Ireland and EU Corporate Tax Reform: The Sovereignty Argument.
As noted in a previous blog, the Irish Governments maintains that tax reform proposed and agreed upon on a worldwide basis (effectively by the OECD) would be acceptable, but reforms proposed by the Commission would not, because of the diminution of Irish sovereignty. However, many EU Directives that directly affect tax policy, the tax base and hence tax revenue, have been implemented by Ireland and all other EU countries.
Consider, for example, the passing into Irish law of Country by Country Reporting (CbCR). This law requires large companies (with turnover greater than €750 million), to report profits, taxes paid, etc. “for each tax jurisdiction in which the MNE does business”.
Revenue guidelines state, “CbCRis part of Action 13 of the OECD/G20 Base Erosion and Profit Shifting (“BEPS”) Action Plan and the EU Commission’s Anti Tax Avoidance Package”. This information is lodged with the appropriate revenue authorities.
The directive on CbCRis presented by the EU as an extension of accounting directives which required country by country disclosure of payments of taxes, royalties and dividends by large firms operating in the extractive and logging industries (which was not an OECD initiative), and was not subject to the unanimity principle relating to tax.
What makes CbCR invaluable to taxing authorities is that in contrast to OECD proposals, it is (1) mandatory and (2) information must be ‘automatically’ shared with other EU countries in which other members of the MNE group are either tax resident or are subject to tax because of a presence of a ‘permanent establishment’.
The EU CbCR rules require slightly less information than OECD guidelines in some respects but also requires MNE’s to “disaggregate data reflecting their activities in problematic tax jurisdictions”.
It is interesting that despite a reduction in sovereignty, Ireland and other countries have also agreed to other EU directives on matters closely connected with taxation. Agreeing, for example, on directives requiring automatic exchange of information on tax rulings where “such rulings may affect the tax base of another Member State”, (Article 9 of Council Directive 2011/16/EU). Member states may then request additional information. An important requirement is that a subset of this information is communicated to the European Commission.
In addition, directives that have implications for tax policy have been introduced requiring:
- exchange of information on income and capital;
- exchange of information to counteract money laundering requiring a register of the beneficial ownership of trust and companies;
- an anti-tax avoidance rules including limitations on interest deductions.
Of particular importance in relation to tax disputes between member states is the EU Arbitration Convention and Mutual Assistance Directive. Although modified post-BEPS, both documents predate the BEPS project by many years.
The EU Arbitration Convention is particularly important in disputes relating to transfer pricing issues. In contrast to alternative arrangement via bilateral double taxation treaties, it is more specific in terms of information provided and time frames and is uniform across countries. The Mutual Assistance Directive requires the automatic exchange of information on tax matters amongst member states. Commission Directives, in contrast to OECD proposals, are mandatory, more specific, and enable sanctions in the case of non-compliance.
What is in Ireland’s interest?
The Commissioner for Taxation (Pierre Moscovici) stated that proposals for CCTB were “a starting point for negotiations. Proposals are not decisions”(http://oireachtasdebates.oireachtas.ie/debates). It is In Ireland’s interest to engage in these negotiations.
Every year PwC (together with the World Bank) conducts an analysis of corporate and other tax rates for all countries. For 2018, PwC reports that the “headline rate on profits is broadly similar to the effective rate”. The effective tax rate on profits is reported as 12.4%, compared with 0.7% for France. This finding is based on a hypothetical firm producing ceramic flower pots that neither imports nor exports and has very limited opportunities for tax minimisation strategies. Yet, this ‘research’ is often repeated during debates by Irish participants in relation to EU tax reform.
Reciting false arguments about the effective tax rate in Ireland being lower than in France is not a credible opposition strategy; nor is an approach based on preserving Ireland’s sovereignty when sovereignty on matters closely related to tax has not presented as an obstacle in the case of numerous other directives.
Commission estimates of the tax loss to Ireland from a CCCTB regime are far lower than other estimates. They range from -0.14% of GDP for Ireland (€360 million for 2015), compared with -1.01%for Luxembourg, and -0.13% for France (this analysis ignores certain economic benefits).
Other issues to consider is that the corporate tax base in Ireland is not under the control of the Irish Government, but is rather dependent on unilateral actions by other Governments in terms of dispute resolution about intra-firm allocation of revenues and costs and tax policies that may be pursued by other countries. Intercountry resolutionof tax disputes has already had a considerable effect on Irish tax revenues.
The Irish Government, U.S. MNE’s and their advisers may not like changes that are being proposed, but not engaging in debate may result in worse outcomes. Irish Tax policies have been and will remain subject to considerable international scrutiny. Shifting and temporary alliances within the EU 27 will not reduce this scrutiny.
HJI Panayi, C. (2018,) “The Europeanization of Good Tax Governance”, Yearbook of European Law, 2018, pp. 1-54.
Revenue (2017, Country-By-Country Reporting Some Frequently Asked Questions (FAQs) , 15 December , 2017.
Revenue (2017), Revenue Arrangements for Implementing EU and OECD Exchange of Information Requirements In Respect of Tax Rulings Part 35-00-01.
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).