Just when good news was starting to flow again out of Ireland, along comes the European Commission to spoil the celebrations. The Irish economy is growing strongly after its three-year, €67bn bailout. But its cherished corporate tax regime, which has attracted billions of dollars of foreign direct investment over four decades, is now under intense international scrutiny.
As the government endures a big investigation into Ireland’s tax arrangement from the commission on allegedly sweetheart tax deals with technology giant Apple, it is considering whether to make another far-reaching decision on the tax front.
In its preparations for next year’s budget, details of which will be announced in two weeks, the government needs to decide how to respond to pressure to close a tax avoidance measure known as the Double Irish, which allows foreign companies including Google and Facebook to reduce their effective overall tax rates well below Ireland’s official 12.5 per cent corporate tax rate.
The tax regime has been the cornerstone of Irish development policy for four decades, and has brought a flood of FDI, particularly from technology and pharmaceutical companies. But the Apple controversy and the Double Irish measure are feeding into a global backlash against corporate tax avoidance, with Ireland squarely in the centre of it.
Michael Noonan, the finance minister, told parliament last week of the controversy surrounding Ireland’s corporate tax system: “There is no doubt we are under an international focus.”
The dilemma for the government is whether to close the loophole unilaterally in this budget, or signal that it will do so in the future, or do nothing until an international consensus has been forged on corporate tax avoidance.
Such a consensus may be forming. Last month the Organisation for Economic Cooperation and Development made progress on agreeing a set of globally agreed rules to clamp down on corporate tax avoidance. The OECD’s interim report showed the initiative is winning the support of governments – including Ireland.
The government says it is confident that its stance on Apple will stand up to scrutiny. The European Commission on Tuesday published a letter it has sent to Dublin arguing that Ireland’s tax agreements with Apple violate the principles of state aid. The case in favour of the Double Irish tax loophole may be more complicated.
The avoidance measure allows companies to be registered in Ireland but not tax resident, enabling them to hold their intellectual property in Irish companies that are tax-resident in another country which has a zero rate of corporate tax, such as Bermuda or the Caymans.
The risk for Ireland is that any move to close the loophole makes its overall tax offering less competitive than jurisdictions like the UK, the Netherlands and Luxembourg, which it regards as its toughest competitors. The Double Irish “is a big selling point for Ireland,” says Peter Vale, a tax partner at Grant Thornton.
Some in the Irish business community want to see the loophole shut down. Danny McCoy, chief executive of Ibec, the employers’ lobby, says: “We are defending ourselves all the time over something that brings no benefits whatsoever to the vast majority of Irish companies.” He says it is “inevitable” that measures such as the Double Irish will be closed down. “If you know you are going to have to close it down, do it.”
But Mark Redmond, chief executive of the American Chamber of Commerce in Ireland, says the government should not act too hastily. “It must be done in a way that ensures the certainty” of the tax system, he says. The government is being urged by business groups to ensure that, if it decides to make a unilateral move on the Double Irish, it compensates by improving the tax treatment of intellectual property, research and development, and other areas where they say the Irish system is losing competitiveness.
The government has signed up fully to the OECD report on ending “base erosion and profit shifting” (BEPS) – the erosion of national tax bases by companies that shift profits around to avoid paying tax. Neither Brussels nor the OECD is targeting Ireland’s 12.5 per cent headline rate. But the OECD wants to ensure that having a low corporate tax rate does not facilitate profit-shifting, says Pascal Saint-Amans, the organisation’s top tax official.
“The question for the government is, ‘do we lead by example?’ Being active is always better than being passive,” he says.