Plans to overhaul global tax system to be published

A plan for overhauling the global system for the taxation of multinationals, to be published on Monday in Paris, will contain major challenges and opportunities for Ireland’s vital foreign direct investment (FDI) sector, according to tax experts.

The culmination of two years’ work, the report by the Organisation for Economic Cooperation and Development represents the first effort in a century to design a new template for global taxation.

Commissioned by the G20 in 2013, in response to the global recession and the view that multinationals were avoiding paying billions of euro annually in corporation tax, the so-called Base Erosion and Profit-Shifting (Beps) project aims to produce a new global template that will better align where a company pays tax, and where it has business substance.

Double Irish

Tax experts say the project is going to close down the use of “Caribbean cashbox-type entities”, legal entities in offshore locations that book massive amounts of multinationals’ profits, but often have few if any employees.

Entities such as these are used in the so-called Double Irish tax structure, which the Government has announced is to be closed down by 2020.

The changes to global tax rules are considered by Irish tax experts and policymakers to contain both threats and potential advantages for Ireland.

“I think there is more in the opportunities column for Ireland than there is in the risk column,” said PwC’s Beps policy leader Peter Reilly.

Companies with offshore intellectual property operations that book substantial profits in locations such as Bermuda and the Cayman Islands, “will need to look at how to onshore that intellectual property and I think Ireland is very well-placed in that context”.

However, other aspects of the Beps plan, such as changes to how tax treaties operate, could contain dangers for Ireland. The Government’s plan to attract high-quality FDI investment by way of a Knowledge Development Box tax structure, has already seen its value “blunted” by the Beps process, he added.

While Monday’s report, which will cover 15 inter-related “action points” designed to help ensure multinationals pay the level of tax that governments expect them to, is widely seen as a significant political achievement, it is understood there are aspects of the plan that may have been held back because of resistance in the United States.

A senior figure from the US treasury, Robert Stack, has played a key role in the Beps process but backing in the treasury for some of the Beps proposals has encountered resistance in the US Senate.

US tax code

Meanwhile, reform of the US tax code, which could have a significant effect on the global tax regime and Ireland’s FDI strategies, has been held up by political paralysis there.

It is expected that the Beps plan will be given political approval at a meeting of the G20 heads of state later this year, and the focus will then shift to monitoring the implementation of its proposals.

Deloitte vice chairman Padraig Cronin said it will be vital that Ireland stays "ahead of the curve" as the process unfolds.

One proposals that looks set to be implemented, in Europe at least, is country-by-country reporting, whereby multinationals with turnovers above a certain threshold will give a country-by-country breakdown of their activities to the Revenue in the country where they are headquartered. The data can then be shared with other tax authorities by way of the tax treaty network.

Ireland is set to introduce measures for such reporting in the upcoming budget. However, there is strong political resistance to the idea in the US, so its introduction for the bulk of the Irish FDI sector, which is comprises US companies, looks set to be delayed.

The OECD has said it has no difficulty with Ireland’s 12.5 per cent corporation tax rate.