Where next for Corporation Tax?Friday 11 March 2016 19.30
The amount of tax multinational companies pay – and the amount they don’t pay – has become highly controversial, writes RTÉ's Economics Correspondent Sean Whelan.
This is mainly as a result of public outrage over legal tax avoidance schemes that big companies can use to shelter vast amounts of money from the taxman.
This week the Irish Tax Institute and the Ash Centre for Democratic Governance and Innovation at the Harvard Kennedy School have been hosting their annual Global Tax conference in Dublin Castle.
This year’s theme was “New rules for a new era”, concentrating on the impact of the so-Called BEPS process on how states around the world tax multinational companies, and clamp down on tax avoidance schemes.
Three heavy hitters in the realm of global tax policy were there, representing the US Treasury, the European Commission, and the OECD.
Pascal Saint-Amans is Director at the Centre for Tax Policy and Administration, OECD
A well known figure in the world of tax policy, Pascal Saint-Amans steered the OECD’s Base Erosion and Profit Shifting project (BEPS) to a successful conclusion, the package being formally adopted by heads of state and government of the G20 last November.
“Most of the leaders at the G20 really did talk about corporate tax, including Putin and Obama. There was strong political support, and they were talking about things ordinary people are talking about”, namely the amount of tax multinational companies are paying, and not paying.
Now the post BEPS work has started, the follow-up of the process to make sure it is being implemented, and fill in some technical details in a few areas.
The follow up will also mean leaning on countries that are reluctant to get on board.
And as all the main blocks are on board, that probably means putting the heat on a few small states.
One area of technical work is a committee to draw up a multilateral instrument that will amend all the existing tax treaties between states to make them compliant with the BEPS process in a single go, rather than a lengthy piecemeal process.
“96 countries are part of the multilateral instrument committee – we want it ready for signing at the end of the year, killing 2000 birds with one stone”.
Country-by-country reporting of corporate profits is probably the most visible change from the BEPS process.
Now the OECD is following up to make sure countries are actually implementing the change.
Ireland has been one of the first to legislate for “CbyC” as it is known: “Ireland has implemented this, we haven't formally checked but we think it’s pretty good at first sight, says Saint-Amans.
One thing he doesn’t like about the Irish tax system is the Knowledge Development Box, the recently introduced 6.25% tax on intellectual property firms resident in Ireland (of which it appears €103bn worth was acquired by Irish companies last year, according to the latest Quarterly National Accounts figures – a 103% increase on the year before).
Patent Box, Knowledge development Box - whatever they're called, the EU, OECD and White house don't like them.. https://t.co/8uprQzc22R— seanwhelanRTE (@seanwhelanRTE) March 11, 2016
This is the Irish manifestation of the “Patent Box” regimes that a few European states have set up (Including the UK).
The government here has made much of the fact that it is the first post-BEPS patent box regime and is “fully OECD compliant”.
Indeed it is says Saint-Amans – but that doesn’t make the patent box a good idea if the aim is to encourage the creation of Intellectual Property.
“It is a bad policy to have patent boxes – they are not a good incentive to create IP.
But If you have a policy that’s not smart, at least do it in a manner that does not take revenue from your partners”, is his view.
As for the next big project, Saint-Amans says it’s to examine how global tax policy can be used as a tool to promote economic growth.
“We are trying to do a new tax pillar in the G20 – we have suggested to Chinese (current G20 presidency) that we can move to something like how can tax policies contribute to growth, innovation, and certainty to increase investment.
“They have agreed with the incoming presidency Germany to have tax symposium in July to promote policies in these areas”.
When Ireland comes under international pressure over the tax rate and (more importantly) the tax regime, minsters, officials and tax practitioners all point the finger at the US tax system and say there are problems over there that need to be fixed if the problem of tax avoidance by multinational companies is to be seriously tackled.
Robert Stack, the Deputy Assistant Secretary for international tax affairs at the US Department of the Treasury, agrees.
He told the conference: “We need to fix our tax system - it permits $2 trillion to hang offshore not taxed - this creates instability in the global system.
“In the BEPS process the world saw a huge pile of money offshore. At the same time there was the economic crisis, countries saw an opportunity to get money that US was leaving untaxed.
“The multinationals were able to achieve low effective tax rates because they never brought this money back to the US.” (Where tax was due at 36%, the highest rate in the industrialised world.)
He said the US was a strong supporter of the BEPS process, and played an active role in all the discussions.
But he admits that Corporate Tax reform is not a big issue with the general public in the US, the way it is in Europe or indeed much of the rest of the world.
“The political situation in EU and US are starkly different. It’s only that I come here and deal with colleagues that I realise taxation of MNCs really is an issue for the man and woman in the street. This is not the case in the US. We didn’t have the same austerity crisis in the US and the forces at work are fundamentally different.
“The politics that create the BEPS process took the US multinational company community by surprise. As tax practitioners (he spent 25 years in private practice) we draw boxes and work the system, we work with political blinkers on.
“We don’t see how a tax plan will be perceived by public at large. The sea change politicisation of these issues is new for the tax advisor community in US and they are going to be impacted by this for years to come.”
But he also sticks up for the American system and the companies that work in it, claiming that US companies have been unfairly treated because the US system is more transparent, so information to use against companies is easier to find in America than in other countries.
And he is particularly critical of the way the European Commission has recently begun to use competition law to seek to recover back tax from companies, many of which are American, and the biggest of which is Apple.
“It was clear to us in the US that you had efforts to tax US companies more in these jurisdictions than heretofore. That meant US would get less tax unless we were aggressive. And US companies could be singled out in BEPS process unless we were vigilant,” he said.
“The US shouldn’t be paying a price for being transparent - one of the undercurrents of the US position is that other companies from other countries do tax planning, but we are singled out because we had transparency and Congressional hearings and our structures are out there”.
Overall he says the effect of the BEPS process will be to change the way multinational companies operate.
“Country by Country reporting (of profit and activity) will bring about a sea change – multinationals will not want to show outsize profits in zero rat countries, and that is a good thing.”
Valère Moutarlier is the Director of Direct Taxation at DG Taxation and Customs Union at the European Commission.
His boss is the French EU Commissioner in charge of Tax, Pierre Moscovici. His big intervention in the conference was around the long running proposal for a Common Consolidated Corporate Tax Base (CCCTB) in the EU, which would set the same rules for determining what constitutes taxable profit in all EU states, and eventually where that tax should be paid.
The latest attempt to create a CCCTB will be launched later this year, with two objectives according to Moutarlier – “Fair and objective taxation in the single market, and an improved business environment in the single market”.
“Now we speak of effective taxation, not harmonisation of tax rates - we have no agenda on the commission side that would lead to harmonisation.
“The rate is the business of individual stats. But when it decides on a rate, it must be able to effectively implement that rate without being undermined by the decisions of neighbours. So the aim is effective taxation within the EU.
“Some will challenge need for a specific EU approach within the global approach Pascal and the OECD has outlined. But the global approach has increased need for speedy implementation within the single market.
“We will make adjustments to the project that’s on the table, looking at ways to address the debt bias (debt financing attracts tax relief, equity financing does not, encouraging firms to load up with debt) and look at ways to design tax schemes to foster innovation and research - I can only totally agree with Pascal on the merits of patent box regimes.”
Of course Ireland is well known for having a phobic reaction to any moves to harmonise tax laws emanating from Brussels, and cites the treaty requirement of unanimity in decision making on tax (one of the few areas left in which the national veto exists), but Moutarlier appealed for the Irish to at least think about the proposal: ”Ireland has an instinctive reaction to CCCTB - would strongly encourage you to take another look at the proposal - as well an attractive rate of 12.5, with a common EU tax base Ireland could guarantee companies a simpler EU compliance regime, with a cross-border loss regime that is to the advantage of companies”.
He congratulated Ireland for implementing country-by-country reporting in law, a key BEPS deliverable.
But the Commission is planning to go much further. Under BEPS the country-by-country reporting is confidential to the tax authorities within states, who may then share the information among themselves to build a comprehensive picture of the activities and tax payments of individual multinationals.
But the Commission is working on a proposal that would see this information made public in some form in the EU.
The proposal is likely to be tabled in the college of Commissioners sometime in the next month.
“We have resisted heavy pressure to rush on this proposal, and taken time to find a balance between a high degree of public transparency, and protecting the competitiveness of companies. That’s why it has taken so long”, says Moutarlier.
“Having possible public disclosure element should not mean any more red tape and compliance costs for companies,” he adds.
According to the Commission, the tide is turning in favour of public disclosure: “Already a lot of MNCs are making these disclosures on voluntary basis, there is a sense of history. We will try to do this in balanced way that does not pose competitiveness challenges to companies”.