Efforts to implement a consolidated tax base should be rejected.
As we face into 2018, this trifecta of change will continue to play out. The international tax landscape will continue to be mainstream news. With the continued spotlight on tax reform and transparency, it is possible that there may even be a Panama Papers take 2. Against this backdrop, Ireland needs to be proactive in balancing its attractiveness as an FDI location but to be also seen as well regulated and transparent.
This article first appeared on the Business and Finance Blog January 2018.