Hotter and hotter in corporate tax kitchen

Cantillon: Ireland in crosswires as European Commission targets ‘aggressive tax planning’

European commissioner Pierre Moscovici: IP payments from Irish subsidiaries were 23-25 per cent of Irish gross domestic product in 2015 and 2016, way above the average of other member states.  Photograph: Olivier Hoslet/EPA

European commissioner Pierre Moscovici: IP payments from Irish subsidiaries were 23-25 per cent of Irish gross domestic product in 2015 and 2016, way above the average of other member states. Photograph: Olivier Hoslet/EPA

 

The heat is being relentlessly turned up under Ireland on the corporate tax issue. Ireland will not welcome being part of what might be called the “secret seven”, seven countries called out by tax commissioner Pierre Moscovici on Wednesday for facilitating so-called “aggressive tax planning”. The others are Belgium, Cyprus. Hungary, Luxembourg, Malta and the Netherlands.

The European Commission chose to make an issue of this in its latest round of reports on the EU economies. It is perhaps no coincidence that its proposals on a new digital sales tax, strongly opposed by Ireland, are due to be published shortly and considered by EU leaders at their summit at the end of this month.

For years, the debate has swirled around the issue of our 12.5 per cent corporate tax rate. But this has been a distraction. The real questions have always been elsewhere, and the Government will be uncomfortable with aspects of the commission report which says that the high level of dividend payments out of Irish subsidiaries – and in particular charges levied for using intellectual property (IP) – “suggest that the country’s tax rules are used by companies that engage in aggressive tax planning”.

Role of multinationals

A graph with the report shows that IP payments from Irish subsidiaries were in the 23-25 per cent range of Irish gross domestic product in 2015 and 2016, way above the average of other member states in low single figures.

Ireland will argue that this is because the multinationals have their European headquarters in Ireland. However the EU report argues that Ireland helps too much. It says that “exemptions from withholding taxes on dividend payments made by companies based in Ireland may lead to those payments escaping tax altogether, if they are also not subject to tax in the recipient jurisdiction. This may facilitate aggressive tax planning.”

This is complicated territory. But the EU is now picking at the rules of the Irish tax regime to see if it has gone too far in helping big US companies move profits earned across Europe through Irish operations without being exposed to tax. As with the digital tax proposals, there may be danger here for Ireland, with all the signs of a big push from the commission on this issue and advance briefings given to some international media before Wednesday’s report fingering Ireland’s tax regime yet again.

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