Insights

Ireland is not a tax haven

Is Ireland a tax haven?  That’s a question which has arisen a lot lately and particularly in Davos.  Short answer:  No.  The longer answer follows:

The OECD outlined certain factors which in its view described a tax haven.  They included a country which has no or nominal tax, one which demonstrates a lack of transparency and an unwillingness to exchange information with other countries as well as an absence of an in country requirement that activity be substantial.  So let’s break it down.   

As part of debates on Finance Bill 2017 last November the issue of our effective rate of corporate tax came up.  Minister Donohoe referred to a paper produced in 2014 which highlighted that since 2003 the effective corporate tax rate has averaged 10.9% and 10.7% respectively. He continued that recent analysis by the Revenue Commissioners noted that the effective tax rate of companies in 2015 was provisionally calculated as 9.8%, representing a marginal increase on the 2014 rate of 9.7% and that in 2012 and 2013, the effective rate was 10.1%. He said that these percentages were lower than the 12.5% headline rate and were attributed to the availability of the small number of targeted measures, such as the R&D tax credit.   Couple that with a personal tax and social security rate of up to 55% on individual income from the corporate entity and the tax burden is clear. 

There are few exemptions from the application of corporate tax and we’re actually behind many competitor countries. For example, dividends received by an Irish resident company from foreign sources are taxable here but other countries just exempt such income.  Granted Ireland gives a credit for foreign tax paid on the profits making up the dividend against Irish tax (to ensure tax isn’t unfairly suffered twice on the same income) however detailed and complex Ts and Cs apply.  Complexity of law brings about uncertainty of application and simplicity eats uncertainty for breakfast when it comes to investment in a country.  The taxation of foreign dividends is being looked at right now as part of the Department of Finance’s public consultation on Ireland’s corporate tax code which concluded on Tuesday last.

On transparency, our tax system is based in legislation which anybody, anywhere can pick up and read. I know I’ve edited the Irish Tax Institute’s direct tax legislation for almost 10 years now.  Time flies when you’re getting older!   Also, you have to remember we were among the first countries on this planet to implement Country by Country Reporting. These reports are exchanged with all relevant countries to ensure tax authorities have a clear picture of the activities of large multinationals.

Further, we have tax treaties with over 70 countries which have exchange of information provisions included within their pages and we have over 20 Tax Exchange of Information agreements with other countries.  But la pièce de résistance is that last summer the OECD's Global Forum on Transparency and Exchange of Information for Tax Purposes gave Ireland the highest possible transparency rating following a second peer review which looked at Ireland’s compliance with international standards for the exchange of information between tax authorities.

This Global Forum is the continuation of a forum which was created in the early 2000s in the context of the OECD’s work to address the risks to tax compliance posed by non-cooperative jurisdictions. It was restructured in September 2009 in response to the G20 call to strengthen implementation of these standards.  The Global Forum has 148 members on equal footing and ensures the implementation of the internationally agreed standards of transparency and exchange of information in the tax area. Through an in-depth peer review process, the Forum monitors that its members fully implement the standard of transparency and exchange of information they have committed to implement.  

On substantial activity, it’s not a slam dunk that a company will be chargeable to tax at 12.5% in that it must be regarded as trading here and there’s a vast quantity of court decisions on what carrying on a trade means.  Meeting that test is a high bar and a company needs economic substance here to be regarded as trading and hence eligible for the 12.5% rate.  Absent that the company’s income is taxable at 25% or maybe the even higher Capital Gains Tax (CGT) rate of 33% depending on the activity concerned.  The higher rates are outliers when compared with our EU counterparts and readers will recall that I’ve previously advocated a lower CGT rate in this column.

Ireland competes on tax policy in accordance with the three R’s – Rate, Regime and Reputation.  Granted it’s well reported that there have been some perceived reputational issues in the past but they were dealt with and fast.  For example, a perceived issue was raised the year before last regarding the taxation of securitisation and certain fund vehicles and the legislation to address that was written rapidly for the Finance Act in that same year.  That was really complex legislation bringing about, I’m sure, many long days and late nights in the Department of Finance and Revenue ensuring that this was appropriately legislated for. 

Reputation is critical, as Warren buffet said it takes “years to build and 5 minutes to ruin it.  If you think about that you’ll do things differently” and we do but as our Government has always said we play fair but we play to win.

I was thinking about this topic this week on the way home one evening and it was pouring rain.  When I got out of my car I put my foot straight into a lagoon of a puddle with the splashing water drenching my suit and shoes.  So it brought back the haven issue and my waterlogged shoe screamed “No we’re not”.  Maybe the weather could be an additional criterion to determining uncooperative tax status! 

Coming back to the question posed at the start of this article.  I think the answer is clear and I would borrow Kevin Bacon’s line from “A Few Good Men” (1992) when he made his prosecutorial submission “Those are the facts and they are undisputed”.  Is Ireland a tax haven?  That’s a question which has arisen a lot lately and particularly in Davos.  Short answer:  No.  The longer answer follows:

The OECD outlined certain factors which in its view described a tax haven.  They included a country which has no or nominal tax, one which demonstrates a lack of transparency and an unwillingness to exchange information with other countries as well as an absence of an in country requirement that activity be substantial.  So let’s break it down.   

As part of debates on Finance Bill 2017 last November the issue of our effective rate of corporate tax came up.  Minister Donohoe referred to a paper produced in 2014 which highlighted that since 2003 the effective corporate tax rate has averaged 10.9% and 10.7% respectively. He continued that recent analysis by the Revenue Commissioners noted that the effective tax rate of companies in 2015 was provisionally calculated as 9.8%, representing a marginal increase on the 2014 rate of 9.7% and that in 2012 and 2013, the effective rate was 10.1%. He said that these percentages were lower than the 12.5% headline rate and were attributed to the availability of the small number of targeted measures, such as the R&D tax credit.   Couple that with a personal tax and social security rate of up to 55% on individual income from the corporate entity and the tax burden is clear. 

There are few exemptions from the application of corporate tax and we’re actually behind many competitor countries. For example, dividends received by an Irish resident company from foreign sources are taxable here but other countries just exempt such income.  Granted Ireland gives a credit for foreign tax paid on the profits making up the dividend against Irish tax (to ensure tax isn’t unfairly suffered twice on the same income) however detailed and complex Ts and Cs apply.  Complexity of law brings about uncertainty of application and simplicity eats uncertainty for breakfast when it comes to investment in a country.  The taxation of foreign dividends is being looked at right now as part of the Department of Finance’s public consultation on Ireland’s corporate tax code which concluded on Tuesday last.

On transparency, our tax system is based in legislation which anybody, anywhere can pick up and read. I know I’ve edited the Irish Tax Institute’s direct tax legislation for almost 10 years now.  Time flies when you’re getting older!   Also, you have to remember we were among the first countries on this planet to implement Country by Country Reporting. These reports are exchanged with all relevant countries to ensure tax authorities have a clear picture of the activities of large multinationals.

Further, we have tax treaties with over 70 countries which have exchange of information provisions included within their pages and we have over 20 Tax Exchange of Information agreements with other countries.  But la pièce de résistance is that last summer the OECD's Global Forum on Transparency and Exchange of Information for Tax Purposes gave Ireland the highest possible transparency rating following a second peer review which looked at Ireland’s compliance with international standards for the exchange of information between tax authorities.

This Global Forum is the continuation of a forum which was created in the early 2000s in the context of the OECD’s work to address the risks to tax compliance posed by non-cooperative jurisdictions. It was restructured in September 2009 in response to the G20 call to strengthen implementation of these standards.  The Global Forum has 148 members on equal footing and ensures the implementation of the internationally agreed standards of transparency and exchange of information in the tax area. Through an in-depth peer review process, the Forum monitors that its members fully implement the standard of transparency and exchange of information they have committed to implement.  

On substantial activity, it’s not a slam dunk that a company will be chargeable to tax at 12.5% in that it must be regarded as trading here and there’s a vast quantity of court decisions on what carrying on a trade means.  Meeting that test is a high bar and a company needs economic substance here to be regarded as trading and hence eligible for the 12.5% rate.  Absent that the company’s income is taxable at 25% or maybe the even higher Capital Gains Tax (CGT) rate of 33% depending on the activity concerned.  The higher rates are outliers when compared with our EU counterparts and readers will recall that I’ve previously advocated a lower CGT rate in this column.

Ireland competes on tax policy in accordance with the three R’s – Rate, Regime and Reputation.  Granted it’s well reported that there have been some perceived reputational issues in the past but they were dealt with and fast.  For example, a perceived issue was raised the year before last regarding the taxation of securitisation and certain fund vehicles and the legislation to address that was written rapidly for the Finance Act in that same year.  That was really complex legislation bringing about, I’m sure, many long days and late nights in the Department of Finance and Revenue ensuring that this was appropriately legislated for. 

Reputation is critical, as Warren buffet said it takes “years to build and 5 minutes to ruin it.  If you think about that you’ll do things differently” and we do but as our Government has always said we play fair but we play to win.

I was thinking about this topic this week on the way home one evening and it was pouring rain.  When I got out of my car I put my foot straight into a lagoon of a puddle with the splashing water drenching my suit and shoes.  So it brought back the haven issue and my waterlogged shoe screamed “No we’re not”.  Maybe the weather could be an additional criterion to determining uncooperative tax status! 

Coming back to the question posed at the start of this article.  I think the answer is clear and I would borrow Kevin Bacon’s line from “A Few Good Men” (1992) when he made his prosecutorial submission “Those are the facts and they are undisputed”.   

Tom Maguire is a Tax Partner in Deloitte and his monthly columns on tax matters appear in the Sunday Independent. The above article was first published on 4th February 2018.

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