This year promises to add spice to the so called "fair tax debate" that has raged since the international banking crisis of 2007, particularly given some of the tax policy measures under consideration by president-elect Donald Trump.
Ireland must play a deft hand to ensure that it continues to be seen as a compelling location for foreign direct investment, while also playing its part in shaping the international tax landscape of the future. It is also critical that Ireland pays as much attention in the coming debate to needs of Irish business – both existing multinationals and those that will grow and expand by exploiting global markets.
In 2013, the OECD launched a project aimed at targeting base erosion and profit shifting by international companies (the “BEPS” initiative). The idea was to co-ordinate multilateral action by OECD members on introducing an element of harmonisation in rules governing the taxation of cross-border profits.
Though the initiative has achieved much more than many would have expected, it has been unable to contain a raft of unilateral action by many countries that, in implementing the BEPS recommendations, went much further than those recommendations.
The European Union, not to be outdone, has looked to enshrine versions of the BEPS proposals that go beyond the OECD's recommendations into EU law through the Anti-Tax Avoidance Directives. This year will see further life breathed into a long-standing EU proposal to set common rules in all EU member states for how company profits are taxed (CCTB), and potentially allocating the taxes that companies pay in the EU to member states based on a mix of factors, such as sales and employee numbers (CCCTB). These proposals face stiff opposition with the Netherlands, notably, recently expressing their opposition.
British influence
It is worth remembering that all EU member states must agree to EU proposed tax measures. The next two presidencies will be enlightening in terms of the priority they will accord to these initiatives. UK influence on this debate will be interesting, especially when there have been many utterances around what UK corporate tax policy might look like post-Brexit, free of the perceived shackles of EU state aid.
There has been talk of UK corporate tax rates falling to as low as 10 per cent, although the affordability of such a reduction in rates is questionable.
US tax reform has been a particularly thorny problem, made more difficult by the US legislative process. With a Republican-controlled Congress and a Republican president-elect citing tax as one of his key policy objectives, the chances of tax reform are much increased.
Two ideas in particular have caught the eye. First, a reduction in the rate of federal income tax for companies from 35 per cent to as low as 15 per cent would be a radical move, as the US is probably one of the highest tax regimes for companies. Still, any reduction would likely be accompanied by the ending of certain reliefs, so the real reduction in effective rate remains to be seen.
The second idea is to introduce a low rate of tax, as low as 5 per cent, for US companies that pay dividends from overseas earnings back to the US – currently taxed at 35 per cent. This could raise billions of dollars for the US, and it’s easy to see how this “windfall” might be used to partly fund some of the new administration’s investment and spending proposals.
Reduced competitiveness
How does this affect Ireland? The EU proposals, particularly CCCTB, have the ability to reduce Ireland's, and indeed the EU's, competitiveness in attracting foreign direct investment, and we will see the emergence of the UK looking to fulfil its ambition to be the most tax-competitive member of the G20 group of nations.
Against this backdrop, Ireland must remain steadfast in its policy of continuing to offer a competitive, stable, and transparent tax environment.
The review of the tax code now being undertaken by Seamus Coffey of UCC as part of the State's response to the EU's Apple tax rulings is a great opportunity for Ireland to reassure on the stability of its tax regime. It will also allow us to consider appropriately bold moves that would help Ireland continue to compete for valuable mobile investment.
In the face of an increasingly competitive and uncertain environment, we cannot afford to be complacent.
Kevin McLoughlin is head of tax at EY Ireland.