Irish tax defence crucial as OECD seeks to level playing field

“Levelling the playing field.” This was the phrase repeated by OECD tax policy head Pascal Saint-Amans as he outlined what he hoped the organisation’s major tax report would achieve. For a country which has, for 40 years, used its tax policy as a key attraction for multinational investment, this is bound to bring some threats. As tax incentives are gradually “decommissioned” everyone will be scrambling for advantage.

The challenge for our policymakers will be to try to see off the worst of the dangers, while positioning Ireland to gain from any advantages – and there may well be some. In the shark-infested world of international tax policy this is not going to be easy and will require a forensic focus over the next year or so as the international response to the OECD report on base erosion and profit sharing – Beps – is fought out.

Low-tax player

Ireland’s success has been in where we have pitched ourselves. We are not a “no tax” haven but rather a “low tax” player, with our 12.5 per cent rate and a relatively friendly tax regime. The OECD process will try to close off the tax havens, meaning we have to do all we can to send out the right signals.

So Minister for Finance Michael Noonan was right to have abolished the controversial double Irish tax relief in the last budget. Had he not done so, Ireland would be in the spotlight now, under pressure to abolish it. That said, you could only smile at his comments that the use of the double Irish by tax planners was not an “Irish policy”. Like many countries worldwide we have tried to frame our regime to suit the multinationals, albeit that United States tax law is the fundamental legislation underpinning what these companies do.

Now, if the OECD has its way, we are going to see a gradual phasing out of special tax incentives and a move towards the level playing field. Expect a lot of ground hurling as everyone scrambles for advantage in this process. Some see the glass half full, some half empty.

PwC managing partner Feargal O’Rourke believes there is an opportunity here for Ireland. If the big US companies find it much more difficult to use offshore tax havens in the Caribbean and elsewhere to park their overseas earnings, then he believes Ireland is an ideal location for them to do this.

This would mean some more tax revenue and activity for Ireland. Saint- Amans also referred to this, saying Ireland’s 12.5 per rate could be attractive when compared with US rates which, depending on the company’s state of residence, can be as high as 40 per cent.

There are dangers, too. Brian Keegan, director of tax at Chartered Accountants Ireland, warns that aspects of the OECD charter could be used by big countries to put pressure on Ireland as tax treaties – which govern how tax rules operate between different countries – are redrawn. They may also use the European Commission to try to attack smaller countries such as Ireland, reviving plans to harmonise the corporate tax base, for example.

For the moment, Ireland will try to win as much kudos as possible, as being clearly compliant could win us new business. There will be legislation in the budget to allow for the reporting and sharing with other tax authorities of more information on activity levels and tax paid by multinationals. The new Knowledge Box legislation – a tax incentive to encourage companies to invest in research and development here – will meet OECD guidelines.

Decommissioning process

Indeed this new tax “box” is a good example of how the decommissioning process will progress. The UK and Germany have similar tax arrangements and both have more attractive provisions which they will have to commit to phase out. Ireland will be a bit of a disadvantage as the terms of our new legislation will have to be in line with OECD guidelines from day one. On the other side of the ledger, the companies benefiting from our “double Irish” incentive have until 2020 to phase it out. This is the game we are heading into.

However, the pressure for countries to hold on to investment and jobs remains strong too, and there will now be a fight as each country tries to protect its position. Ireland is in a reasonable position. Multinationals have a lot of investment and jobs in Ireland – real economic activity – and thus there is an argument that they should pay tax here.

However, the bigger countries will be trying to grab tax revenue, too, by arguing that they are the locations where the most goods and services are sold.

There has already been a lot of positioning and debate as the OECD process has gone on, but as it moves to implementation over the next year it will be a case for Ireland, as shouted on the sidelines of soccer pitches countrywide every weekend, of “watch your house”.