Multinational moves could prompt major losses in tax

Action on tax avoidance could see €600m go from the pharma sector, says report

UCC economist Seamus Coffey: has warned that big pharma companies with European bases in Ireland could end up paying much more tax in big markets, cutting the take for the Irish exchequer

UCC economist Seamus Coffey: has warned that big pharma companies with European bases in Ireland could end up paying much more tax in big markets, cutting the take for the Irish exchequer

 

International moves on multinational tax could threaten Ireland, with a potential annual loss of corporate tax revenue of €600 million or more from the pharma sector alone, according to a new report from Chartered Accountants Ireland.

The report, written by UCC economist Seamus Coffey, warns that big pharma companies with European bases in Ireland could end up paying much more tax in big markets where their products are sold, cutting the take for the Irish exchequer.

Foreign-owned companies account for around three quarter of annual corporation tax payments, but there is uncertainty about how this revenue will be affected by international moves to cut down on corporate tax avoidance.

This is being led by the OECD under its Base Erosion and Profit Sharing initiative, but there may also be moves from Europe to revive a plan to create a common base for corporation taxation.

Caution

In particular it focuses on the pharma sector, responsible for around one sixth of annual corporation tax revenues, or about €700 million a year.

The risk here for Ireland, according to the report’s author Mr Coffey, is that only one per cent of the sales of pharmaceuticals in the EU takes place in Ireland.

This means that if tax were allocated purely on the basis of sales, there would be a potential reduction of 95 per cent in the profits from the pharmaceutical sector that would be included in Ireland’s tax base.

This would be Beps operating “at its most extreme” but would cost the Irish exchequer over €650 million per annum, as most of the tax revenue from the sector disappeared.

The report then examined a less extreme scenario under which the tax base was allocated largely on the basis of sales, but also taking into account capital assets and employees.

Under this formula, previously proposed by the EU Commission, the reduction in the tax base of pharma profits here would still be 80 per cent, costing the exchequer an annual €575 million.

Ireland would be the most exposed if this happened, followed by Sweden and the UK, with the biggest winners being the countries with the largest consumer markets – France, Italy, Germany and Spain.

In contrast, the report also examines the retail sector, a source of €200 million for the exchequer each year.

Around 44 per cent of profits in the sector are generated by foreign-owned companies. The report sees little danger to corporation tax revenue from this sector.

Boost tax

So far the focus has been on the potential upside as some multinationals move intellectual property assets to Ireland, which could boost tax here in the long term.

However the report for Chartered Accountants Ireland warns that rather than targeting the actual investment by pharma companies, some of the bigger EU countries could instead target the tax revenues by arguing for changes in the international tax rules.