Corporate tax - Let’s do what we have to, not what we’re expected to!
Tuesday 30th January was the end of the beginning. It marked the end of the public consultation on corporate tax launched by the Minister for Finance on budget day. Now the heavy lifting starts with the authorities drafting law to deal with the issues raised. There is little doubt that the changes coming from that review will shape Ireland’s future on the international stage and the careers of anyone involved in corporate tax.
To quote the late Heath Ledger in 2008’s the Dark Knight “why so serious?” Because that review focussed mainly on the EU’s Anti-Tax Avoidance Directive (ATAD) which seeks to bring Base Erosion and Profit Shifting (BEPS) -like measures to the EU and hence our law. Pierre Moscovici (European Commissioner for Economic and Financial Affairs, Taxation and Customs) said in Davos that he wants the EU to adopt a “BEPS plus” approach and the directive does that.
On implementation all EU members will have similar treatment of certain corporate tax avoidance measures. Some of these concepts are new to our law and will take some getting used to but we’ll all be singing from the same hymn sheet on these measures in a somewhat harmonious manner. I say “somewhat” given that the ATAD allows certain options to be taken by each Member.
Bruce Lee’s advice comes to mind: “Adapt what is useful, reject what is useless, and add what is specifically your own”. Given this is an EU directive there is little we can reject this time but we can adapt and add!
To be clear, this “somewhat” harmonious singing isn’t the Common Consolidated Corporate Tax Base (CCCTB) by another name. The ATAD seeks to reduce certain types of activity by bringing about various provisions to deal with tax avoidance. One of those is a General Anti-Avoidance Rule (GAAR). The directive says that all EU Member States should have one. We’ve had one since 1989 so we’re way ahead and it got added muscle in 2014. Basically it says that if a transaction is done just to get a tax advantage then the taxpayer can’t have that tax advantage. Our GAAR affects everybody: companies and individuals alike thereby treating everybody equally before the law.
A former Revenue Commissioner described the original GAAR as being akin to a cross eyed javelin thrower competing at the Olympics: He may not win, but he will keep everyone on the edge of their seats. So its uncertain application is clear. The law changed in 2014 so that a tax advantage could be removed where it is “reasonable to consider” that a tax advantage was the driving force behind the transaction. That javelin thrower is still competing while everyone watches with the stadium lights switched off.
Don’t get me wrong, such law is necessary. I have to say that because I wrote a book on it and I want to compete with John Grisham although I don’t think Mr Grisham need be concerned. Such law provides the Exchequer with the ultimate protection against tax avoidance and rightly so. But here’s the thing: The ATAD’s version is arguably clearer than ours by requiring some conclusion be made on avoidance rather than a consideration of its existence. If every other EU member goes the way of the ATAD then our law may be disadvantaged when competing with them so why not go with a “reasonable to conclude” test instead? Clarity eats uncertainty for breakfast when it comes to investment because investors read all T’s and C’s carefully and choose the path of least resistance when looking for a return. Differences with competitor countries can be chinks in our otherwise competitive armour.
EU countries can compete on tax rate which is their sovereign right but also on tax policy choices within the ATAD’s rules. The directive contains other measures such as Controlled Foreign Company (CFC) rules, exit taxes, hybrid mismatch counteractions, interest restrictions and we will have to implement all of these in time. Technical jargon containing stings in their tails.
Take CFC or as I call it the “reach out and touch” law for a minute. Basically such provision says that where a company sets up a corporate entity in a foreign country to avoid tax then the parent company’s home country can reach out and pull those profits back home and tax them.
The ATAD allows choices of application which are now well known within the tax profession as options (a) or (b). Option (a) adds certain forms of a CFC’s undistributed income to its parent company’s tax computation back home. Option (b) has a similar result but uses a different approach as, unlike option (a), it applies to the CFC’s total undistributed income where that income arises from non-genuine arrangements put in place for the essential purpose of obtaining a tax advantage. Options (a) and (b) provide exclusions from the application of the CFC rules being substantive economic activities and non-artificial arrangements respectively. Of course T’s and C’s apply.
However, Ireland choosing option (a) over (b) or vice versa as part of our domestic law may represent some limitation in itself. Coming back to Mr Lee’s advice we must “add what is specifically our own”. In my view, our domestic law should, while adhering to the ATAD’s object and purpose, ensure no discrimination exists between substantive companies in foreign countries and their smaller counterparts. Both types of company should be allowed demonstrate their innocence once their CFC was located abroad for genuine economic and not tax reasons.
When I was in school there were two types of pupil being the swots and everybody else. The “everybody else” group produced engineers, award winning photographers, entrepreneurs, lawyers and many of my species “accountants”. And so it is with our tax system. We don’t have to have the EU’s shiniest tax system to get the job done i.e. securing our future in times of increased competition from other EU member states while playing by the EU’s rules. Simplicity of application, yes; clarity, definitely; a swot, not necessarily.
In short we play fair but play to win. All life’s important decisions often come down to just one moment, this is one of them.
Tom Maguire is a tax partner with Deloitte and his fortnightly columns on tax matters appear in the Sunday Independent. The above article was first published on 18th February, 2018.