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Our diplomats facing a fight in Brussels and it’s not about Brexit

Looming new corporate tax proposals open up another battlefront for Ireland

As if Brexit and the possibility of US tax changes do not present enough uncertainty for Irish economic policymakers, new corporate tax proposals set to be discussed by EU finance ministers open up another battlefront for Ireland. The big EU countries are putting forward a plan that would transform the basis on which major US companies pay tax in Europe, a move that threatens to undermine one of the pitches Ireland uses to attract major US investors and damage our corporate tax base.

The Financial Times reported this weekend that the French government, with the backing of Germany, Spain and Italy, were presenting a plan that would dramatically change the way big companies pay tax. Big multinationals would be taxed on the basis of turnover, according to the proposal, as opposed to the current system which taxes them on profits. In what appeared a carefully choreographed launch, the European Commission also welcomed the plan.

The background to this is the debate about the extraordinarily low levels of tax paid by many big US companies on their operations in the EU market. Google, Facebook and of course Apple have been in the spotlight, with the European Commission finding in a landmark decision that Apple owed the Irish Government in excess of €13 billion plus interest for unpaid tax.

This, according to the briefings coming from Paris, Berlin and Brussels, is an indication of the scale of cash that could be involved if the big players paid their dues. There have also been a series of disputes involving other companies, including Google, centring on where tax should be paid. This is far from straightforward, with a tax system invented to deal with the taxation of goods struggling in the internet era, where it is often far from clear where tax should be paid.

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US companies have used a range of tactics to cut the tax bills they pay on overseas earnings. But they typically operate in the following way. Profits are earned on sales across Europe and a large proportion then flow back to the country where the corporation has its European headquarters. Many have this EU base in Ireland. In turn the actual amount of taxable income is sharply reduced by claiming allowances on foot of the intellectual property used to design, create and market the products.

Offshore tax havens

Typically this has allowed the companies to channel profits out of Europe – after paying small amounts of tax – to offshore tax havens such as the Cayman Island, Bermuda and so on. In turn US tax law allows them to avoid paying American corporation tax on these profits provided they are not returned to the US.

The companies involved have always claimed they operate within the law – and in many cases this may be true. But the cynical gaming of a gap between the US and European tax systems has been pushed to the limit – and beyond. Ireland is only one link in the chain, but through measures such as the now-abolished “double Irish” we have made it easier for US companies to structure their tax avoidance and have thus been in the firing line.

Under proposals overseen by the OECD – the Paris-based body representing all major industrial countries – there have been steps to reform this. These have centred on trying to get companies to pay tax where they have major centres of operation and to crack down on the use of tax havens. This OECD process has risks for Ireland, but as the companies have major operations here the Government has been prepared to support it. In fact, we appear to have benefited as some big players, apparently including Apple, have restructured their operations to Ireland’s advantage.

The plan emerging from Paris is completely different and is another chapter in the battle between the OECD and the EU to control this process. It suggests that companies would pay tax based on sales, or turnover and not profits. As most sales are made in big economies, this would be to the advantage of the big players and the disadvantage of smaller countries such as Ireland.

There will, however, be huge barriers. It is not clear how the EU could impose such a system, when companies everywhere else are taxed on profits. Also, is this just to apply to big US companies, or all large players? Tax changes in the EU also require unanimity and could be blocked by any one country. Ireland will certainly oppose the plan, though it will no longer have the support of the UK, on which it could have relied in the past on this subject.

New uncertainty

The proposal does create new uncertainty, however. Already threatened US tax changes could limit the “push” that the current system gives big multinationals to establish operations outside the US and avoid the 35 per cent corporate profits tax rate on as much income as possible. President Donald Trump wants to cut this rate and also provide an incentive for companies to bring home cash stashed offshore. A plan to penalise companies importing into the US – which would have increased the threat to us – now seems to have been dropped.

Now we also face proposals in Europe that could further undermine our tax advantage, even if Ireland would still have many attractions as a European base. Taxing on the basis of sales could also threaten our corporate tax base, though it is too early yet to judge the extent of this threat. Surging corporate tax has been a boon to the Irish exchequer in recent years, but moves on both sides of the Atlantic suggest we need to be cautious in pencilling in further increases for the years ahead. And just as Brexit is coming to the boil, it seems our diplomats face a new battle in Brussels.