At the time of the €13 billion Apple State Aid judgement you might have been forgiven for presuming that Ireland’s tax regime was far from what it seemed. Was it full of tax breaks for multinational companies aimed to allow them to minimise their tax bills without similar treatment for Irish companies? Was the system as fair and transparent as had been suggested.
The Coffey report aims to lift the bonnet on the Irish tax code to unearth anything untoward but its secondary goal was to try to restore public confidence in that same system. This broad ranging review has satisfied the first goal, but it may take a little longer for the public perception of the tax affairs of mulinationals to turn around.
Mr Coffey found no smoking gun or hidden loop hole to allow unfair tax competition. The trend internationally has been on eradicating preferential tax treatment of multinationals and encouraging substance based investment. The report confirms Ireland's commitment to these principles. Tax legislation is complex and the rules are both detailed and varied but, importantly the legislation and regime around it is transparent - there are no side agreements.
In this way Ireland is different from a number of our competitor nations where tax deals or rulings are the name of the game. The Coffey report shines an interesting light on the evolution of our corporate tax system over time, from using tax expenditures to attract investment, through to the forward thinking decision to move to a low rate broad based regime. It was this decision and the commitment to it which has allowed Ireland to compete for investment in a very competitive market place.
It has also demonstrated that in certain areas low rates work. Ireland generates more corporate tax as a percentage of GDP than most countries.
One of the overriding messages in the report is that providing certainty to multinationals is now key to attracting investment. Companies crave certainty and countries who introduce significant change at short notice and without consultation find themselves at a competitive disadvantage. The strong message that we hear on a regular basis is that change is manageable, but unforeseen change is not. Indeed there is a realisation across most industry groups that the days of very low effective corporate tax rates are in their winter and now certainty is one of the key economic drivers for investment. If the Coffey report acts as a "road map" as is suggested by Minister Donohue, this will be welcomed by industry.
The detail of the report really centres around a number of key areas, the policy rationale for which are sound.
Ireland introduced transfer pricing - tax rules under which subsidiaries of a company trade with each other - in 2010 and in the intervening 7 years a significant amount of work has been undertaken to guide companies how to better align profits with economic activity. As such it makes sense for Ireland to now consider modernising our rules to adopt international best practices in this area.
Due to tax regimes of the near past it is no secret that many large multinational companies have significant stocks of intellectual property (IP)generating royalty income offshore in tax jurisdictions with little or no tax. These structures are unsustainable due to the agreed new transfer pricing guidelines and as such new homes, where economic activity and substance can be supported, are being sought.
Ireland is in an international battle fighting to be the most attractive place for this IP. The advantages of potential IP “onshoring” are across the board as not only should it lead to increased exchequer revenue (as we are already experiencing) but also increased high value employment. Ireland fought to attract manufacturing in the past whereas now the focus is rightly on IP.
Ireland, like many other countries, treat IP in a similar way to other assets and allows the cost to be written down over time against profits . The difference with many other assets is that IP can have a very high value. In an effort to smooth corporate tax revenues Coffey has suggested that the amount available for offset against any profits should be capped at 80 percent of the revenues of that entity with the rest carried forward. The initial view from industry is that such a change is understood and accepted
The tenet of the rest of the recommendations are either technical in suggest that Ireland should stay the course on its reform path and should maintain its commitment to transparency. For this reason Coffey has, I believe, struck an important balance of technical and theoretical and if the report is used as a blueprint for change it should satisfy multinational’s craving for certainty along with the public’s wish for transparency.
Joe Tynan is Head of Tax at PwC Ireland