Staying competitive in an ever changing tax landscape

The recently published 2017 Exchequer returns explain that in cumulative terms Ireland’s corporation tax receipts of €8,201m came in €486m or 6.3% ahead of target for the year as a whole. In year-on-year terms, receipts grew by 11.6% or €850m in 2017. Cumulative income tax receipts at end-December of €20,009m were up 4.4% or €840m in year-on-year terms and we are moving closer to full employment.  A good news story so far; however, our open economy is more exposed than most to international developments given our global economic ties and in particular with the UK and US. In addition there remains some pressing social and economic challenges across Ireland that require attention.

As multinational groups make sense of US tax reform and as Brexit negotiations continue, the Irish economy is faced with a high level of uncertainty and unprecedented challenges. With many of our competitor FDI locations implementing changes that enhance their attractiveness as a location for investment and with ongoing new tax threats from the EU, including the proposed special tax on digital companies, the traditional approach of Ireland to attract foreign direct investment through tax competiveness is facing significant challenges.

Tax competitiveness

The international tax landscape continues to evolve at pace, and we will see the impact of the OECD’s Base Erosion and Profit Shifting (“BEPS”) project and the EU’s Anti-Tax Avoidance Directive (“ATAD”) measures in Ireland and internationally in the period from now to 2020 in particular.

Developments in the international tax landscape as a result of the BEPS project continue. As recently as 7 June 2017, representatives from 68 jurisdictions, including Ireland, signed up to the OECD Multilateral Instrument (“MLI”) that is designed to implement a number of changes to double taxation treaties (“DTT”) in response to recommendations from the BEPS project. Some areas of the MLI are likely to add uncertainly in relation to the access to DTT benefits. Whilst the MLI is not anticipated to take effect until 2019, the Irish Government needs to carefully consider the tax policy aspects in relation to implementation of the MLI given that Ireland has an extensive and vital DTT network.

Our corporate tax strategy, focused on rate (12.5% rate), reputation (playing fair but playing to win), and regime (competitive tax regime), has been an important cornerstone of our corporate tax positioning, providing confidence and certainty to corporate taxpayers. It is essential that Ireland continues to focus on our competitiveness and overall tax regime, in particular as it approaches the introduction of BEPS and ATAD measures into Irish law.

In the area of personal taxation, it is acknowledged that the marginal tax rate remains too high, and this is an important factor in the war for talent, in particular in seeking to attract individuals to work in Ireland. A roadmap should be developed to determine the approach and timing to reduce the marginal tax rate, as well as ensuring that assignee reliefs are operating at competitive levels to attract key roles and talent into Ireland (which is an important factor impacting location decisions for investments).

When seeking to attract investment to Ireland it is imperative that tackling infrastructure and housing supply should be part of a larger goal to improve Ireland’s competitive climate to attract international talent and large scale foreign direct investment, as well as ensuring businesses can grow and scale their business from Ireland. We need people to want to live and work in Ireland, to want to move to Ireland and add to the economic potential and opportunity for the country – we need to invest to ensure this happens in the future, that accommodation is available, as well as schools (including those of an international stature) and with the necessary infrastructure to support a dynamic growing economy.

Uncertainty can bring opportunity

The foregoing comments in relation to tax policy, the impact of global developments such as Brexit and the US tax reform, the opportunities for Ireland at a time of increased uncertainty are all set against a backdrop of a critical need for investment in housing, infrastructure, and education. There is a real opportunity for Ireland to position itself for the future and for further economic growth and stability. However, unless the current situation in relation to housing and rented residential accommodation in particular is addressed, this will become a binding constraint on Ireland’s economy and our ability to attract investment and ensure new jobs can be created or retained here. 

Ireland has a strong track record of attracting foreign direct investment and re-investment. Brexit is likely to create a level of new investments into Ireland, particularly in the financial services and broader fin-tech sectors, but broader investment opportunities will emerge.

While US tax reform will likely result in US companies being more reluctant to relocate assets such as cash or intellectual property abroad, there will remain many businesses globally that will wish to have a hub in Europe, in an EU Member State with access to EU markets – Ireland can continue to attract its fair share of that investment, provided the right policies and issues are prioritised. Indeed, a level of future US investment into Europe which may otherwise have been located in the UK, may determine that Ireland or other EU locations are more appropriate and provide greater certainty and stability.

More broadly, there is also an opportunity for Ireland to position itself at the heart of new business opportunities and global business developments through innovation and competitiveness across a number of areas.

This article was originally published in the US Business in Ireland Supplement which appeared in Irish Examiner in the in association with the American Chamber of Commerce on Friday 9th February, 2018. 

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