European Commission to pressure Ireland on tax in recovery fund plan

Tax loophole closure among ‘country-specific recommendations’ to be met for fund access

Minister for Finance Paschal Donohoe has defended Ireland’s record on tax, saying it “has fully engaged in making massive strides” on tax transparency and reforms. Photograph: Alan Betson

Minister for Finance Paschal Donohoe has defended Ireland’s record on tax, saying it “has fully engaged in making massive strides” on tax transparency and reforms. Photograph: Alan Betson

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The European Commission will pressure Ireland to address “aggressive tax planning” in national plans for spending its chunk of the bloc’s €750 billion Covid-19 economic recovery funding, The Irish Times understands.

Ireland is due to get hundreds of millions of euro in grants and loans over the next three years as part of the stimulus plan, but must submit a plan for how it will spend the cash that must be signed off by the commission.

Member states must commit to using the money for investments that strengthen their economies for the future, particularly in digitalisation and green initiatives, in order to get the nod.

But the commission will also insist that governments agree to implement a longstanding list of recommended reforms, known as “country-specific recommendations”, for their spending plans to be signed off on and the cash released.

This would include measures to “close loopholes in their tax codes, modernise/digitalise tax administration, and promote a culture of compliance”, according to a commission document.

European economy commissioner Paolo Gentiloni has confirmed that tax reforms are on the commission’s wish list when it comes to Ireland’s national recovery plan, in a written answer provided to Sinn Féin MEP Chris MacManus seen by The Irish Times.

“It is important to strengthen the fight against tax avoidance and close loopholes that can lead to situations of double non-taxation,” Mr Gentiloni wrote.

“In the Irish context, the high level of royalty and dividend payments as a percentage of gross domestic product suggests that tax rules are used by companies that engage in aggressive tax planning.

‘Substantial progress’

“Member states’ recovery and resilience plans are expected to contribute to effectively addressing all or a significant subset of challenges identified in the relevant country-specific recommendations, including fiscal aspects,” he added.

“Unless the commission has assessed progress with these recommendations as ‘substantial progress’ or ‘full implementation’, all country-specific recommendations are relevant.”

The European Commission is under intense pressure from more fiscally conservative member states to tightly police how the recovery funds are spent, and has vowed to use “strict criteria”.

In its 2020 recommendations for Ireland, the commission wrote that a high level of certain payments to shareholders as a percentage of national gross domestic product indicated that companies were using Irish tax rules for aggressive tax planning.

It argued that tackling the issue “is key to improve the efficiency and fairness of tax systems”, and that broadening the tax base would also make Ireland’s public accounts “more resilient to economic fluctuations and idiosyncratic shocks”.

In initial draft national spending plans by EU member states, the issue of aggressive tax planning “is not addressed”, according to a commission document, which notes that measures already taken “only partially address” the issue.

International momentum

Minister for Finance Paschal Donohoe defended Ireland’s record on tax in a key speech last week, in which he said the country “has fully engaged in making massive strides” on tax transparency and reforms.

Mr Donohoe acknowledged there is international momentum to reach international deals on digital taxation and minimum corporation tax rates. But he defended Ireland’s 12.5 per cent tax rate as fair and said tax policy was essential to help small countries compete, “as a legitimate lever to compensate for advantages of scale, location, resources, industrial heritage and the real, material and persistent advantage enjoyed by larger countries”.

The initial deadline to submit national spending plans was Friday, but Ireland received an extension along with several other member states, and is expected to submit the 1,000-pages document in May. The commission is expected to receive about a dozen national plans by this weekend.

Ireland is among the EU countries which have yet to ratify a key part of the EU recovery plan, allowing the commission to borrow to raise the money, something that requires approval in national parliaments.

Germany, France, Italy and Spain made a joint call for national parliaments to sign off on the plan as soon as possible so that the money can start flowing to stimulate pandemic-struck economies. with Spain’s economy minister and deputy prime minister Nadia Calviño insisting “time is of the essence”.

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