Proactive engagement on international tax reform remains vitally important.
Ireland is on course to have the fastest growing economy in the euro zone for a fourth consecutive year, influenced strongly by our ability to attract inward investment. Having expanded very strongly over the past two years, the economy is set to grow at a more sustainable pace in 2017 and 2018.
To maintain this growth and international attractiveness, Minister for Finance Paschal Donohoe has been clear on his intent to deliver a balanced budget, with tax measures focused on prolonged stability and certainty.
From a personal tax perspective, Budget 2018 continues the trend of providing modest income tax adjustments aimed at easing the tax burden on lower and middle income workers.
From a corporate tax perspective, much of our road map continues to be influenced by the international sphere. Our continued active engagement in initiatives being undertaken by the OECD and EU in the area of international tax reform is therefore of critical importance.
Digital economy
Our economic success is heavily influenced by the strength of our digital economy. Ireland is a global frontrunner in this “new industrial revolution”, with OECD data showing our share of global digital exports to be more than 30 times larger than our overall share in the global economy.
With the growing digitalisation of the global economy, the taxation of digital firms has come into international focus. It is widely perceived that insufficient tax is paid by these firms and that international tax reform is required to update tax rules, which were designed for the traditional economy and not for activities which are increasingly based on intangible assets and data.
Ireland is strongly committed to continuing to support the OECD in its work to reform the international corporate tax system, believing that global solutions are needed to ensure that tax is paid by companies where value is created.
The European Commission recently announced its plans to look at digital taxation, suggesting that plans to harmonise tax rules across the bloc, known as the common consolidated corporate tax base (CCCTB), could be used to incorporate new rules on digital tax. A levy based on turnover in a given country has been suggested.
The Government is expected to contest any such moves at EU level towards corporate tax consolidation or turnover taxes on digital companies.
Under the spotlight
Given Ireland’s recent and continued success in attracting foreign direct investment in the technology sector, it is not surprising that our tax regime has come under the spotlight.
The findings in the Apple state aid case prompted the Department of Finance to commission the Coffey report, which was released last month. The over-arching message from this report is that our current corporate tax system is transparent, competitive and fair.
Both the OECD and the EU recognise our tax regime as an open and transparent regime which is broadly fit for purpose. Ireland recently received the highest compliance rating on tax transparency from the OECD in its latest peer review reports published in August.
The Coffey report does make a number of key recommendations around overhauling Ireland’s transfer pricing regime, recalibrating its existing IP regime and introducing a competitive territorial regime. The Minister has announced the start of proactive consultation with business on these recommendations to determine what changes should be made, which is very welcome.
One recommendation to be implemented with immediate effect is the reintroduction of the 80 per cent cap for new spend on intellectual property. This means that, in any given year, 80 per cent only of the associated income can be offset by IP amortisation and related financing expenses.
The measure is aimed at ensuring some smoothing of corporate tax revenues over time. Any excess deductions can be carried forward to subsequent years without limit. While the change is unlikely to have any impact on a company’s effective tax rate, it can affect cash taxes in any given year.
In the face of growing external challenges and opportunities, the measures announced by the Minister should ensure that the State continues on a stable and sustainable path for growth. However, our ongoing proactive engagement on international tax reform measures remains vitally important.
Joe Tynan is head of tax at PwC
