Making Ireland's corporate tax system better
Last Tuesday represented the end of the Department of Finance’s public consultation period regarding our corporate tax system. It was a self-created opportunity to allow us stand back and determine its good and not so good aspects in terms of certainty of application and competiveness. So what can we do for FDI? What about the next “Aghaidh leabhar”? Where will it come from? What can we do to make this happen?
In the 1989 movie “Field of dreams” Kevin Costner hears a solitary voice in a vast field whisper “if you build it they will come”. We did and they did. We built the IFSC and we became a global force in financial services. We reduced our corporate tax rate and many countries now seek to emulate it; just look at what Prime Minister May and President Trump want to do. But we’re not done, our system is a work in progress. Let’s start with the home grown sector.
Right now deposit interest rates are low. The current Deposit Interest Retention Tax (DIRT) rate is 39% and will decrease to 33% by 2020. That would then make it the same as the rate for capital gains tax and that in itself is too high if we want to secure additional investment. Why not bring about a tax at the standard rate on returns on investments made by individuals in start-up companies with potentially higher yields?
Straight away some will say that this will benefit those who have such money available on deposit, and that may be the case. But Myron Scholes who shared the Nobel Prize for economics once wrote that success is achieved when the tax rules subsidise activities that benefit society as a whole more than they benefit the individuals engaging in the activities. You can see his point. If that tax efficient investment helped a start-up that would not have got off the ground in the first place then is that not the very definition of success?
Further, as much as we argue against the introduction of the CCCTB (and let’s be clear, we still do) it did suggest the introduction of a notional equity deduction for companies, a good thing! I know mentioning “CCCTB” and “good” in the same sentence is the very essence of controversy! However, I’m only talking about one element of the regime here and Minister Noonan has said it’s an element that’s worth looking in to.
This proposal allows a deduction for a percentage of equity increases in a company while taxing by the same percentage when equity drops. A substantial proportion of Irish domestic small and medium enterprises have little debt so it’s appropriate that companies who are predominately equity financed are provided with similar reliefs afforded to those who are more heavily leveraged.
We have a start-up company relief in tax law but why not introduce a refundable start-up company credit? This would be a more relevant relief for start-ups dealing with the commercial difficulties (which to a large extent revolve around cash flow) they typically face.
Consideration could be given to following the UK’s example in its recent proposed reforms regarding utilising company losses. These changes allow British companies significant flexibility on how current year reliefs are set against various profits ensuring cash remains driving the business forward.
Moving on to international tax and FDI. The OECD and EU have suggested changes be made to countries’ tax laws internationally. We’ve agreed to implement these changes and rightly so given they maintain our reputation all over the world. However within the proposed changes there are options and a country can choose the more attractive options over lesser ones depending on its economic and social needs. So choosing wisely is key.
For example, Ireland has over 70 tax treaties with countries around the globe and in June of this year we’ll sign another one (the OECD’s Multilateral Instrument) which will amend all the others instantly. Yes, all of them. Various options are possible within that instrument and one relates to the existence of taxable presences (the legal term being “permanent establishments”) in a country. If this option was chosen then taxable presences could show up where they hadn’t shown up before. That sounds great but not all countries are taking this option, for example we know the UK isn’t going down this route. Therefore going that way would mean we would be, with the stroke of a pen, suddenly less attractive than the UK in a post Brexit world and any other country that chooses similarly to the UK.
On a related point, the European Union has brought about an Anti-Tax Avoidance Directive which we’ve agreed to legislate for and it contains various options so choosing wisely there is equally important. From an international tax perspective we continue to meet our obligations. However from an FDI perspective we should not seek to implement what may be perceived as a best in class regime if it puts us as at the back of the class in terms of attractiveness compared to our competitors; it’s our “force of attraction” which should form our primary focus from now on.
But back to existing law and by international standards the Irish provisions allowing interest deductions on a company’s borrowings and relief for foreign tax deducted on income are overly complex. They make Ireland a much less attractive jurisdiction for investing in companies, both foreign and domestic. At a time when Ireland is faced with competition from Paris, Frankfurt and Luxembourg looking to ‘win’ high-value financial services business post-Brexit, it’s critical that such measures be addressed to ensure Ireland is a highly attractive location for companies who want to rebase their EMEA or global operations.
Bruce Lee once said “to hell with circumstances, I create opportunities” and is that not what we do? April 4 was a self-created opportunity to craft our future. We’ve met and continue to meet our international tax obligations. Now is the time to ask not what we can do for international tax compliance but what national tax can do for us. We’ve done it before. We can do it again. We will do it again. Is feidir linn!
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 April 9th 2017.