Government must avoid knee-jerk reaction to Paradise Papers

Controversy is over complex but legal methods firms use to minimise tax bills

European finance ministers yesterday blacklisted 17 countries as part of a crackdown on aggressive tax avoidance. American Samoa, Bahrain, Barbados, Grenada, Guam, South Korea, Macau, the Marshall Islands, Mongolia, Namibia, Palau, Panama, St Lucia, Samoa, Trinidad and Tobago, Tunisia and the United Arab Emirates were all listed as so-called non-compliant jurisdictions.

From the Luxembourg Leaks to the Panama Papers to the Paradise Papers there seems to be an insatiable appetite to examine the activities of businesses and individuals.

It is important that Ireland does not overreact to this scrutiny and that it remains steadfast in its objective to position itself as a country that provides certainty to enable business engage in long-term planning that will bring economic growth, jobs and wealth creation.

The ideal position is to ensure that the interests of government, the private sector and the citizens are fully aligned to ensure a prosperous and vibrant economy. Ultimately it is the private sector that creates jobs and opportunities, with government policy being the key enabler.


If there is concern that the law allows practices that we don't like, then let's re-examine the law

In an Irish context the private sector comprises multinational companies and the indigenous (SME) sector, whose management have an obligation to maximise the return to shareholders while ensuring the businesses they run contribute to and play a role in the wider community.

Legal methods

The controversy over matters such as the high-profile leaks is not around alleged law-breaking. It is around what seems to be various complex but legal methods used by businesses and individuals to minimise their tax bills.

The rule of law is a key foundation stone of any democracy. It is the role of an elected government to fulfil the wishes of the electorate as regards what the laws (including on taxation) should be. And if there is concern that the law allows practices that we don’t like, then let’s re-examine the law – as governments are currently doing through the OECD-sponsored base-erosion profit-shifting (Beps) process.

But it would undermine the democratic model if corporate behaviour was not judged against how well it complied with the law, but against more subjective criteria and opinions. Such an approach undermines the rule of law and creates uncertainty for all concerned. Certainty allows businesses to prosper and underpin economic growth and cross-Border trade.

From a tax perspective, the Beps project is the forum through which governments are agreeing on the tax rules that should apply to ensure everyone pays their fair share of tax. The project is in the course of being implemented. Its essence is to ensure better alignment between real substance and the allocation of profit. This will increase the level of tax paid by businesses over time.

The Government is fully committed to implementing all relevant Beps recommendations on a consistent basis with other countries. To ensure it obtains a fair share of the increased tax cake it must move at the same pace as other countries while maintaining its competitiveness as a location.

This requires a re-examination at our tax strategy. If we do not do so we might all be “getting up early in the morning to work hard” but others could be eating our lunch.

In setting our road map, we need to show bold ambition. Critically, all stakeholders should participate in a consultation process

Ireland now needs to determine how it will play to win within the evolving Beps framework. In this context, history shows embracing change that is coming is always the best approach to maximising the opportunity.

Knee-jerk reactions

Setting out what our 2030 road map will be and then sticking to it would send a powerful message to the business community that it should feel it is safe to get on with business and underpin economic growth. By contrast, knee-jerk reactions by governments are bad for business, certainly with a knock-on negative impact on economic growth. We need to avoid these.

In setting our road map, we need to show bold ambition. Critically, all stakeholders should participate in a consultation process to ensure the final product is fit for purpose.

Research by the OECD suggests a hierarchy of taxation harmful to economic growth exists. This should underpin our new strategy framework. This would require a greater focus on consumption and property taxes while reducing personal taxes and maintaining a competitive corporate tax regime.

We should aim to finalise our propositions during 2018 and legislate accordingly in Finance Act 2019 with a commitment to maintain the core principles to 2030.

Then, companies that play by these rules should be allowed to get on with business without fear of criticism.

Pádraig Cronin is vice-chairman of Deloitte