Ireland must stay tax-competitive to attract multinationals
The existing rules for international taxation are still grounded in doing business between countries and don’t take account of global business models.
We’re all familiar with global business models even if we don’t always think of them as such. Consider a mother who decides to buy a laptop for her daughter who is going to college. As she clicks on the website to order the new laptop, the order pops up on the screen of an Irish company, Liam Casey’s PCH, at its factory in Shenzhen in China. The order is packed and dispatched across the border to Hong Kong and delivered to the daughter in New York the next day.
Where does one tax the profit made on this transaction? Similar challenges arise in relation to the profit from the books you read on your Kindle, the clothes you order from ASOS, the subscription you pay to Netflix and the electronics you order from Amazon.
This challenge is one of the reasons the OECD launched its Base Erosion and Profit Shifting (BEPS) review.
Another reason is the significant competitive advantage which companies with low tax rates enjoy. Consider two companies who are looking to acquire a target of €100m. One has a tax rate of 40pc. It must make profits of €167m before tax in order to be left with €100m. The second has access to a pool of money taxed at say 5pc. It requires profits of €105m to acquire the same target. The company with the 40pc tax rate is at a competitive disadvantage of 60pc.
Companies who cannot compete become fearful. Countries with higher tax rates see their companies unable to compete and in turn also become fearful. This may be particularly the case when they value their national champions. They could reduce their rates but that may not be politically feasible. Alternatively, they could attempt to get other countries to change their rules. Welcome to BEPS.
BEPS seeks to reduce the ability of companies to generate large pools of low taxed income. It wants to ensure profits are earned where the activity or possibly the customers are located. Many of our EU colleagues share this objective. It’s not unreasonable and it could play to Ireland’s advantage. Ireland’s regime is in place to attract companies with real economic activity.
The Department of Finance issued a consultation paper in relation to BEPS last week. It signals a potential but likely change in the residency rule for Irish companies. In the short term, this could create a challenge for Irish companies who are not resident here. Typically these companies are resident in a location where they have little activity. However, they are usually connected to companies with real activity in Ireland. BEPS is suggesting that in future profit will have to be allocated to locations with real economic activity. Where will companies move to? Ireland is an option but they have other choices.
Ireland has done well over the last 20 years in creating an attractive environment for multinationals. This has generated significant corporate tax revenue in excess of €4bn per annum.
We have faced competition for such investments all along but the competition is getting fiercer.
The UK has quietly lowered its corporate tax rate to 20pc. It has also introduced a special rate for income from certain intellectual property which is taxed at 10pc. It does this at the same time that it points the finger at other countries in relation to unfair tax practices.
Germany, France, the Netherlands and many other countries are also very competitive and they have many advantages which Ireland, as an island off the coast of an island off the coast of Europe, does not have.
If we are serious about staying competitive, we have to consider how we will compete, for example, with the UK’s lower tax rate for intellectual property.
As Ireland changes its rules for companies, we should ensure that changes are well signalled and that companies have sufficient time to adapt. This consultation is part of the process of engaging with the multinational community in ensuring that our tax system is compliant with BEPS but also one that encourages the international companies to put their activities in Ireland.
Joe Tynan is Tax Partner at PwC