From top: Minister for Finance and Public Expenditure and Reform, Paschal Donohoe at the publication of the review of Ireland’s Corporation Tax Code (Coffey Report) this week; Tony Groves
There’s a lot of kites in the Republic of Opportunity airspace at the moment. It can be difficult to keep up with which ones are up and which ones are dive bombing back to the earth.
Even when some are flying higher than others it can be unclear as to what it might mean for us back on terra firma.
One such kite, that has been floating for years now, is the EU’s Common Consolidated Corporate Tax Base. After many years of ignoring it we are going to have to deal with it, Jean Cluade Junker says so!
The CCCTB is, like all tax laws, easy to understand, while impossible to navigate safely. The main aims are to:
Tackle loopholes currently associated with profit-shifting for tax purposes.
Encourage companies to finance their activities through equity and by tapping into markets rather than turning to debt.
Support innovation through tax incentives for Research and Development (R&D) activities which are linked to real economic activity.
Corporate tax rates are not covered by the CCCTB, as these remain an area of national sovereignty. Our 12.5% rate is not up for discussion.
There’s a lot to be said for a CCCTB that stops huge Multinational Companies avoiding paying tax. The issue, from an Irish perspective, is that there won’t be any profits in the pot for us to tax by the time the “transfer pricing trick” receives the cash.
That is a worry.
When Seamus Coffey, Chairperson of the Fiscal Council, reported on our Corporation Tax system this week the media reported a clean bill of health.
Minister for Finance, Paschal Donohoe was triumphant, describing the report as “very positive”. RTÉ and the rest went along for the ride.
I’m not sure many of them read the report, or some of its more interesting conclusions. I’ve linked to it here for those of you as boring as I am.
For the rest of you the main points, at least to my mind, are:
That Ireland’s transfer pricing scheme needs “updating and expanding”
Revenue require “enhancement of resources to deal with international dispute resolution”
That we introduce “a cap on allowances as a way of smoothing corporation tax revenues over time”
In layman’s terms, this means Ireland is not offering our (dodgy?) transfer pricing scheme to all firms. That’s something the EU Commission might call “preferential treatment”.
The Revenue Commissioners are currently, and through no fault of their own, unable to deal with the mess that is sheltering profits from all over the world in Ireland.
The ‘smoothing over time’ simply means we close our loopholes slowly, so as not to spoke the MNC horses.
I’m not advocating for Ireland to drop the “transparent tax haven” Unique Selling Point, far from it. We don’t have German Manufacturing, Scandinavian Natural Resources or Mediterranean Sunshine. We have low tax. That’s our thing.
The CCCTB and the Seamus Coffey report aren’t things we should worry about. They are things we should tackle. The Coffey report tells us to make our scheme more widely available, do it.
And the CCCTB has an angle for us as well.
There’s a reason the word innovation is in bold above. The CCCTB has an out for Ireland if we can get in on Innovation. One of the key proposals of the new Tax Reforms is based on Innovation.
What the EU are saying is that start-ups AND Large Corporations who “support innovation” will be rewarded “through tax incentives for Research and Development (R&D) activities which are linked to real economic activity.”
These Large Established Corporations are defined as companies who earn more than €750m per year. Not the type of young dynamic company that needs a break. But the type that frequent the Irish economy.
While these tax breaks are misdirected; the established high-tech innovation sector is not a big employer in the EU. In fact, it’s a small player.
As Eurostat reported:
“in 2014, about 34m people were employed in the manufacturing sector across the EU, representing 15.4 % of total employment. Among these workers, 2.3m were employed in high-tech manufacturing, corresponding to 1.1 % of total employment.”
That’s employers of only 1.1% of total EU jobs are to receive tax incentives the 98.9% won’t. But Ireland needs this loophole.
Ireland doesn’t fare much better, job wise. While we lead the EU with 3% of our workforce in the high-tech sector, it’s estimated nearly 50% are not in high-tech jobs, but in administration roles.
At most 2% of our workforce are employed in these Innovation, Research and Development roles. 2%, it’s hardly worth giving such huge tax breaks to, or is it?
The Big MNCs aren’t really innovating anymore. They don’t need to. They are sitting on huge pots of money.
What they do is wait to see which start up (genuine innovator) is doing well, or has promise and they buy them out. Bang, the market shrinks, they consolidate their position and the Innovation becomes theirs, along with the tax break.
Between 2011 and 2015 the Big Players spent nine times more money in acquiring (buying up) innovation than on innovation itself. Yet the CCCTB gives tax break to the Big Guys, already earning over €750m per year.
These Behemoths are not really innovators. Some of them are not even big employers. In 2015 Facebook’s global workforce was less than 13,000. Poke that on your wall beside your Insta Snap.
But we need the Corporation Tax. So Ireland needs to Innovate the Hell out of the CCCTB.
Tony Groves is a full-time financial consultant and part-time commentator. With over 18 years experience in the financial industry and a keen interest in politics, history and “being ornery”, he has published one book and writes regularly at Trickstersworld