Ireland can play fair and win the global tax game
A decision on Northern Ireland's bid to have the right to set its own corporate tax rate is due after next month's referendum on Scottish independence. Conor O'Brien reflects on the latest controversy surrounding the Republic's corporation tax regime
President Obama's recent remarks about the practice of US companies engaging in "tax inversion" practices has again fuelled a bout of speculation about threats to Ireland's corporate taxation regime. The OECD's base erosion and profit shifting initiative, combined with initiatives at an EU level and the ongoing debate in the US, means that we are in a period of extraordinary volatility with regard to international tax rules.
While this may contain threats for Ireland, it ultimately may present more opportunities than threats. There is a huge amount of detail in current international tax proposals, but in very broad terms many of the initiatives are designed to make it harder for multinationals to separate the location of taxable profit from the location of economic substance.
For instance, if you have substantial numbers of staff (particularly senior staff) and premises in a country, you may be able to justify locating a significant proportion of your global profits there, but it will become much harder to locate profits where you merely have a brass plate operation.
This is potentially bad news for tax haven locations where substance may be minimal and good news for Ireland where multinationals typically have large numbers of employees and substantial activity. We may therefore see activities and profits moving out of the tax havens and into Ireland.
In our recent evidence to the Oireachtas Committee on Global Taxation, KPMG set out what we believe are the pros and cons of various policy options open to Government in light of criticism of Ireland's corporation tax regime. It is critical that policy options best place Ireland to secure its economic future in the evolving landscape.
Firstly, we believe that Ireland should be nimble and responsive to the evolving landscape as we have been in the past. Our corporation tax system has been overhauled several times in the last 40 years to deal with changing international tax rules – in each case successfully.
As we see how the various OECD and EU initiatives conclude, we should consider what measures are needed to remain competitive.
Secondly, it may be appropriate to consider amending our corporate residency rules, at the appropriate time, along the lines that the UK did a number of years ago – bringing UK incorporated companies within the charge to UK tax except where they are deemed non-UK resident under a tax treaty.
This ought to deal with the criticism that certain features of Irish residency rules have attracted.
Thirdly, we should seek to design a taxation system that makes it attractive for senior personnel to locate in Ireland given that corporate activity and profits are likely to have to much more closely follow such personnel in future.
Finally, we should be alive to what the competition is doing. The UK, for example, is ruthlessly pursuing its self-interest by substantially improving its tax offering to business.
In our evidence to the Oireachtas Committee, we also made the point that Ireland's cause had not been helped by virtue of Irish persons publishing inaccurate and/or misleading material which then got picked up and repeated by international media. In particular, we were concerned that reports published suggesting that Ireland is operating an effective corporation tax rate of close to 2% rather than the headline 12.5% were highly misleading.
This prompted us to do a technical study earlier this year, which we have published, and which indicates an effective corporation tax rate of at least 12.24% in Ireland. Studies undertaken which indicate an effective Irish corporation tax rate of circa 2% are based on US Bureau of Economic Analysis (BEA) data which is collected for firms which are incorporated, as distinct from tax-resident, in Ireland.
The place where a company is incorporated is similar in concept to the place where an individual is born. An individual's place of birth does not tell you where an individual should be taxed – tax for individuals is based on place of residence and not on place of birth.
Similarly for companies, they are taxed where they are resident or where they have a presence in the form of a branch. The BEA data is flawed, firstly in that it excludes taxes paid in Ireland by the many non-Irish incorporated companies either resident or with branches in Ireland and, secondly, in that it includes in its denominator income of companies that are not resident in Ireland, that don't have branches in Ireland, and that have no factories, premises, employees or anything else in Ireland.
We don't believe in shooting the messenger – but we believe the messenger ought to be as accurate as possible when something as precious as Ireland's reputation is at stake.
In the modern era there has probably never been a time of greater change in the arena of international tax rules.
The Republic's Finance Minister Michael Noonan has said that in this arena Ireland aims to "play fair but play to win".
If we continue to follow this philosophy, then we believe that Ireland can secure a strong economy which will offer opportunity and employment to our children.
Conor O'Brien is head of tax at KPMG Ireland