Kevin Doyle, Tax Partner speaks to Siobhán Maguire at The Sunday Business Post on new taxation rules and Ireland remaining competitive with an attractive corporate tax rate.
Ireland’s 12.5 per cent rate has been the cornerstone of Ireland's corporate tax offering for some time now and there appears to be broad political support for it to continue long into the future. That’s according to Kevin Doyle, Partner and Head of Financial Services Tax at BDO.
“Potential inbound investors/FDI companies are always aware of Ireland’s 12.5 per cent rate. It's part of Ireland's international business branding at this stage and has been the envy of many of our competitor jurisdictions – with many either having moved to or are in the process of moving to lower their rates.”
Doyle said as other jurisdictions moved to lower rates, there was debate as to whether Ireland should also lower its corporate tax rate further. However, it was decided to maintain the existing corporate tax rate, offering a level of tax rate certainty during a period of significant tax and wider political uncertainty in many other jurisdictions.
“A reactive move to lower Ireland's rate could be viewed internationally as an indication that Ireland too has entered turbulent seas,” he said. “By changing the rate, you are signalling the possibility of further rate movements, up or down, depending on the prevailing political agenda. For Ireland, the key is stability.
“Of course, that is not to say that developments in other jurisdictions cannot and will not continue to target Ireland and other attractive FDI locations through the adoption of domestic tax and customs related measures that seek to nullify a low foreign rate of tax. For example, US tax reform brought in measures aimed at supporting US companies that export directly from the US as well as measures that seek to apply what might be considered a minimum rate of tax on the non-US activities of US owned groups. And of course, the on-going debate and discussion about how best to tax the digital economy would appear to indicate that over the short to medium term, groups engaged in the digital economy, including those with Irish companies in their structures, are likely to find that their overall effective rate of tax will increase.”
Doyle said trade disputes between the United States and the European Union and the United States and China have one thing in common – the United States.
“The Trump administration’s ‘America First’ approach is the lens through which they view all bilateral and multilateral relationships and agreements,” he said. “The dispute with Europe was principally a trade dispute rooted in older industries and classical protectionism. The trade dispute with China, however, is about so much more. The rise of Chinese mercantilism threatens US hegemony in the Pacific, and more than that, it is a dispute about future dominance in the areas of technology and artificial intelligence. Furthermore, the supposed truce agreed at the G20 in Argentina appears to already be coming off the rails with apparent confusion over what was agreed. This issue is likely to run for some considerable time yet and at this point, keeping a watching brief is the best advice.”
Irish policymakers and business people continue to watch international developments closely and tweak the Irish tax regime accordingly. This, said Doyle, ensures Ireland remains attractive for international investment while balancing this with being supportive of the growth and internationalisation of Irish domestic businesses.
“Already we are seeing more Irish companies looking to set up US based operations than we saw before US tax reform,” he said. “On the flip side, US businesses are still setting up Irish operations to take care of their EU customer needs. However, their corporate structures in Ireland are being considered in more detail than may have been the case before US tax reform. But a foothold in Europe is still needed by most US businesses and Ireland continues to represent a great location for their European business and will become an even more important location for international business post-Brexit.”
In tandem with all of this, the Finance Bill 2018 is legislating for a number of significant corporate tax changes with even more to follow in the coming years as the EU’s Anti-Tax Avoidance Directive (ATAD) is enacted into domestic legislation.
“This year’s legislation includes Controlled Foreign Corporation (CFC) rules and a significantly amended exit tax provision,” said Doyle. “The next few years will see fundamental changes to Ireland’s interest deduction rules and transfer pricing laws as well as the introduction of anti-hybrid rules.
“Ireland does not need to go above and beyond what is agreed at say OECD or EU level in order to prove a point. We remain a small, open economy that must compete fairly on the tax front in order to win international business and to support domestic companies that want to grow their worldwide footprint. Where there are relatively non-contentious tax laws that Ireland could adopt to help attract new business, for example, the adoption of a participation regime for foreign dividends rather than Ireland’s current tax credit regime, these should also be adopted in the short term.”
Doyle said that Ireland's tax laws are only one part of the international tax matrix that multinationals and international businesses have to negotiate their way through when they consider their group structure.
“Ireland's laws are overlaid with EU tax directives and state aid laws, double tax agreements and the likes of the new multilateral agreement,” he said. “Most legal tax avoidance structures around the world are a play on how two or more jurisdiction's laws interact. The interaction of such laws between the United States, Ireland and various Caribbean countries led to what was known as the ‘double Irish’ structure. Ireland can only unilaterally change its own tax laws and in 2015, the Irish rules in relation to tax residence of an Irish incorporated company were amended with a view to eliminating the use of new "double Irish" structures while older structures were given until 2021 to restructure away from it.”
However, Ireland's tax treaties take precedence over domestic tax laws and this has led to the structure often referred to as the "single malt", a loophole that the government is now closing.
“The "single malt" is not widely used and shutting it down, which was broadly expected in the short term, may lead to the on-shoring of those companies or the acquisition of their IP by a related Irish company with more and more future set ups being conducted fully onshore,” said Doyle.
Another tax on the horizon is that of the Digital Sales Tax. Doyle said the reticence of the Irish Government to back a European approach has to be seen within the context of the multinationals based here.
“Successfully resisting a European only digital tax that may have put Europe and Ireland at a disadvantage is seen as a success for Ireland and I believe that is a fair assessment, especially when it is noted that the Government acknowledges that some form of change is coming and is supportive of a global OECD led solution which should then include the US,” he said. “However, with a Europe-wide approach to a digital sales tax now appearing to be off the table or at best, struggling for traction, we are left with the risk that jurisdictions will introduce different versions of the same tax, with various thresholds, rates and cut-off points across Europe and beyond. Many have already started and have put significant pressure on the OECD to find a workable solution as soon as possible. The likes of India, South Korea, Hungary and Israel have all implemented a form of digital tax while the UK and Spain have proposed a similar plan.
“We are now, in a way, left with some of the worst elements from a business perspective as compliance with these varying taxes and somewhat novel concepts will increase complexity and cost and inevitably lead to an increase in cross-border disputes. Ireland eagerly awaits the OECD’s 2019 update in this regard.”