Why Ireland should address corporate tax residency rules before we’re forced to

Opinion: The challenge for the Department of Finance will be convincing companies that the changes need to take place

As Bob Dylan puts it, “You don’t have to be a weatherman to know which way the wind blows” and change is coming in the global tax environment. But, perhaps contrary to the conventional wisdom, this could end up playing out quite well for Ireland in the medium to long term.

Let’s start at the end game. It is in Ireland’s strategic economic interests to have a corporate tax regime that attracts investment, creates employment and rewards risk.

However, it must also be accepted by the global community as a competitive but fair tax system. We need to take the long-term view. In the current global debate, being hosted by the OECD under its BEPS (base erosion and profit shifting) agenda, it is the last factor that has Ireland in the spotlight. Minister for Finance Michael Noonan has rolled out his “3Rs” – rate, regime and reputation. The 12.5 per cent rate is a settled issue. Ireland’s tax regime is rules-based and transparent; but how does Ireland’s tax reputation stack up at what is a pivotal time in the global tax environment?

Constant attack

Ireland’s corporate tax regime is under constant attack from a variety of locations. Much of that criticism is flawed – for example, a paper suggesting the tax rate for companies operating in Ireland is 2.2 per cent has been comprehensively rebutted, but the inaccurate headline is what is remembered. Explaining how tax works on an international basis is challenging while a senator saying a company pays only 2 per cent tax is not.

The department on the last budget day issued a proactive document, Ireland's International Tax Strategy, setting out Ireland's principles in the global debate and last Tuesday issued a public consultation document on the Irish corporate tax regime post the BEPS debate.

Reading between the lines, it is clear our corporate residency rules have been identified as the issue that needs to be addressed from a reputational perspective. If we accept this principle, the only issue we are debating is timing. Does Ireland benefit from addressing the issue before it is forced upon it? I believe the balance of advantages lies in Ireland dealing with it on a proactive basis.

What are the corporate residency rules? Irish law says a company is tax resident where it is managed and controlled. Other countries, for example, the US, say a company is tax resident where they are incorporated. Some US companies have used Irish incorporated companies to house assets and activities which have nothing to do with Ireland and which have no operations here. These Irish incorporated companies tend to be resident in no/low tax jurisdictions. But people see an Irish incorporated company and wonder why it isn’t paying Irish tax. Clearly it doesn’t if it’s not tax resident here – an analogy might be someone who holds an Irish passport but doesn’t live in Ireland – but the perception of an “Irish” company not paying any tax is causing reputational damage to Ireland. This is the issue Ireland looks ready to make changes on which would, when implemented, eliminate the “double Irish”.

Irish tax

Some people assume that these companies will then pay Irish tax at 12.5 per cent.

However, that is unlikely as these assets and activities have nothing to do with Ireland. If there is US tax reform that affects US companies using low/no tax jurisdictions then it might make a difference but that seems two or three years off yet.

The challenge for the department with any such changes will be messaging and engagement with the foreign direct investment community – convincing companies why the changes need to take place to make Ireland a sustainable location, while also ensuring that other changes are made so that our post-BEPS regime remains competitive with other countries for inward investment. Other countries such as Britain are trying to make their regime more business friendly to attract foreign direct investment. They have many other advantages over Ireland, so we should be careful we don’t find ourselves uncompetitive.

The ideal scenario for Ireland post the OECD BEPS process and US tax reform is that tax havens would be out of business, countries would not be able to give preferential rulings to taxpayers and there would be a focus on aligning profits with substance. In such circumstances, Ireland, with a low rate, a transparent tax system and comprehensive double-tax treaty network will provide a very competitive tax environment for companies who are willing to put activities in Ireland.

The department has issued an invitation to corporate Ireland to give input and shape this environment. Engagement must take place.

Feargal O’Rourke is head of Tax at PwC Ireland. Twitter @feargalorourke