In the context of tax policy, we are in a golden era for people operating in this space, the likes of which I do not expect to see again in my lifetime.
The OECD BEPS (base erosion and profit shifting) process is the greatest change to the global taxation system since it was established after the first World War and is likely to shape the tax landscape for the next 50 years or more.
We are currently in the midst of a three-year programme which started in 2012 and the OECD released on Wednesday the first seven elements of its 15-point action plan. The scale and speed of progress made to date around agreeing a general approach has been surprising, and the speed at which it is progressing is impressive. However, implementation at local country level has not been so rapid and it may be expected that countries will be hesitant in implementing changes to their domestic tax regimes / treaty network.
At its core the BEPS process has three main pillars: coherence, substance and transparency. It is looking to redefine how companies operate on the international stage. Areas of focus include the impact of new business models with mobile workforces, significant amounts of intellectual property and reliance on digital sales as well as curbing the use of hybrids (usually financial that are treated in a different way from a tax perspective in different jurisdictions) and perceived abuses of double tax treaties. As such, it could materially increase companies’ effective tax rates.
Many countries have been identified in the OECD Report on Countering Harmful Tax Practices (Action 5) as having potentially harmful elements in their tax regimes, including Switzerland, Luxembourg, Spain, Britain and the Netherlands. It is therefore clear that this is a global process and many countries will need to consider and make changes to their tax regimes.
Interestingly, while there has been a significant level of global publicity around aspects of Ireland’s regime such as the “double Irish” structure, Ireland does not appear on this list. Clearly the OECD process is not all about us, notwithstanding the impression a reader might get from our own media.
Taxation of profits
Overall BEPS seeks to align the taxation of profits with the location of business substance (ie economic activities and value creation). This approach is currently a key plank of our taxation corporate system which is a positive for Ireland. Furthermore, the Irish corporate tax system is transparent and is not rulings-based. Another plus.
Action 1 of the BEPS Action Plan centres around addressing the tax challenges of the digital economy. The potential use of modern information and communications technology by all businesses raises difficulties in identifying a specific digital sector. This has been recognised by the OECD, meaning that any measures intended for the digital economy are likely to be consolidated into the overall plan. The key tax challenges around digital business centre on the fact that there can be little economic substance and hence little profits attributed to the territory in which sales are ultimately made. The majority of the profit would typically be attributable to the place in which the functions, assets and risks are located. Reference is made in the action paper to ensuring that taxing rights are aligned with the market jurisdiction and the jurisdiction of the ultimate parent. A move towards taxing profits in the country of final sale is unlikely to be a positive for Ireland and would affect many multinational groups with substantial intermediate economic activities in Ireland.
It would also appear to conflict with the overall BEPS aim of aligning the taxation of profits with the location of business substance. The digital economy was one area where the OECD initially wanted rapid progress but they seem to now acknowledge the issue is more complex than originally envisaged. How should Ireland react?
Pascal Saint-Aman, director of the OECD centre for tax policy, as noted in The Irish Times earlier this week, suggests that Ireland would be best suited in moving sooner rather than later, in taking actions to counter harmful tax practices, specifically around the infamous "double Irish" structures.
Stateless companies
While measures have been introduced to deal with stateless companies, should Ireland go further in taking unilateral action as a number of OECD members have? To a certain extent, this may be viewed as turkeys voting for Christmas, as we don’t ultimately know how BEPS will be implemented on a global scale, and to take any actions now may undermine our regime and in fact help other countries.
In the case of the double Irish structure, before we could even consider doing anything which would essentially close down the structure (which is not a problem of our making), a viable alternative intellectual property regime would need to be in place.
Socrates said, “The secret of change is to focus all of your energy, not on fighting the old, but on building the new.” Absent a competitive intellectual property regime and we would run the risk of losing significant existing and future foreign direct investment to other countries.
An early mover advantage must be accompanied by a change in our intellectual property tax regime to ensure Ireland remains attractive in a fast moving race for inward investment. While the Irish sandwich may not taste as sweet (as noted by Raffaele Russo of the OECD), we will still need an attractive alternative to keep the bread on the table.
Feargal O’Rourke is head of tax services for PwC, a board member of the American Chamber of Commerce in Ireland and chairman of its tax working group @feargalorourke
