For years, the taxation of big international companies was something of a game. Big multinationals – mainly from the United States – exploited gaps and differences between jurisdictions to slash their bills, often paying derisory amounts on profits earned outside the US. The big companies had huge lobbying power at home and were delivering jobs and economic activity abroad. No one was in a rush to change the rules.
The economic crash changed everything. Suddenly government exchequers were scrambling for cash. The “Hollywood moment” was Apple’s appearance before a US senate committee in May 2013, when its extraordinary system of tax avoidance, involving Irish subsidiaries, was exposed.
The loopholes have started to close gradually in recent years through a mind-numbingly complex programme of international reform – generally led by the OECD – the final direction of which remains somewhat uncertain. The report on Ireland's corporation tax system by economist Séamus Coffey, which was commissioned by the Department of Finance and has just been published, is an attempt to keep Ireland in line with these moves on reform.
It is likely to spark change here, including important moves on tax write-offs on intellectual property that could come in the budget. This is important, particularly in the light of the European Commission ruling that Apple owed Ireland more than €13 billion plus interest in unpaid tax, a conclusion that is now the subject of an appeal by both the company and the Irish Government.
Remember, too, that the big companies are also under pressure to be seen to play by the rules
This put an unwelcome focus on Ireland, which we will be fighting this case for years. The Coffey report was sought by Minister and Independent TD Katherine Zappone in the light of the Apple ruling and will renew debate about how we tax multinationals.
Wave of reform
The Coffey report looks at how Ireland should respond to the international wave of reform. Recent developments have shown that the battle for multinational tax revenues – as well as investment – remains fierce. So how we respond to the international moves, particularly those led by the OECD, is important. Ireland needs to strike a balance between attracting inward investment and not allowing companies to manufacture new ways to avoid paying tax.
Remember, too, that the big companies are also under pressure to be seen to play by the rules. According to Feargal O'Rourke, managing partner of PwC, if we want to maintain our attractiveness to foreign direct investment, it is now essential that nobody can criticise us in relation to the reform programme being led by the OECD.
Many of the key points of the report are surrounded by the extraordinary complexity of international tax, replete with acronyms and jargon. A close reading is required to pull out the key changes it recommends.
Coffey calls for action on a range of fronts. These include bringing in new rules on mandatory disclosure of cross-border tax arrangements and updating Irish legislation on transfer pricing, which is the way companies account for goods and services sold from one part of the company to another. There will be controversy here about a call for transfer pricing rules to be extended to SMEs. Brian Keegan of Chartered Accountants Ireland warned that it would "merely increase the burden of paperwork without significantly enhancing the integrity of the system".
Intellectual property
A key part of the report deals with intellectual property – the brain power used to invent, design and market products. Charges related to the use of intellectual property are a key way multinationals reduce their reported profits in countries such as Ireland.
The report recommends that a cap be reimposed on the amount of capital allowances – tax write-downs – a company can claim relating to its intellectual property assets. Former minister for finance Michael Noonan removed the cap in 2014 , the same year he announced the abolition of the controversial double Irish tax relief.
His successor, Paschal Donohoe, looks set to reimpose it, slowing the rate at which companies can claim tax relief in relation to intellectual property. This is important at a time when some companies are moving IP assets previously held in tax havens to countries such as Ireland in response to international criticism of their use of offshore havens.
Christian Aid, which has campaigned on the corporate tax issue, said its figures showed that the removal of the cap could have led to a cut of more than €3 billion in tax in 2015 alone, presuming all the tax benefit could be taken in one year. The size of the assets means that most companies would write them off over a much longer period, but there are certainly big sums involved.
Donohoe would be well advised to move quickly on at least some of the report's recommendations. He should resist calls from some of the 'Ireland Inc' lobby
The likely reimposition of the cap on how quickly such write-offs can happen would limit the up-front tax advantage companies can take, though they would still be able to claim the full amount over a period of years.
It is important for Ireland to get all this right. Reports at the weekend said the big EU countries are seeking to impose a new tax arrangement on the major digital players. It may not fly, but it shows the way the wind is blowing.
Donohoe would be well advised to move quickly on at least some of the report’s recommendations. He should resist calls from some of the “Ireland Inc” lobby, which will try to slow reform. As the inevitable move to change the way big companies are taxed rolls on, and the fall-out from the Apple ruling persist, we need to ensure we stay ahead of the reform game as best we can.
