Public consultation on OECD International Tax Proposals

Brendan Burgess

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Minister Donohoe launches Public Consultation on the OECD International Tax Proposals

On 1 July 2021, the OECD Inclusive Framework reached agreement but not unanimous consensus on key aspects of the two-pillar solution to address tax challenges arising from digitalisation and globalisation.

Ireland has been clear in expressing our broad support for the agreement but have expressed our reservation in particular about the proposed global minimum effective tax rate of ‘at least 15%’.

Given the importance of the OECD proposals, it is timely to invite views through a public consultation on the OECD proposals. The consultation will be helpful in identifying the challenges and opportunities of the proposals in respect of Ireland’s corporate tax code and broader industrial policy.

Minister Donohoe said: ‘I believe it is in the interest of all concerned to achieve an equitable, ambitious and sustainable agreement at the OECD on the international tax architecture. It is essential as we emerge from the Covid-19 pandemic that the international tax system provides the necessary certainty and stability to support growth and investment, and Ireland is committed to playing our part in reaching the comprehensive agreement’.

“I am committed to ensuring that Ireland’s tax policy continues to support economic growth and prosperity, and in this respect I would welcome the views of the public and key stakeholders on the key aspects of the OECD proposals”.

The consultation will run until Friday, 10th September. Details of how to engage with the consultation are available in the document published here.
 
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Séamus Coffey sets out the factual background here:

Ignore the headlines & hype about taxation of Apple, Google, Amazon & the rest: here are the surprising facts

A conversation with Seamus Coffey
cjpeconomics.substack.com

Here is my summary of a 45 minute programme.

Transfer pricing

Where is something taxed?

  • Where it’s developed?
  • Where it’s manufactured?
  • Where it’s sold?
Revenue can challenge the transfer pricing to make sure that the country gets its fair share of tax.

Is Ireland doing anything wrong?

  • Ireland is not stealing tax revenue from other countries
  • If another country thinks that its tax revenue is being stolen, it can tax the company in its own country – it does not need to get Ireland’s permission
  • But the company can choose where to put its activity and can choose Ireland, but that is not stealing another country’s tax revenue
Is Ireland a tax haven?

  • We collected €12 billion in Corporation Tax last year
  • But are companies not putting their profits in Ireland to be taxed here? Yes, they are, but they are US companies and the US tax system now taxes companies on their worldwide profits.
  • If we are a tax haven – where is the German profit in Ireland? Or French or the UK even?
  • Any UK companies that are here and are profitable are serving the Irish market
  • The bizarre profits we have are from US companies who have 10s of billions of profits in Ireland. Why are the countries who share our currency not locating profits here if we are a tax haven?
The BEPS Project

  • We were very worried about it when it was first mooted
  • But Ireland has been a beneficiary of it.
  • Was brought in to align the profits with the substance
  • The US companies had profits in Bermuda and other low tax jurisdictions but they have moved them to Ireland
  • American companies may have lots of customers in France, Germany and Spain, but their activities are in Ireland – manufacturing, HQs
  • We have the substance, so now we have the profits
So what the Europeans want is to tax companies where the sales are

  • Apple may have billions of $ of sales in France, and they get to charge VAT on those. But the profits are taxed at source.
  • You could argue that this system should change which is what the Consolidated Corporate Tax Base is about
Consolidated Corporate Tax Base

  • Gives a weight to sales – where are your customers?
  • Transfer pricing has not kept pace with the digital economy
  • How profits are allocated in digital sales is up for discussion
  • What is the product of Google? It’s activity is where the customers are.
  • This is not a violation of the principles of transfer pricing – it is an adaptation of it to the current reality
  • But the US opposes this as most of these companies are American
The reality is that multinational companies do pay a lot of tax

  • Apple is often given as an example of a company which pays no Corporation Tax, but in fact it pays more CT than any other company in the World. It has paid over €100 bn in CT over the last ten years. But it has made huge profits in those years.
  • There is no “race to the bottom”. There is no sign of it in the figures for CT revenues around the world.
  • Corporate Tax rates have fallen but the exceptions have been removed so the effective tax rate has increased.
Some of the changes proposed may help Ireland if they are based on false information but Biden is a threat…

  • The BEPS process helped Ireland
  • Biden’s proposals may help Ireland depending on how they are implemented
  • He is reversing Trump’s tax cuts which might make Ireland more attractive
  • Policy should be based on the reality and not on the false perception
  • There is a significant threat within the proposals
  • Trump introduced a minimum tax on overseas profits 10.5% but countries were allowed blend, so a high tax country like Germany could blend with Ireland and keep the tax low.
  • But Biden is proposing to double the overseas profits tax to 21% and abolish blending – it would be done on a country by country basis.
  • This would make Ireland less attractive. If they pay 12.5% in Ireland, they would pay an additional 8.5% in America. If they locate in France and pay 20% , they would pay an additional 1% in America. So Ireland would lose its comparable attractiveness over France
  • But there is still an attraction for Ireland over a country with a tax rate over 21%.
  • If they are paying 25% tax in Germany, they would pay nothing further to the U.S.
Why is Ireland so attractive to American companies if we are not a tax haven?

  • No one can point to a smoking gun i.e. identify the tax advantage of Ireland
  • Our provisions fit in well with the US tax system
  • The US let their profitable activities out without penalty
  • The Germans and French don’t let their profits out without penalty
  • The US transfer pricing is not as airtight as that of other countries
  • The US tax system deemed profits made from selling to foreign countries as “offshore”
Most of the headlines are about US companies

  • If they could clean up their tax system , most of the headlines would disappear
  • The US tax mess suits us – US companies want to shift their operations and profits abroad and can do that via Ireland
The Double Irish

  • What about the Double Irish ?
  • Noonan when asked said it was not a feature of the Irish tax system but a result of the interplay between different international systems driven by problems with the US tax system.
  • Then in October 2014 , he said he was abolishing it.
  • I think he was wrong in saying he was abolishing it , he was right in saying
  • What was it?
  • It was US companies setting up their operations in Ireland via two companies
  • A trading company and a holding company that had the I.P. developed in the US
  • The holding company in Ireland was incorporated in Bermuda – that is why it’s double Irish
  • The US taxed passive income e.g. that of holding companies at 35% but deferred tax on active income
  • But the US Tax Code had a same country exemption loophole – which allowed income to be moved around without being taxed.
  • What Ireland changed was that the company in Bermuda would not be considered non-resident in a non-treaty country so now an Irish taxed company can’t be resident in Bermuda. This limited the ability to do the double Irish with Bermuda, but you could do it with Malta
  • The US got rid of deferral and same country exemptions so the Double Irish wouldn’t work anymore anywhere. But not by Noonan.
So what is happening now in place of the Double Irish?

  • Google was sending all its profits via Ireland to Bermuda
  • Now they come to Ireland and the Irish company pay huge royalty income to the US
  • Can France argue that the US is robbing their tax money? They could have argued that about Bermuda. But now the US is collecting it and is taxing it.
But Irish Corporation Tax Revenues have increased dramatically since the changes!

  • If you make changes based on perceptions, Ireland won’t be hurt.
  • If the focus is on the likes of Google, we could lose tax revenue. Their HQs are here, but really their substance is where the users are. They are sending their profits back to the US.
  • There are more significant profits in the manufacturing of pharmaceuticals , computer chips, software.
  • The ICT companies moved their IP from Bermuda to the US. The pharma companies moved it to Ireland – their substance is in Ireland.
  • We might see more employment in Ireland to justify the move of the IP
  • We have about 6 years before anything major changes. But the likes of Intel might build their next development somewhere else
What do you say to the citizen of France who is told that Amazon generates billions of profits in their country but pays very little tax?

Politicians and media love a bogeyman

What is the threat level to Ireland?

  • The threat is small but the impact would be huge
  • We have €12 billion of CT more than half of which is from America
  • The US Revenue publishes where companies pay tax. In 2018 US companies paid
  • $140 bn in America
  • $10 billion in the UK
  • $8.5 billion in Ireland which is the third largest
 
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The bit I don't understand is how come we are getting €10 billion a year in Corporation Tax from American multinationals.

The answer seems to be: Because their activities are here.

But why are their activities here if we are not a tax haven? Why are they not in the UK or France?

If we are not a tax haven, why don't we increase our Corporation Tax to 25%?

Imagine a situation without any multinationals in this country.

Do you think we would tolerate 48% income tax rates and Corporation Tax at 12.5% on companies?
 

They need an EMEA HQ. Why would they locate in higher tax jurisdictions like the UK and France? Having a lower tax rate than other EU countries does not make us a tax haven. We also offer a very stable business environment in an English-speaking country that has been one of the most - if not the most - committed member of the EU.

Question for you Brendan: at what % corporation tax rate do we no longer qualify as a tax haven in your eyes?
 
24601 said:
at what % corporation tax rate do we no longer qualify as a tax haven in your eyes?
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It's a matter of degree.

There should be international co-operation to tax multinational companies fairly.

There should be international co-operation so that some countries don't get an unfair share of activities.

We should not subsidise businesses directly or indirectly.

Brendan
 
And the taxation system here is simple. Paying tax in America is a nightmare. Paying it in Germany and France is not much better. Our system is simple, stable and transparent. Then there's the critical mass of qualified people (a large proportion of whom are immigrants), we are English speaking, we are in the best time zone in Europe from a US perspective, and above all else we are in the EU.
 
We subsidise nearly every business in the country. The entire agricultural sector only exists because of subsidies. SME's get grants, if they are in the Border Midlands and West region the grants are thrown at them.
 
The definition of a tax haven is not very tight, but generally includes some or all of: (a) no or only nominal taxes (b) lack of effective exchange of information and (c) lack of transparency in legislative, legal or administrative provisions.

Ireland scores very well on (b) and (c).

You can argue the toss on (a) of course. 12.5% is of course very low for a developed economy of course. It is very definitely part of a strategy to attract FDI from other places.

I argue that Ireland is simply using a Laffer Curve-type approach given the features of the economy, as are most countries.

DOES Ireland's approach attract activity that would otherwise take place elsewhere (and associated tax)? YES.

Is it part of a system that helps rich people hide their wealth and large corporations obscure their activities? NO.

Is Ireland being a good global and EU citizen. MAYBE.

Is the global landscape changing and will Ireland have to move on the rate? PROBABLY.
 

These are the fundamental questions. Discussing whether Ireland is a tax haven or not is not really useful.

The more fundamental "global" question is "What is a fair rate of tax for multinational companies to pay on their profits?"

If we charge up to 51% Income Tax and USC on personal incomes, what should we charge on corporate incomes?

I don't know the answer, but it's not 12.5%.


Brendan
 
It's also worth noting that the corporation tax rate is almost irrelevant for the SME sector as those companies make low profits, don't have a great deal of IP and are not capital intensive. They earn income and pay nearly all of it in taxes and wages. If an SME is making a large profit they have a bad accountant.
 
Purple said:
If an SME is making a large profit they have a bad accountant.
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I presume that you mean a large taxable profit.

I have argued elsewhere that SMEs should pay their profits as salaries to avoid the double hit of Corporation Tax and Income Tax.

Brendan
 
Brendan Burgess said:
I presume that you mean a large taxable profit.
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Yes.
Brendan Burgess said:
I have argued elsewhere that SMEs should pay their profits as salaries to avoid the double hit of Corporation Tax and Income Tax.

Brendan
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I agree. Other than working capital there's no good reason to leave cash in the business and paying CT on profits and then paying income tax on the same money is stupid.
 
Brendan Burgess said:
If we charge up to 51% Income Tax and USC on personal incomes, what should we charge on corporate incomes?

I don't know the answer, but it's not 12.5%.
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If firms in Ireland made products mainly for Irish people and had mainly Irish shareholders I would agree.

But that's not the world we live in at all.
 
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