Cliff Taylor: It is time for us to take the corporate tax medicine
OECD reforms should be seen as challenge for Ireland rather than looming catastrophe
Minister for Finance Paschal Donohoe: OECD corporate tax reforms one of the biggest challenges he faces. Photograph: Dara Mac Dónaill
It’s happening. All the signals now are that a major shake-up in the way big companies are taxed is on the way towards agreement next year, with big implications for Ireland. Taoiseach Leo Varadkar signalled as much when he spoke to the big US multinationals at their Thanksgiving gathering on Thursday.
This reflects the intelligence-gathering of the Irish official system internationally and the reality that the big players – led by the US and Germany –want the global reform plan being masterminded by OECD tax head Pascal Saint Amans to succeed.
This should be seen as a challenge to Ireland, rather than some kind of looming catastrophe, but it does have significant implications for both our public finances and our policy of attracting investment here. It may even spark a review of our FDI policy – perhaps timely anyway in the light of the sustainability agenda and the pressure on housing. But in the short-term the focus will be on the threat to revenues and investment.
Strategically, it may be time for us to take the medicine and, as Donohoe has said, to plan future budgets on this basis
Varadkar’s comments on Friday – that higher stamp duty as construction picks up might compensate for any hit to corporation tax – may turn out to be correct. But you wouldn’t want to be relying on it as a policy approach.
At the heart of the tensions between the budget watchdog, the Irish Fiscal Advisory Council (IFAC) and the Government is a debate about just how much revenue needs to be set aside – and not spent – to safeguard us against a fall-off in corporation tax, now accounting for one in five of every euro in tax collected.
You could argue about what the “right” answer to this question is – but it certainly isn’t to rely on an uplift in stamp duty or some other potentially transitory revenue source to make up any shortfall.
The extent of our exposure to corporate tax reform is very difficult to estimate. The IFAC says between €3 billion-€6 billion of annual corporate tax revenues –which could come close to €12 billion this year – are hard to explain via normal economic trends and so could be considered vulnerable.
The international reform plans in the pipeline could certainly knock a chunk off revenue here – though how this would balance out against other corporate tax trends, some of them positive, is impossible to gauge. But the dangers are becoming clearer and the corporate tax reform plan is one of the key strategic issues facing this Government and Minister for Finance Paschal Donohoe – and the key moves will come in 2020, before and after the likely date of the general election.
Tax – and Brexit – represent two big unknowns heading into 2020, threatening what has been a remarkable run of real economic growth
Donohoe and his colleagues, with their international contacts, have been picking up the message that a deal is now more likely at the OECD – the only issue is what it will look like. And given the international mood, an OECD deal is probably the better outcome for Ireland. The alternative – a range of unilateral actions or a new Franco-German push for EU-wide reform– would lead to more uncertainty and ultimately more danger for Ireland.
Strategically, it may be time for us to take the medicine and, as Donohoe has said, to plan future budgets on this basis. And politically we need to accept that the tax avoidance game for big companies is changing fundamentally and that it is only right this should happen. We have lost the fight against being dubbed a “ tax haven” – rightly or wrongly – and are at the sharp end of the debate internationally.
Most of the discussion here has been about part one of the OECD proposal, which is that the big companies would pay a bit more tax in the big markets in which they sell – like the UK, France and Germany – and a bit less where they have their international headquarters, typically in smaller, lower-taxed countries like Ireland.
This will cost us in terms of lost revenue, though given the more than doubling of corporate tax revenue in recent years we should still end up well ahead of where we were five years ago. But it is part two of the OECD plan where the real questions arise.
This involves a proposal to set a minimum corporate tax rate for big companies, a baseline of what they must pay as a percentage of earnings. This is controversial and if there is a falling out at the OECD it will be about this. But there are big questions for Ireland in how the minimum rate is set – particularly whether it is set at a global levels for companies, or applies to what they are obliged to pay in each county. And the minimum rate chosen will, of course, also be vital. This has implications for attracting future FDI – and holding some of what is here – as well as just corporate tax revenues.
For example were the OECD to agree that big companies must pay a minimum rate of tax in each country in which they operate and this rate was set around our current 12.5 per cent, or a bit higher, our competitive advantage in terms of using tax to attract FDI would be significantly hit.
If the tax operates at a global level for companies, the damage would be bit less for us – and how deductions and allowances work will also be vital.
Realistically, unlike around the EU table, we have no veto, as if Ireland says “no” then everyone else can still go ahead.
Tax – and Brexit – represent two big unknowns heading into 2020, threatening what has been a remarkable run of real economic growth.
It is tricky for Ireland that the two are coinciding – and will overshadow our own general election, which is likely to take place when both are still in the mixer.