Corporation tax faces OECD test
The much-maligned corporation tax is facing its stiffest test after a world recognised think-tank set out far-reaching reforms to halt aggressive tax avoidance by big business.
The Paris-based OECD launched the first major international shift towards a single set of rules to force multinationals to pay fair and equal rates regardless of where they put up a brass plaque or register profits, patents or operations.
The aim is to close loopholes and thwart tax planners looking to exploit variations in tax regimes between two countries by shifting profits.
Ireland's base corporation tax rate of 12.5% has repeatedly been attacked by European politicians, most notably in France and Germany as Irish officials sought to reduce the debt burden over a 64 billion euro bank bailout.
The low rate is one of the key drivers of foreign direct investment into Ireland, although enterprise chiefs also promote Ireland's skilled, young, mobile and well educated workforce.
The OECD targeted corporation tax to bring coherence internationally by introducing new model tax and treaty provisions to neutralise "hybrid mismatch arrangements".
This key reform would end the practice of companies securing multiple deductions for a single expense or a deduction in one jurisdiction with no corresponding taxation in the other.
And the proposed OECD reforms will also be a direct challenge to multinationals as they call for reports disclosing activity in each country, employment, profits and tax paid in regions they do business.
Among the most criticised for their tax bills are the tech giants like Apple and Google which have elaborate arrangements flowing from having a number of international bases.
Following the OECD report, Irish ministers went on the offensive to promote the clampdown as an opportunity rather than a dent to policy.
Finance Minister Michael Noonan said Ireland has been actively involved in all aspects of discussions on the proposals.
"Ireland in particular agrees with the conclusion of the report on the digital economy that this sector should not be ring-fenced from the economy as a whole," he said.
"Significant progress has also been made in the areas of coherence, substance and transparency and while further work is required in some of these areas, the reports are a further step towards multilateral co-operation on countering base erosion and profit shifting by multinationals."
Richard Bruton, Jobs Minister, said: "Ireland is fully engaged with this process. We can gain from the opportunities that will arise from this."
He added: "I think our tax base will grow as businesses move away from tax havens."
Last year at a US Senate sub-committee hearing Ireland was singled out for tax arrangements which attract multinationals.
Influential senators John McCain and Carl Levin claimed Ireland was a tax haven after it emerged Apple paid taxes of 2% on its foreign earnings in 2012.
The OECD review of international tax avoidance - base erosion and profit shifting - does not force countries to adopt its recommendations.
But secretary general Angel Gurria said the G20 group of countries identified this tactic as a serious risk to tax revenues, sovereignty and fair tax systems worldwide.
"Our recommendations constitute the building blocks for an internationally agreed and co-ordinated response to corporate tax planning strategies that exploit and gaps and loopholes of the current system to artificially shift profits to locations where they are subject to more favourable tax treatment," Mr Gurria said.
The OECD was asked to investigate options to crack down on big business by the G20 to help governments protect tax bases and offer increased certainty and predictability.
The findings will be a key focus of discussions when the group meets next week in Cairns, Australia.
Sinn Fein finance spokesman Pearse Doherty said Ireland has nothing to fear from OECD moves on tax transparency.
"The world is moving towards a more transparent global tax environment and Ireland should not be seen in any way to be reluctant passengers in that journey and rather should be an agent for delivering tax transparency," he said.
"As our country tries to find a sustainable recovery we must develop a healthier reputation as a transparent place to pay tax and face up to any changes necessary to create transparent global tax system where multinationals cannot escape their duties to countries including developing countries."
Ibec, the lobby group representing Irish business, also backed the Government's assessment that the reforms were an opportunity for Ireland.
The association's chief economist Fergal O'Brien said: "Many of the recommendations are needed to reflect the modern reality of how global business operates.
"A key focus of the recommendations will be to align business substance with profit allocation. Ireland is well placed to be a location of choice for manufacturing, business decision making, R&D and intellectual property."