The OECD and global tax: what’s going on?
Since 2016, the Paris-based the Organisation for Economic Co-operation and Development (OECD) has been working on proposals to reform the global tax system. It comes on the back of an outcry over multinationals and their aggressive tax avoidance schemes. It's called the OECD's Beps project. Beps stands for "base erosion and profit shifting" and refers to corporate tax planning strategies used by multinationals to shift profits from higher–tax jurisdictions to lower–tax jurisdictions. In the line of fire are digital companies such as Facebook, Apple, Amazon, Netflix and Google which have shifted profits around the world to minimise their tax bills. So even though Apple has massive global sales, it books most of the profits generated from these sales through its subsidiary in Ireland, taking advantage of our low-tax regime.
So what happened this week?
On Wednesday, the OECD secretariat released a consultation document, containing the broad outline of its proposals, which have still be to agreed by member states. The organisation believes a deal is in the offing and hopes to persuade countries not to go down a unilateral route with a domestic digital sales tax, such as that proposed by France, which could further inflame global trade tensions.
So what is it proposing, exactly?
Currently countries only have a right to tax activities from companies that had a physical presence on their soil. This dates back to when businesses dealt primarily in physical commodities and appears woefully inadequate when dealing with the likes of Netflix and Amazon, whose service-based activities transcend physical borders. The OECD wants to break this long-standing rule and suggests that countries should have a right to tax a portion of the profits of multinationals based on the sales in their jurisdictions regardless of where these profits are shifted. Exactly how much is still to be decided. The OECD says it is still consulting on what would count as “residual profit” open to this form of taxation.
What’s Ireland’s role in all of this?
Ireland is at the centre of the storm over multinational tax avoidance because it hosts most of the companies involved and has "facilitated" their aggressive tax stratagems. Think of the European Commission's €13 billion Apple tax ruling. If the OECD succeeds in getting a deal, smaller countries like Ireland will inevitably suffer. The question is, by how much? Under the proposals, bigger countries will be afforded greater taxing rights, in other words they'll be able to levy more tax on multinationals generating sales in their jurisdictions. Cynics say the Irish Government backed the OECD's process over the the EU's more aggressive reform agenda in the hope that the OECD's one would result in little or no change.
So what does the OECD say to countries such as Ireland?
On a recent trip here, the man heading up the OECD's Beps project Pascal Saint-Amans said the process can't entail "big winners and big losers". What he meant was that Ireland would have to compromise potentially ceding some of its taxing rights in return for a more stable global system or in Saint-Amans's words, "tax certainty". Where this line is drawn has yet to be decided. The Minister for Finance Paschal Donohoe says " whatever emerges from the discussions at the OECD will be disruptive".
So could this prove a major risk to Ireland?
Potentially, yes. Ireland's has triumphed in the current system, attracting a gargantuan proportion of global foreign investment to these shores. This is primarily for two reasons. First the US system used to be seen as prohibitive, encouraging multinationals, particularly in the tech sector, to locate offshore. Second, Ireland's low-tax regime, combined with some bountiful loopholes - the double Irish- made locating here very attractive. Under President Donald Trump, the US tax system has been changed, making the offshoring of business less advantageous. And now if the OECD's proposals are successful, Ireland's low-tax regime will become less significant internationally. Together these two processes could take away Ireland's single biggest selling point for inward investment.
Is there an upside?
When the OECD’s process started, it was predicted Ireland would suffer big time. However, the opposite has happened with multinational doubling down on their presence here. Billions worth of assets have been relocated here since 2015. Hence the windfall in corporation tax. So while a difficult compromise has to be made, Ireland’s ability to secure inward investment, particularly from the US, has confounded forecasts to date.
Is Brexit likely to play a role in all of this ?
If the UK exits the bloc as planned that makes Ireland the only English-speaking EU member state, a potential advantage in attracting more businesses seeking a gateway into the EU, the most lucrative consumer market in the world. Since the Brexit referendum, there has been a modest, but not insignificant, influx of business from London. That said, some Brexiteers want to turn the UK into a Singapore-style low-tax jurisdiction – Thatcherism 2.0, they call it and this could, in theory, entice investment away from us.
