Ireland and EU Corporate Tax Reform

Part I

James Stewart03/05/2018

Corporate tax reform is a key objective of EU policy. Examples include proposals for a harmonized corporate tax system (Common Corporate Tax Base CCTB and a Common Corporate Consolidated Tax Base, CCCTB) and taxes on the digital industry, which ensures the principle that profits will be taxed where they are made (read more).

 

Digital tax proposals by the EU were strongly supported by France, Germany, Italy and Spain. However, at a meeting of finance ministers in Sofia on April 6, Ireland, Denmark and the UK opposed a digital tax, along with other countries such as Luxembourg and Malta. This opposition raises serious concerns.  According to a Politico study,  only seven of the 28 member states are staunch supporters, with 13 described as being neutral or ‘on the fence’ and seven opposed. Germany, for one, is reportedly concerned that a digital tax could exacerbate tensions with the U.S. and potentially damage the German car industry.

 

Opposition at the country level is important because decisions at the European Council must be taken unanimously.  The Commission might wish, as the President of the Commission has stated, that decisions on tax are taken by Qualified Majority Voting (QMV), but this is unlikely.

 

In contrast, civil society orgnanisations such as Christian Aid, Oxfam, the European Trade Union Institute and the S & P Group in the European Parliament are strongly in favour of tax reform, including a digital tax, as is the European Parliament as a whole.

 

In Ireland, the Chairman of the Irish Fiscal Advisory Council has describedthe proposed  EU tax harmonisation rules as a greater threat that Brexit and claims they will reduce corporate tax revenues by 4 billion (Irish Times, Sept 14, 2017). The proposed digital tax has been described in similar terms. For example, Pat Leahy (Irish Times, Oct 28, 2017), states “people at the very top of Government believe it’s as serious as Brexit”. Corporate tax advisors are also strongly opposed to both measures.  These views are also shared by the main opposition party.  The shadow spokesman for Finance has stated :

 

“The common theme running through both the CCCTB and digital tax proposals is a desire to wrestle from small member states like Ireland the competitive advantage we have through our relatively low corporate tax rate. (https://www.fiannafail.ie/ireland-must-reject-eu-digital-tax-proposals-mcgrath/).

 

Why are some countries opposed to reform?

 

Over the span of many years, current corporate tax systems have developed to benefit some countries and manyMNE’s.

 

In the following table, the EU accounts for 55% of the non-U.S. worldwide profits of U.S. firms.  Most of these profits (68%), however, are declared in just three EU countries (Netherlands, Luxembourg and Ireland) with low effective tax rates.

 

Net Income of U.S. MNEs in Various Countries ($ billions)

 

2013

2013

2013

2014

2014

2014

2015

2015

2015

Low tax Countries

Net

Income

Tax

Paid

Tax Rate

  %

Net

Income

Tax

Paid

Tax Rate

   %

Net

Income

Tax

Paid

Tax Rate

  %

Netherlands

134.1

3.7

2.7

152.6

5.6

3.5

186.5

 3.8

 2.0

Luxembourg

112.7

0.4

0.4

124.4

0.8

0.6

  81.6

 0.8

 1.0

Ireland

106.8

3.6

3.3

115.3

4.0

3.3

131.6

 4.0

 2.9

Bermuda

  76.5

0.2

0.2

  84.2

n.a.

n.a.

  70.4

 0.7

 1.0

Switzerland

  64.5

2.9

4.3

  70.6

2.8

3.8

  69.9

 3.1

 4.2

UK Islands Caribbean

  49.6

0.9

1.7

  74.2

0.7

0.9

  63.0

 0.6

 0.9

Others

 

 

 

 

 

 

 

 

 

France

      6.8

    3.5

  33.9

    2.4

   4.1

 63.0

      7.9

  3.5

30.1

Germany

    16.9

    3.9

  18.7

  23.0

   6.7

22.6

    21.1

  4.9

18.8

UK

   72.3

    8.6

  10.6

    9.7

   9.1

 48.4

    11.8

  7.1

37.6

E.U.

 483.2

  32.0

    6.2

544.3

 40.3

   6.9

  585.8

32.6

  5.3

Total World

1044.6

138.9

  11.7

1166.2

160.6

 12.1

1065.8

91.2

  7.9

 

High profits declared in the Netherlands, Ireland and Luxembourg also ensure that the corporate tax yield as a % of total tax is also larger than the norm. Using OECD definitions taxes on corporate income as  % of total tax for 2015, amounted to 11.9%, 11.3% and 7.2% for Ireland, Luxembourg, and the Netherlands respectively, compared with 4.6% and 4.7% for Germany and France.

The case of tax reform is clear. Not surprisingly, however, Ireland, Luxembourg, and the Netherlands, together with other low tax jurisdictions such as Malta and Cyprus, are opposed to current proposals because, amongst other reasons, of the potential loss in tax revenue.

 

The Sovereignty Argument

 

While recognizing the need for tax reform, the Irish government’s position is that tax reforms proposed and agreed upon on a worldwide basis, (effectively by the OECD) would be acceptable, but that those proposed by the Commission would not because of the diminution of Irish sovereignty.  This argument, however, is undermined by the many EU Directives that have been implemented by Ireland and all other EU countries that directly affect tax policy, the tax base and hence tax revenue.

 

The issue of Sovereignty will be discussed in my next blog.

 

 

Posted in: Corporate governanceEuropeTaxation

Tagged with: applecorporationtaxMultinationals

Prof James Stewart

James Stewart

Dr James Stewart is Adjunct Associate Professor at Trinity College Dublin. His research interests include Corporate Finance and Taxation, Pension Funds and financial products, Financial Systems and Economic Development.

He is widely published and his titles include Mutuals and Alternative Banking: A Solution to the Financial and Economic Crisis in Ireland (2013), Choosing Your Future: How to Reform Ireland's Pension System (co-author, 2007) and For Richer, For Poorer: An Investigation of the Irish pension system (2005).


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