Devil in detail when it comes to future taxation policy

Global tax reform has been a hot news topic in recent months. The changed administration in the US brought new impetus to the Organisation for Economic Co-operation and Development (OECD) process and it now appears likely that final agreement will be reached by the end of the year. Ireland has remained outside of the consensus to date, but this could change, according to Cormac Kelleher, international tax partner with Mazars in Ireland.

“While Ireland continues to be vocal in its support of the OECD global tax reform agenda, to date it has not signed up for the proposed changes, including a minimum effective tax rate of 15 per cent for big companies,” he notes. “This delay seems to be attributable to the proposed minimum rate and seeking to obtain concessions on key technical elements of the provisions. A secondary challenge comes in the guise of tax reform which the US is trying to implement itself.”

Balancing the OECD and US agendas with Ireland’s reputation is a difficult act. “The general view is Ireland is likely to sign up to the OECD provisions, but only once greater clarity, and ideally concessions, have been obtained,” says Kelleher. “The OECD appears keen to have essential countries such as Ireland on board. But what steps will convince Ireland and the remaining eight countries to sign this agreement? For example, to achieve engagement from China, concessions were given by the OECD.”

Exchequer receipts

Ireland’s hesitance is at least partly due to the impact reform will have on exchequer receipts. “It is now generally accepted that global tax reform will significantly impact Ireland,” says Kelleher. “Jurisdictions such as France and Germany are expected to be net beneficiaries, which in part explains their support for reform. From an overall exchequer perspective, while the impact has been baked into budget projections, it will have a knock-on effect on borrowing levels and future tax strategy.”

Responding to this loss of revenue will require an imaginative response. “A vital element of global reform is a focus on talent and where it is located,” he adds. “Essentially, the more highly skilled employees there are in a jurisdiction performing high-value work, the greater the proportion of value that can be attributed to that jurisdiction. The concept of a smart economy has always been important but will be even more so in the future.”

This will require a focus on attracting highly qualified workers when developing future tax policy, Kelleher contends. “While we have tax incentives such as the special assignee relief programme (Sarp), regimes such as these need to be reviewed and enhanced. Covid is likely to result in a change in the working environment and where employees choose to work. Some large tech employers have already announced they will allow their staff to work remotely for good. The corporate tax deficit could be offset by attracting highly skilled and paid talent to Ireland via an attractive expatriate regime. The exchequer receives higher payroll taxes and VAT receipts from more disposable income circulating in the economy.”

Home working arrangements

The advent of hybrid working will also require a tax response, he adds. “Hybrid working is the future. While employers can provide certain benefits to staff tax-free such as specific office equipment, and mobile phones, these are limited and were written at a time when remote working was limited. With a government plan to encourage staff to live and work in non-urban areas, the question of how an employer can reimburse an employee for the cost of home office expenses needs to be reconsidered. As we approach winter, questions will undoubtedly be raised on whether a contribution can be made to home heating costs.”

And it will extend beyond standard household bills. “Tax policy needs to be updated for a post Covid-19 environment to consider scenarios ranging from an employee incurring expenditure to build and fit out a home office to being reimbursed for the monthly wifi bill,” Kelleher concludes. “Will there be an impact on the employees’ capital gains tax position if they sell their home at a future date, and can workers claim travel expenses for visiting the main office once a month?”