The major report by the Organisation for Economic Cooperation and Development (OECD)on multinational tax is part of an inevitable process. Exchequers are tight for cash. Personal taxpayers are being asked to pay more. It is not sustainable in this context for big companies to be making tiny tax payments on large amounts of their profits. They will pay more in future, though how much, and by when, remains open to question.
The most obvious advantage of the OECD report – on so-called base erosion and profit sharing – will be if it ends the more aggressive tax planning practices undertaken by many big multinationals. These may be within the letter of the law in most cases, but by playing one set of tax rules off against another many of the industry giants such as Apple and Google have ended up paying excessively low corporate tax on earnings outside the US.
The new rules will, if implemented in full, make it much more difficult for big multinationals to park large amounts of cash in offshore tax havens.They will also rule out some of the more aggressive manoeuvres used by these companies in their own internal accounts, which has allowed them to arrange to incur the largest amount of profit where the lowest tax rate is paid. In future, more profit will have to be declared in locations where there is a large amount of economic activity. More debates lie ahead on exactly how this will be defined and the detail will be important, not least for Ireland.
Predictably, the recommendations have pluses and minuses for Ireland. The head of OECD tax policy, Pascal Saints-Amans, has said that Ireland could collect more corporation tax as a result. This is possible, though by no means guaranteed. One of the key risks that the changes in tax treaties which will follow the EU study could disadvantage Ireland – and the follow up EU action, driven by some of the big member states, could renew pressure on our corporation tax code. To this extent the OECD report marks an important step in a process, but not by any means the conclusion.
The decision by Minister for Finance Michael Noonan to abolish the double Irish tax incentive in last year’s Budget – albeit that companies benefiting from it can continue to do so for some years – was definitely the correct one. Had we not done so, we would now be under severe pressure on this front. Further changes lie ahead, and new legislation on information sharing and transparency are expected to be flagged in the Budget, but the Government may also have to go into battle as the precise details of the OECD plan are tied down.
The days of using aggressive tax incentives to attract multinational investment are drawing to a close. It is wise now to recognise,while of course fighting to safeguard Ireland’s vital economic interests in the negotiations to come.