On tax we are the undisputed leaders of the EU awkward squad

Cliff Taylor: New move changing how big companies are taxed raises serious questions for Ireland

Ireland had a “victory” this week when EU finance ministers decided to abandon – for now – the idea of imposing a special digital sales tax to increase the take from the big tech multinationals.

This would have increased the amount of tax the big players pay in large markets like France and Germany – and reduce what they pay here. Ireland, along with Sweden, Denmark and Finland, had opposed the move and, as unanimity is needed for EU tax changes, the idea has been parked.

So that’s all okay then?

Well, no.

It has been a bit lost in the Brexit fuss, but a move is gathering pace to change the way big companies are taxed – and specifically to make sure that there is a bigger tax from the likes of Facebook, Google, Amazon and the other leaders of the digital economy.

Change is now, clearly, on the way, raising serious strategic questions for Ireland.

Successive Irish finance ministers have fought off proposed EU tax changes

Minister for Finance Paschal Donohoe seemed to accept as much, when – welcoming the EU move on digital tax – he commented that "given the concerns of our citizens I accept that we will have to make changes globally".

Successive Irish finance ministers have fought off proposed EU tax changes, saying that Ireland was committed, instead, to the process led by the OECD, the body in which some 125 industrialised countries are represented. The OECD changes have been slow – and have posed less threat to Ireland. Until now.

And having used the OECD process as cover, we can hardly back out now.

Some context is necessary here. Irish corporation tax has soared in recent years. Ibec has pointed out that, since 2015, the State has received €14 billion more than expected from corporate tax receipts, €1 billion more than European Commission ruled that we were owed by Apple in its landmark disputed judgment.

Strong corporation tax payments have reflected, in part, a buoyant economy and strong exports – both boosting profits and thus the tax paid on them.

However, reorganisations by the major multinationals in response to earlier changes recommended by the OECD have also been vital.

This has involved moving a lot of their trademarks, copyrights and patents – their so-called intellectual property – from offshore tax havens to Ireland. While profits earned directly by this intellectual property are sheltered, for now, by tax allowances, the big companies have also brought other associated activities to Ireland as part of these reorganisations, increasing the profits they report here – and our corporate tax take.

This has benefited our exchequer – and is probably sustainable for the moment, in so far as these things can ever be forecast. But it has led to some “tax envy” elsewhere in Europe. And to questions about why all the extra tax cash should be going to Ireland and none to big countries where most of the customers are located.

Why should Ireland get all the tax benefit, even if the operation is run from here?

Traditionally this was the way it worked – tax was paid where the people were employed and processes were undertaken. But, increasingly, this is seen not to work in a digital economy, either for the big tech players or more widely for business generally.

If Facebook, for example, is making profit from attracting customers in France, Germany, Italy and so on, why should Ireland get all the tax benefit, even if the operation is run from here?

The OECD is now studying how a reform plan might work. It looks likely to happen via some value being put on the customer online interactions, the data collected and the value of the big brand names being deployed to make this happen.

This will mean changes in the way profits are allocated between countries, with more payable in big markets.

The wind is now firmly behind this. IMF managing director Christine Lagarde penned an oped in the Financial Times last week calling for change. The European Parliament is vocal – and has named Ireland as one EU jurisdiction which operates in some ways like a tax haven.

Big EU countries. especially France, are identifying us as the clear block to their European tax plans.

We don’t see it here, but in the French media, in particular, this is a big issue and president Macron has promised to deliver. They may support us on the backstop, but on tax we are the undisputed leaders of the EU awkward squad.

The battle now is to hold on to as much of this tax base as possible

The realpolitik of this puts us on the back foot – in damage limitation mode. We have had a big boost to corporate tax revenues in recent years, partly as a result of a once-off restructuring. The battle now is to hold on to as much of this tax base as possible.

And to adjust our tactics in attracting foreign direct investment in a world where countries like Ireland will have much less ability to use tax as a marketing tool.

There is one final point – the reason why there is such political heat and pressure on this issue. Many of the world’s biggest companies are aggressive tax planners – in particular big US tech and digital firms have arranged their affairs to pay little tax on the profits earned outside the US.

The OECD estimates this cuts corporate tax revenue worldwide by 4-10 per cent, or $100 billion (€88.3 billion) to $240 billion each year in cash terms.

The multinationals and their tax planners have pushed this too far for years – playing governments off against each other and exploiting the ability to shift profits between countries to do so.

It’s all been perfectly legal, they claim. Perhaps so, but as the facts have been dragged into the light, it has been exposed for what it is – aggressive and unreasonable. Nor is it now politically sustainable – and so it will change.