Unfair tax competition plan will challenge Irish regime

Mon, Dec 3, 2012, 00:00

BUSINESS OPINION:Come Wednesday all eyes will be on the Dáil and Michael Noonan’s second budget. But elsewhere in Europe something else is due to happen on Wednesday that might arguably be of equal significance for Ireland. The European Union’s tax commissioner, Algirdas Semeta, is expected to publish proposals to deal with unfair tax competition between member states, which, according to some estimates, costs the union €47 billion.

The proposals will be seen as a response to the recent controversies in both Britain and France over the extent to which multinational firms avoid paying tax in those jurisdictions despite having very substantial sales there.

Google featured in both controversies, and Ireland and its “business-friendly” tax regime have come in for close scrutiny as a result.

But as luck would have it the two other companies that have outraged British and French lawmakers – Amazon and Starbucks – don’t appear to use Ireland in their tax planning.

Google, however, is as good example as you could wish for of what is getting under the skin of the French and the British. Using a web of companies in Ireland, the Netherlands and Bermuda, it manages to avoid tax on much of its worldwide earnings.

The so called “Double Irish Dutch Sandwich” is legal. At its heart lies the principle that the profit is made where the assets are based, which in Google’s case is primarily intellectual property held by its Irish operations, which employ 2,000 people.

According to various leaked drafts of commissioner Semeta’s proposals, the commission wants to make it harder for multinationals to arbitrage the differences between member state tax codes in this way.

The first proposal is that member states should include a “general anti-abuse” clause in their national legislation that would allow tax authorities to disregard any corporate arrangements deemed to serve tax purposes rather than commercial purposes.

The second is that, in order to prevent “double non-taxation”, member states should insert a clause into their double-tax agreements specifying that one country is precluded from taxing income only if that income is taxed in the other contracting state.

What this will mean in practice, and for Ireland in particular, is hard to know.

The preliminary view from Merrion Street would be that, because Google and its peers carry out genuine economic activities in Ireland, they are allowed declare their profits here.

They will rely very heavily in this regard on a 2006 European Court of Justice ruling in favour of Cadbury Schweppes, which interpreted anti-discrimination provisions in the mother of all EU treaties, the Treaty of Rome.

The other battleground is likely to be around intellectual property. Some sources expect to see a pre-emptive refining of Irish legislation as soon as Wednesday.

All else being equal, Ireland is reasonably well placed to fight its corner in the coming battle and has some powerful, well-resourced allies in the form of the multinationals based here.

But all is not equal. Ireland is trying to extract itself from an EU/IMF bailout, and to do so in a sustainable fashion, most people agree we will need some sort of debt forgiveness or refinancing. Following the Greek deal last week, the wind appears to be once again blowing our way when it comes to getting a concession of some sort.

The Government has learnt its lesson about counting euro chickens before they hatch and no hostages to fortune have been given post the Greek deal, but things look better than they have in a while.

Even so, the timescale for a deal is likely to be quite extended, with many now linking an Irish deal to the introduction of European-wide banking regulation, which is not really expected to be in place until 2014.

The next step in this delicate process is a paper from the troika, due before the end of the year.

But it does look like negotiations on a programme to allow us wean ourselves off external support will be proceeding in tandem with whatever process comes out of Semeta’s proposal and the pressure that might come on Ireland’s tax regime.

Ensuring that the two processes don’t become linked will be a significant challenge.

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