The corporate tax world faces significant change in 2016 and beyond. This could represent an opportunity for nimble economies such as Ireland writes Peter Vale.
Did you know that the EU is putting together an anti-BEPS Directive? If you didn’t know, you might think that the EU is against the OECD’s BEPS project. It’s not.
There is a lot going on in the international tax space as far as Ireland is concerned. Here are some of the current live issues and what they might mean for Ireland:
- finalisation of BEPS action plans in October 2015 - lots of work still to do in 2016 and 2017 - can we hold the line that Ireland is “BEPS proof” and that the BEPS focus on substance will play into our hands?;
- still awaiting Apple tax case determination from EU - when will we get it and what impact will it have?;
- EU Common Consolidated Corporate Tax Base (CCCTB) proposals - significantly more serious for Ireland if they ever become a reality - will they?;
- EU anti-BEPS Directive - the EU’s attempt to fast-track some of the OECD’s BEPS proposals - will this make Ireland and the EU less competitive?;
- US tax developments - what is the likelihood of significant changes in US tax law that would impact Ireland?; and
- how will our recently enacted Knowledge Development Box stand up against its competitors?.
While CCCTB and some of the proposed US tax changes have been around in some shape or form for a number of years, it is really in the last three years that we have seen the most significant developments in the international tax landscape.
Driving these developments is political momentum, governments responding to public disquiet at the tax practices of large multinationals. We are now seeing actions, not just rhetoric, resulting in the OECD’s BEPS project.
The BEPS project
The Base Erosion Profit Shifting (BEPS) project, led by the OCED, has as its objective the creation of a new set of global tax rules to combat perceived tax avoidance. A key BEPS objective is to align taxable profits with real economic activity.
The OECD published its final BEPS report in October 2015. While there are aspects of BEPS requiring more work in 2016 and 2017, it’s becoming clearer what the final proposed landscape will look like. Substance will drive the location of taxable profits and the exchanging of information between tax authorities will improve significantly. The ability to avoid tax will be more difficult.
What’s less clear is whether the new landscape will be directly a result of the BEPS project or whether it will be the culmination of unilateral changes taken by governments around the world under the backdrop of a new BEPS “mindset”.
It would be far more efficient if the changes were all kept under the one roof, which is the objective of the BEPS project. Anything less will simply create more anomalies, more loopholes and more uncertainty.
The OECD is very aware of this risk and is keen to maintain the current BEPS momentum so that countries continue to have faith in the ability of BEPS to deliver.
The OECD has already achieved certain results through the BEPS project. Country by country reporting (CbCR reporting) has already been adopted by many countries, including Ireland.
Unquestionably some of the changes introduced by Ireland in recent years are the result of BEPS, including the abolition of the so called Double Irish structure.
Ireland has been involved in all stages of the BEPS process. With its focus on substance, there is a genuine belief that BEPS can further increase Ireland’s attractiveness for foreign direct investment.
A bad Apple
At the time of writing we are awaiting the EU’s decision in the Apple case. This case was brought against Ireland by the EU as a result of an alleged breach of State Aid rules.
It’s not unreasonable to conclude that there is a political element to the Apple case. It’s very possible that the EU will find against Ireland and that we will be obliged to fight the case through the European courts.
A prolonged legal case will cast a spotlight on Ireland and could impact on our reputation overseas.
Given that our reputation at the moment is very strong, such attention would be unwelcome, particularly as companies are increasingly looking at the reputation of a jurisdiction in assessing investment decisions.
EU CCCTB proposals
The EU's CCCTB proposals extend far beyond BEPS. If implemented, they would see the allocation of taxable profits driven by factors such as the location of customers, employees and assets.
The CCCTB would likely see profits diverted away from small economies such as Ireland and significantly dilute the benefit of our 12.5% tax rate.
The good news is that there are several countries against the CCCTB proposals and at this point the likelihood of CCCTB implementation is low to remote.
In the view of many people, the BEPS proposals should be allowed develop before any effort is made to push through CCCTB.
The EU is also pushing ahead with plans for a Directive to implement certain BEPS recommendations this year.
Such a Directive would require unanimous adoption across the EU by virtue of the veto option that all countries have over corporate tax matters.
If implemented, it could potentially add additional costs to EU countries and impact on EU competitiveness.
Both this Directive, the Apple case and the CCCTB are examples of the EU flexing its muscles in a battle which has seen it sidelined by the success of the OECD’s BEPS project.
The US tends to be more vocal about other tax regimes rather than do anything about the flaws within its own corporate tax system, which has the highest tax rates in the developed world.
Notwithstanding some changes to the inversion rules, there is little evidence to suggest any significant change in its stance. This should be positive for Ireland.
Knowledge Development Box
The recently introduced Knowledge Development Box (KDB) offers a 6.25% tax rate to companies that carry out R&D activities in Ireland.
While the KDB has its drawbacks, particularly as it doesn’t work well for groups that outsource much of their R&D to group companies outside Ireland, it does add to Ireland’s attractiveness as a place to house profitable R&D activities.
The KDB also enhances our reputation with both the EU and OECD as it is fully compliant with the “modified nexus” approach. While this means that it doesn’t work as well as some other competing regimes, it has the benefit of making us more attractive to groups that are keen to be associated with regimes with strong reputations.
There is recent evidence to suggest that groups are looking to “cleanse” their structures and move away from offshore traditional havens to onshore locations such as Ireland.
We are living in a time of great change in the corporate tax world. In my view, the opportunities for Ireland outweigh the dangers. The focus on real substance can be a positive for further international investment here. Undoubtedly others will seek to replicate elements of our successful tax regime. If we stay nimble we can stay ahead of the game.
Accountancy Ireland, 9 February 2016