Taxing affairs

Never has the question of taxation, in particular taxation related to businesses operating on a multijurisdictional basis, been so topical, writes Aidan Byrne.

The controversy over multinational companies’ tax affairs has put Ireland to the forefront of this debate. They say there is no such thing as bad publicity and in this instance I believe they are right.

The controversy has actually increased interest in what Ireland has to offer to multinational businesses and they are discovering that there is more to it than pure tax savings.

Ireland does have the fundamentals in its tax system which makes it attractive for investment but that tax system is backed up by a solid track record of companies investing here, a well-educated workforce, an ease of doing business and a speed to market that is unrivalled in the EU.

Following political storms in the US and UK, the G20 requested the OECD to undertake a review of international tax practices. This project named BEPS (base erosion and profit shifting) seeks to address anomalies that have developed, whereby multinational businesses use planning techniques, which although completely legal, have the effect of reducing their global effective tax rate. The changes coming down the tracks will change the international tax landscape but may also have a positive effect on Ireland as companies seek to move operations to jurisdictions with a transparent and low tax rate and a pro-business environment.

Tax directives

The EU is also looking at its tax directives, and in particular, the Parent Subsidiary Directive as it believes that it is being used in a manner that was not intended by some companies. The directive was aimed at ensuring that double taxation did not arise for companies operating within the EU on a multi-jurisdictional basis. However, the directive has actually led in some circumstances to double non-taxation. It is recommending an update to the anti-abuse provision in the Parent Subsidiary Directive, in line with the Commission’s recommendation on aggressive tax planning, and interestingly the draft proposal obliges member states to adopt a common anti-abuse rule.

This will allow them to ignore artificial arrangements used for tax avoidance purposes and ensure taxation takes place on the basis of real economic substance. The use of hybrid entities or instruments gives rise to tax outcomes not envisaged when the directives were drafted and enacted. These changes will have little effect on Ireland. However, countries such as Belgium, Luxemburg and the Netherlands will no doubt be carefully watching developments as these changes will have a radical effect on their territories.

As much as the EU is searching for solutions, the problem stems from the US and until reforms can be put in place across the Atlantic, tax avoidance will continue. For example, Apple’s structure has been a hot topic of conversation of late; it is a classic example of double non-taxation. Apple are falling between two country’s legislation and avoiding taxation.

Again, it needs to be reiterated in a completely legal and proper manner. They are not seen as being resident in Ireland as we define residency by where a company is managed and controlled (the US) and they are not seen as resident in the US as the US defines residency as where the company is incorporated (Ireland). Therefore, they are seen as resident nowhere.

Ireland is seeking to disable double non-taxation on our shores. The Finance Bill 2014 contained legislation which is to be introduced to circumvent this possibility of ‘state-less companies’. However, the new rules should not adversely affect the existing operations of the majority of multinational companies in Ireland, many of whom incorporate Irish subsidiaries which are tax resident in zero or low tax jurisdictions.

This is a solution to one problem for now but in the bigger picture more action needs to be taken. This unilateral action is part of a campaign by Government to ensure that our international reputation remains intact.

The recently issued Government Tax Strategy paper reiterates our commitment to pursuing a policy of a low tax environment but with full commitment to transparency and cooperation with other countries on exchange of information. The very public support recently received from Pascal Saint-Amans, director of Taxation Policy in the OECD, whereby he reiterated the right of Ireland’s Government to set its own corporate tax rate and where he debunked the myth that Ireland was a tax haven, is very welcome. It does put some clear water between us and tax havens.

Of course, tax reform in the EU is useless without similar moves on the other side of the Atlantic. The idea of tax reform in the US would be the key factor in reducing tax avoidance globally, although there seems to be little prospect of that.

Future prospects

With the political impasse that exists in the US it is difficult to see a time in the near future when reforms of this nature will be legislated for. A US President made the following observation: “Recently more and more enterprises organised abroad by American firms have arranged their corporate structures aided by artificial arrangements between parent and subsidiaries regarding inter-company pricing, the transfer of patent licencing rights, the shifting of management fees and similar practises in order to reduce sharply or eliminate completely their tax liabilities at home and abroad.” Most surprisingly the quote is by John F Kennedy, made in 1961. It seems little has changed in 50 years.

Ireland has a positive future ahead in terms of the continuance of investment in the country by foreign businesses, as it has a lot to offer besides a business friendly tax system. It is a good place to do business and has more to offer than tax slights of hand that reduce group tax liabilities.