Joe Tynan: International tax changes on the horizon

The Irish economy is now in better shape than at any time since the beginning of the financial crisis. After many years of tough austerity measures, last year's budget marked a turning point where Minister for Finance Michael Noonan was in a position to reverse some of the increases to personal tax and offer a small stimulus package to business.

He has continued this trend this year with €750 million to spend on tax adjustments targeted mainly at reducing personal taxes and enhancing tax reliefs for entrepreneurs. These should assist in stimulating Irish domestic activity.

From a personal tax perspective, low- to middle-income earners continue to benefit most. The phasing in of a tax credit for the self-employed will bring their effective tax rate closer to that of PAYE workers, very welcome news for a sector with little representation. However, the marginal rate of income tax remains at 52 per cent for earnings above €70,044, one of the highest in the OECD.

We are at a critical juncture in the global tax policy debate with the OECD’s publication of the final papers on tax base erosion and profit shifting (Beps). The coming years will see a move to the implementation phase at country level. The reports embody a move towards better alignment of taxing rights with substance. Many multinational groups will need to reassess their global operations, particularly those currently holding valuable revenue-generating assets such as intellectual property (IP) in low-tax jurisdictions where there is little substance. The OECD is also reviewing the “innovation box” offerings in many countries, and most are likely to require significant changes in the coming years.

Attractive proposition For multinationals looking to better align their IP with substance in a jurisdiction with a good tax regime and a successful track record, Ireland is a very attractive proposition. Our tax system is extremely competitive, with a low corporation tax rate and an established regime of tax relief for expenditure on intangible assets and R&D activities.

Ireland has also moved to ensure that its “knowledge development box” (KDB) offering is Beps-compliant. This should provide certainty on tax treatment to groups looking for an appropriate location for IP-related activities.

A significant challenge will be to ensure key management associated with such new activities is located in Ireland. While our corporate tax regime is attractive, one potential fly in the ointment in terms of attracting talent to Ireland is our marginal income tax rate for high income earners.

A headline rate of 52 per cent for earnings above €70,044 is widely seen as unpalatable. This compares unfavourably with those of many OECD countries where the top rate of tax is not reached until earnings have reached minimum thresholds of €150,000 or beyond. Reducing this marginal rate below 50 per cent would have been a positive move, as would the introduction of incentives beyond the limited Sarp programme for assignees to promote Ireland as an attractive relocation destination.

As anticipated, the Minister announced the introduction of country-by country reporting (CbCR) for Irish- parented multinational groups with consolidated revenue of €750 million or more. Organisations will be required to file annually with the Revenue Commissioners a report for each tax jurisdiction in which they operate.

Risk-assessment tool CbCR is viewed by tax authorities globally as improving transparency, providing them with the "risk assessment" tool necessary to identify tax avoidance. It affords them the opportunity to analyse across groups matters such as the location of activities versus revenue/profits, and to benchmark data such as margins across different countries.

There are concerns that this could lead to multinational groups being in a perpetual audit or inquiry cycle as tax authorities get to grips with this information. For example, they may focus on the rationale behind justifiable differences in margins between countries.

The tax adjustments made in this budget are aimed primarily at improving the tax situation for workers, particularly low- to middle-income earners. The incentives for entrepreneurs and the KDB should stimulate domestic business growth. However, international relativities in these areas are becoming more important.

Joe Tynan is Head of Tax at PwC