Those who live in glass houses do well not to throw stones, and Ireland's predilection for such tax schemes as the "double Irish" probably makes it the last place to cast aspersions at Luxembourg's creative approach to assisting what is now euphemistically called "tax planning", once "tax avoidance". Having sensibly taken pre-emptive action on the "double Irish" in the Budget, however, ahead of the inevitable OECD-inspired curbs coming down the tracks, Merrion Street will watch the international pillorying of Luxembourg with quiet sympathy and a "there, but for the grace of God ...".
This paper and other world titles revealed last week that more than 340 major companies, including several blue chip Irish-based firms, availed of Luxembourg shelf companies to create notional interest liabilities on many billions of euros that hugely reduced their tax liabilities . Their tax planning was facilitated by a system of “advanced tax agreements” (ATAs) negotiated with the Luxembourg authorities which cleared the individual arrangements in advance.
The arrangements have resulted in a substantial tax losses to many exchequers, including Ireland's, and, not surprisingly will bring yet more demands from states like Germany and France for the EU harmonisation of corporate tax bases – common standards for, and transparency in assessing what is taxable, and where the tax should be levied – an issue quite distinct from the tax rate, and arguably crucial to establishing a genuine single market in which tax competition might be allowed to thrive.
Work on agreement at international level is underway through the OECD's Base Erosion and Profit Shifting (Beps) project and the issues raised by the "Luxleaks" affair are addressed directly in its Action Plan which was approved by G20 finance ministers and central bank governors in 2013. The BEPS group will report in September 2015 with specific proposals for common rules to govern "interest deductability". Raffaele Russo, head of Beps expressed confidence on Thursday that the proposals would be agreed and swiftly implemented – the road is running out for Luxembourg's schemes, not least also because it is under EU Commission investigation for tax deals offered to Apple, Starbucks and Fiat.
A new OECD/G20 standard on automatic exchange of information between member states on data relating to their tax bases was also endorsed 10 days ago in Berlin significantly enhancing transparency.
Central to the broad consensus of the Beps work, and the only basis on which international agreement can be reached, is what it calls the principle of “realigning taxation with economic substance” – that means moving towards an internationally agreed corporate tax regime based on taxing profits where they genuinely arise, not where internal company accounts may deem them to arise or shift them.
In Luxembourg’s case that involved generating phoney interest charges that were tax deductable, in other cases, “transfer pricing”– the attribution of artifically inflated internal costs to show losses where tax is highest – or, similarly, the attribution of inflated management. Beps is also working on tax challenges posed by the borderless digital economy.
From an Irish perspective recognition that reform is on the way is crucial in reappraising our own regimes and in rebranding the country’s tax advantages. The move to abolish “double Irish” is sensible but detail of further reform of our corporate tax regime will have to await the specifics of Beps’ project proposals.
