Cliff Taylor: Ireland faces year of living dangerously over Brexit

All likely outcomes carry significant dangers to Irish trade and jobs

Taoiseach Leo Varadkar will set his stall out against the digital tax plan at the EU summit on 22nd-23rd March. Photograph: Clodagh Kilcoyne/Reuters

Taoiseach Leo Varadkar will set his stall out against the digital tax plan at the EU summit on 22nd-23rd March. Photograph: Clodagh Kilcoyne/Reuters

 

At the next European Union summit on 22nd-23rd March, Taoiseach Leo Varadkar will face into a dual challenge. First, EU leaders are to have a special debate on the taxation of the digital sector, based on proposals carrying particular dangers for Ireland. Then, progress in the Brexit talks is to be discussed and the leaders will guide negotiators on what happens next.

Trade and tax are at the heart of our economic model. With the Brexit talks faces big difficulties and an EU push clearly coming on corporate tax, we are facing into a year of living dangerously.

There is always a temptation to over-interpret the latest “thing” and overplay its likely consequences. Some kind of Brexit deal may well emerge. And many previous attempts to harmonise EU corporate tax have ended up in a quiet siding, going nowhere.

But the backdrop is different now. Populism has driven politics – towards Brexit, to elect Donald Trump and to demand more tax from massive multinationals. Part of this is a new economic nationalism, demonstrated again this week as US president Donald Trump announced tariffs – or special import taxes – on steel and aluminium imports , ostensibly to protect US producers. The EU, Canada and others have threatened to retaliate.

Double whammy

For a country reliant on free international trade, this is one to watch. Even if we are not directly threatened by Trump’s move on steel and aluminium, trade tensions could escalate. And it is as another signal of the move away from global economic co-operation which also lies behind the bigger immediate risks from Brexit and the EU corporation tax moves. These threaten a double whammy to the modern and more traditional sectors of our economy.

Our economic development has been based on exports – and our corporate tax regime has been a key factor in attracting inward investment from big tech and pharma players, who have led the export charge. We are one of the world’s most open economies, hugely reliant not only on world economic growth but also on factors that affect trade and investment flows.

The focus in the Brexit debate has been on the impact on the Border, a key political issue. But with the UK being the biggest purchaser of exports from our indigenous sector, the biggest economic impact would come from restrictions on trade with the UK, valued at €1.2 billion a week. The recent report by Copenhagen Economics highlighted the potential cost from so-called non-tariff barriers – the bureaucracy, checks and delays which could follow a harder version of Brexit. Tariffs, if imposed, would take a toll too.

At the March EU summit,the Taoiseach will join the other leaders in assessing where the talks are at. This could involve fine-tuning guidelines for the next stage – but it could also involve looking at a near-crisis position in negotiations which have gone nowhere for a year and are still stuck in the mud of Conservative party politics.

Right now, if there is a deal, it looks likely to be some kind of a free-trade arrangement similar to that done between the EU and Canada, though probably going further in some areas. Such is the uncertainty that either extreme outcome – a UK retreat towards a new customs deal with the EU, or a chaotic no-deal Brexit – both also remain possible.

Border problem

Barring the UK staying in the EU trading bloc, these all carry significant dangers to Irish trade and jobs. Ireland could still face difficult decisions here on our negotiating priorities. A Canada-type free-trade deal would be better for us in economic terms, for example, than no deal, but on its own would not solve the Border problem. The support of our EU partners has so far been solid on the Border debate, but the talks on what happens after Brexit have yet to even get fully under way.

While the Taoiseach will count on this Brexit support at the March summit, he will be in a less comfortable position on the digital tax issue. A European Commission draft plan, leaked during the week, proposes a blunt tax on the sales of the big tech companies in EU markets and even if this plan falls this indicates a bigger fight to come about proposals to introduce a common corporate tax regime across the EU.

Our tax regime has long been a target for countries such as France. These moves threaten our corporate tax revenues. If big companies pay more in large markets where they sell products, they will have less taxable profits here, even if the impact of the various proposals will differ.

But fundamental tax changes could also threaten investment flows into Ireland in the years ahead as the big players reassess their strategy. Tax experts put the digital tax move into the context of recent US tax reforms, which aim to ensure the big tech players such as Apple, Google and Facebook pay more to the US treasury. Europe, it seems, wants its share of the loot. This one has a way to play out, but the existing corporate tax model – a key factor in bringing foreign direct investment to Ireland – is threatening to fracture.

The Taoiseach will set his stall out against the digital tax plan – which would be seen in the US as an act of economic aggression. And so far it appears there has been no suggestion that Ireland should give ground on corporate tax in return for support on the Brexit issue.

But equally we are dealing with realpolitik here in an increasingly aggressive world of economic diplomacy. It is now clear that we will face real pressure on the corporate tax issue and tricky choices and threats as Brexit plays out. And one small country has only so many cards to play.

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