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By Ali Qassim
Businesses can safely bet that Ireland’s Oct.10 annual fiscal budget will reiterate the government’s commitment to the 12.5 percent corporate tax rate—one of Europe’s lowest.
Less certain is whether the center-right Fine Gael party can allay ongoing concerns that too few large companies make up the bulk of these corporate tax receipts or that some of these firms pay an extremely low minimum effective rate.
The latest alarm bells over the sustainability of Ireland’s corporate tax receipts have been rung by the Office of the Comptroller and Auditor General.
In its latest annual report, the C&AG highlighted that more than a third—37 percent—of corporate tax receipts for 2016 were from just 10 companies. Further, 13 among the top 100 companies had an effective corporate tax rate of less than 1 percent.
In contrast, around 7,000 companies in the UK—accounting for just under 1 percent of all companies paying corporation tax—are responsible for the payment of 54 percent of all corporate tax collected during the equivalent (2015-16) period, according to the report.
The Committee of Public Accounts (PAC) has said it is “very concerned” with the figures and will investigate the issue in the coming months, Ciarán Brennan, a spokesman for PAC told Bloomberg BNA.
A separate group of parliamentarians who make up Ireland’s Oversight Committee are already looking at whether the country relies too heavily on tax receipts from multinational companies that make up the country’s biggest firms.
Although the C&AG report fails to mention any company names, Ireland is a favored location of many large U.S. corporations, including Johnson & Johnson, Eli Lilly & Co., Microsoft Corp., Hewlett-Packard Enterprise Co., PayPal, JP Morgan Chase & Co., Dell Inc., and Alexion Pharmaceuticals Inc., according to the American Chamber of Commerce’s U.S.-Ireland Business 2017 report.
A spokesman for the Ministry for Finance declined to comment on the C&AG’s references to corporate taxes. Instead, he pointed to a Sept. 12 review by the Irish Fiscal Advisory Council chairman Seamus Coffey, which concluded that corporate tax receipts were sustainable until at least 2020.
Describing this conclusion as “very positive,” Finance Minister Paschal Donohoe has since reiterated, in a pre-budget announcement speech, that Ireland’s 12.5 percent corporate tax rate “will continue to be competitive while also offering long-term certainty to international business.”
The small concentration of companies paying a large amount of taxes is certainly an issue that Irish business confederation Ibec Ltd. has “has drawn attention to,” according to Gerard Brady, the lobby group’s head of tax and fiscal policy. He told Bloomberg BNA this fact “reflects the structure of the Irish economy where 1,000 companies represent 80 percent of turnover and profits.”
Brian Keegan, director of Public Policy and Taxation at Chartered Accountants Ireland also acknowledged that “a narrow tax base is always of concern.” But he said historically there has been a pattern of relatively few companies paying the bulk of the tax yield.
“The main reason for this is that Ireland operates a particularly rigorous close company tax regime,” he told Bloomberg BNA. “It is tax inefficient to leave profits in family-owned or closely held companies, so profits tend to get paid out by way of salary and are taxed under income tax rules rather than remaining in the company and taxed under corporation tax rules.”
Keegan argued the issue “is whether or not the tax yield is sustainable and if a change of policy is required.”
Given that in the analysis of the Irish Revenue Chairman and Coffey report, the overall CT yield is sustainable, Keegan concluded no policy change is necessary.
Kevin Doyle, a tax partner, and international tax coordinator at Dublin-based BDO, highlighted another positive point from the Coffey report showing that the hike in corporation tax receipts in 2015 and 2016 were “not the result of increased payments from one company or group of companies or from a single sector.”
In any case, the government isn’t being complacent. Members of the Irish government are “focused on the concentration of receipts on an on-going basis and are monitoring how underlying tax policy may need to adapt,” he told Bloomberg BNA.
As one way of addressing the small number of firms paying almost no effective corporation tax, the opposition Labour Party earlier this year proposed introducing a minimum effective rate of 6.25 percent.
According to Peter Vale, a tax partner at Dublin-based Grant Thornton, “it would be wrong to create an artificial minimum tax environment which is blind to the commercial circumstances in which a company finds itself.”
He told Bloomberg BNA that the effective rate of corporation tax paid by companies is influenced by many factors such as past trading history—where losses brought forward can reduce current liabilities—and allowances for capital investment and research and development investment. These “reflect commercial realities rather than tax policy,” he said.
Despite the 10 percent of companies paying 1 percent minimum corporation tax rate, Doyle also highlighted that the average effective tax rate in 2015 for the top 100 Irish companies was 12.4 percent, according to the C&AG report.
For those firms paying little effective corporation tax, Doyle said the Coffey report has suggested reintroducing a cap, which was removed in the Finance Act 2014, on the quantum of intellectual property capital allowances that can be claimed by a company in any given taxable period.
“Some companies may welcome a capping as it may assist with a strategy to show a suitable effective tax rate at an international group level in light of current dialogue on aggressive tax avoidance,” he said. “Other companies may be disappointed with what could be considered a U-turn in tax policy that would have an element of retrospective effect.
Meanwhile, Ireland’s Minister for Finance Paschal Donohoe will announce Oct. 10 his first annual fiscal budget, a landmark moment to set the country’s tax agenda.
Tax practitioners told Bloomberg BNA they are watching five principal issues related to the budget, including protections against Brexit.
Last month, Donohoe announced his plans to implement further measures from the OECD’s 15-action project to combat tax avoidance from multinational companies.
In addition, Ireland’s finance chief will act on recommendations made in the Coffey report, commissioned by the government, relating to the Organization for Economic Development and Cooperation’s BEPS project.
As a result, Grant Thornton Ireland tax partner Peter Vale told Bloomberg BNA that “it may be the case that the finance minister will announce his intention to incorporate the OECD’s 2017 Transfer Pricing Guidelines into domestic Irish tax legislation.”
The Coffey review set a deadline of 2020 to incorporate the OECD’s Base Erosion and Profit Shifting Actions 6 to 10 to coincide with the extended period of cooperation for the project.
Kevin Doyle, a Dublin-based partner and international tax coordinator at BDO Ireland, agrees with Vale and noted that the Coffey report, which concerns revisions to transfer pricing guidelines, recommended introducing Action 8, 9 and 10 of the BEPS project into Irish law.
Vale pointed to other recommendations by Coffey and said the Irish finance minister “might include some reference” in his Oct. 10 speech to a “proposal to limit the allowances available for intellectual property acquisitions suggested with a view to ‘smoothing’ corporation tax yields in future years.”
The measure is aimed at trying to raise the effective corporate tax rate paid by some of Ireland’s large companies. Recent reports point out that more than a tenth of the country’s top 100 firms paid less than 1 percent in effective corporation tax while more than a third of the total corporation tax receipts is paid by just 10 companies.
Practitioners expect some announcement on how Ireland plans to adopt the European Union’s anti-tax avoidance directive (ATAD) to allow time for businesses to plan ahead.
The bulk of the directive, which lays down common minimum rules on the areas of interest limitation, exit taxation, GAAR, controlled foreign companies and hybrid mismatches, must be transposed by the start of 2019.
Adopting some of the rules could be challenging. “Ireland does not currently have a controlled foreign company rule, for instance,” Doyle said. “How such a rule would be legislated for in Ireland and how it might interact with Ireland’s current tax credit system for foreign source dividends should be explored in detail in a consultation ahead of finalizing underlying legislation.”
The full effect of Brexit on the Irish economy “will most likely be felt during 2019, so it is important that there are some measures put in place in advance for 2018,” Brian Keegan, director of public policy and taxation at Chartered Accountants Ireland, said.
CAI, which represents more than 25,000 practitioners, is calling for changes in the VAT regime to minimize the effect on Irish importers and industry generally where the U.K. is involved in the supply chain, he said.
Gerard Brady, head of tax and fiscal policy at the main business lobby Ibec, said that “there needs to be provisions for mitigation from Brexit.” In particular, Irish firms need some tax measures to support exports as trading with the U.K. becomes “less attractive,” and they are forced to find new export markets, he told Bloomberg BNA.
Brady said Ibec also recommends some overhaul to personal income taxes to keep Ireland internationally competitive, given that executives earning more than 35,000 euros ($41,000) a year currently pay a 49.5 percent marginal tax, which he described as a “fairly punitive regime for high-skilled workers.”
Vale agreed it was important to make the Irish personal tax regime “more attractive to key decision makers of multinational companies, with a view to them relocating to Ireland as key strategists.”
Ireland is already popular with large U.S.-based MNCs. Several Silicon Valley technology companies, have their European headquarters in Ireland, including Alphabet Inc.’s Google, Facebook Inc., Amazon.com Inc., and Twitter Inc. while eight of the world’s top 10 pharmaceutical and biopharmaceutical companies, such as New York-based Pfizer Inc. and Dublin-based Allergan Plc, have manufacturing operations in the country, according to Enterprise Ireland.
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Details of the Finance Bill related to the budget are available at http://www.finance.gov.ie/wp-content/uploads/2017/04/171006-Finance-Bill-Timetable.pdf.
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
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