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Ireland Considers Future Shape Of Corporate Taxation

Wednesday, September 13, 2017

Irish corporate income tax receipts are expected to remain buoyant up to 2020, according to the review of Ireland's corporation tax code published this week.

There have been concerns that Ireland's tax base is too reliant on corporate tax revenues, and that it depends heavily on payments from a relatively small number of large multinationals. International tax reform measures could hit Ireland's tax base.

The review was undertaken by Seamus Coffey, who was appointed as an independent expert in October 2016. His report was published on September 12, 2017.

The report noted that the corporation tax yield was EUR4.6bn (USD5.5bn) in 2014 and rose by 49 percent in 2015 to reach EUR6.9bn. In 2016, the yield reached EUR7.4bn.

As the report observed, this increase "has raised questions as to the sustainability of corporation tax receipts as a part of total tax receipts, and to whether this increase represents a step change or a series of one-offs." Corporation tax has however been comparatively sluggish this tax year, with cumulative receipts down on target for the seven months to July but recovering in August.

According to the report, corporation tax is the most volatile of Ireland's main taxes. Receipts rose from EUR4bn in 2000 to almost EUR7bn in 2006, before falling back to below EUR4bn in 2009. Corporation tax receipts in 2015 were 66 percent higher than the average amount collected over the previous four years.

However, the review found that the sectoral distribution of receipts indicates that the increase "was not the result of increased payments from one company or group of companies and, though the payments remain concentrated, there were increases in corporation tax receipts from virtually all sectors of the economy." The increase in receipts from multinationals has also been "relatively widely dispersed."

The review therefore concluded that a range of factors have contributed to the increase in receipts and that it is "unlikely that any reversal of these factors would similarly coincide."

The report stated that receipts "are sustainable at a new higher level at least in the medium term to 2020," but added that the inherent volatility will remain and some of the factors that have led to the increase could "unwind individually."

"Given this uncertainty we can never be sure of the sources and permanency of such revenues and it would be wise that policy should be suitably cautious in terms of introducing increases in spending or permanent reductions in taxation," the report recommended.

It also suggested that, to ensure the "smoothing" of corporation tax receipts, the limitation on the quantum of relevant income against which capital allowances for intangible assets and any related interest expense may be deducted in a tax year should be reduced to 80 percent.

More broadly, the review recommended the following:

  • The Government should consider whether, in the context of the introduction of the controlled foreign company rule provided by the EU's Anti-Tax Avoidance Directive, it would be appropriate to move to a territorial corporation tax base in respect to the income of foreign branches of Irish-resident companies and, in respect of connected companies, the payment of foreign-source dividends;
  • If the Government decided against such a move, it should review Schedule 24 of the Taxes Consolidation Act, which provides relief from double taxation on foreign income, to simplify the computation of the foreign tax credit for all forms of foreign income;
  • Domestic transfer pricing legislation should be applied to arrangements the terms of which were agreed before July 1, 2010;
  • The Government should consider extending transfer pricing rules to SMEs, taking into account whether the imposition of additional administrative burdens on SMEs would be proportional to the risks of transfer mispricing occurring;
  • The Government should consider extending domestic transfer pricing rules to non-trading income and to capital transactions;
  • There should be a specific obligation on Irish taxpayers who are subject to domestic transfer pricing legislation to have available the transfer pricing documentation recommended in the OECD's 2017 Transfer Pricing Guidelines;
  • Ireland should take account of any recommendations made by the Global Forum on Transparency and Exchange of Information for Tax Purposes;
  • Any proposed changes to the corporation tax code should be carefully scrutinized to ensure that they do not constitute either a potentially harmful preferential tax regime or a potentially harmful tax regime, as defined by the OECD and the EU; and
  • The Government should consult on the implementation of the Anti-Tax Avoidance Directive and Actions 8, 9, and 10 of the OECD BEPS project (which aim at aligning transfer pricing outcomes with value creation), and on the effects of moving to a territorial corporation tax and reviewing Schedule 24.

Finance Minister Paschal Donohoe said: "I welcome this comprehensive review which presents an overall positive message for our corporate tax code. The Review provides a clear road map and timeframe for Ireland to implement important international reforms."

"The Review points to the sustainability of our current corporate tax receipts to 2020, which is very positive. I welcome the emphasis given in the Review to the importance of certainty, which is core to our corporate tax offering. Our 12.5 percent corporation tax rate remains the bedrock of our competitive corporation tax regime and that is not going to change."

Donohoe confirmed that he will launch the consultation process recommended in the Review on Budget Day.

Reacting to the report, Gerard Brady, Head of Tax and Fiscal Policy at Ibec, commented: "The report contains a number of sensible recommendations on improving the Irish tax regime, which was recently ranked among the most transparent in the world by the OECD's Global Forum on Transparency and Exchange of Information. However, a number of recommendations which have potential implications for SMEs, and the type tax system we operate, in particular, will require careful thought and further consultation."

A more cautious response was offered by Chartered Accountants Ireland, which warned that the Government should be "careful to use its recommendations to modernize the system, rather than as a justification to levy new taxes on business." It said that, if adopted in full, the net effect of the recommendations would be to increase the tax take from the corporate sector. In particular, it is concerned that the suggested changes for SMEs would increase the burden of paperwork without significantly enhancing the integrity of the system.