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Ireland retains focus on tax competition

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15th Oct 2014
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The phased abolition of the controversial “double Irish” tax scheme and introduction of a new tax relief for intellectual property will enhance Ireland’s corporate tax regime and align it with best practice internationally, Ireland’s finance minister Michael Noonan said yesterday as he delivered his Budget 2015 proposals.

Noonan published A Road Map for Ireland’s Tax Competitiveness to “secure Ireland’s place as the destination for the best and most successful companies in the world”. Ireland was playing an active part in the G20/OECD base erosion and profit shifting (BEPS) project, the paper said, recognising that  tax planning by multinational companies had moved to the top of the political agenda.

But Noonan acknowledged that the “double Irish” had exploited “mismatches in tax legislation”, and the road map recognised that Ireland’s company tax residence rules had not kept pace with international developments. A new default rule will provide that all companies incorporated in Ireland are tax resident in Ireland. The change will take effect from 1 January 2015 for new companies, but “in the interest of giving certainty to companies with existing operations in Ireland, a transition period to 2020 will be provided”.

The Irish Independent reported that Pascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration, praised the government’s action: “This is a significant move in the right direction, as well as a smart and courageous move on Ireland's part.”

Bloomberg reported that the phase out, coupled with the availability of other strategies in Ireland and elsewhere, “may reduce the impact on companies and tax revenues”. As executives “pore over the slow death” of the scheme, used by several of the world’s biggest technology companies, “the reaction seems to be: keep calm and carry on”.

It quoted Stephen Kinsella, economics lecturer at the University of Limerick, as saying: “From a tax justice perspective, this is bad news. For the government, it’s a good thing as it limits any reputational damage going forward.”

The European Commission had threatened to open a full-scale investigation of the double Irish structure unless the government acted to shut it down, according to the Financial Times.

New ‘intellectual property offering’

The “key role” played by the corporate tax regime in attracting investment was “recognised by all developed economies,” Noonan said.

Competitors for foreign direct investment (FDI) were introducing enhancements to their systems to attract investment. He announced a consultation on a new “knowledge development box” along the lines of “patent and innovation boxes which have existed for many years in countries that compete with us for FDI”, adding that “this intellectual property offering will be a key element in attracting future FDI to Ireland”.

Reputation

However, aggressive tax planning by multinationals had been criticised by governments across the globe and had “damaged the reputation of many countries”, Noonan said.

“Schemes that exploit mismatches in tax legislation are being heavily scrutinised by the OECD and others, and through the BEPS project they will come to an end over time.

“The so called ‘double Irish’ is one of many such schemes. I am abolishing the ability of companies to use the ‘double Irish’ by changing our residency rules to require all companies registered in Ireland to also be tax resident.”

He added: “This proactive change will not bring an end to international tax planning; that requires co-ordinated action by all countries. By taking action now and making this change as part of a broader reform of our corporate tax system, we are giving certainty to investors about corporate tax in Ireland for the next decade.”

The 12.5% tax rate remained at the heart of the Ireland’s corporation tax strategy and would not change. The road map would improve Ireland’s R&D regime and enhance the intangible asset tax provisions to “make Ireland an even more attractive location for companies to develop intellectual property”.

Other measures would include extension of corporation tax relief for start-up companies and the accelerated capital allowances scheme for energy efficient equipment.

Tax competition

Noonan’s road map argued that “there are international rules around fair tax competition which recognise that a competitive tax system is a legitimate tool for promoting business and economic growth, but also acknowledge that there are limits as to what a country can do with its tax system before it constitutes ‘harmful’ tax competition”.

In this context, it said, Ireland “seeks to strike the appropriate balance of playing fair, but playing to win”.

The UK's patent box regime for taxation of intellectual property is being investigated by the EC and has come under scrutiny during the BEPS project.

David Quentin, a tax barrister and adviser to the Tax Justice Network, has claimed that David Gauke, financial secretary to the Treasury, made “no attempt to disguise the fact that the underlying driver [of the UK’s policy] is not the incentivisation of innovation … but the dynamic of international tax competition”.

He cited a leaflet, published by PwC in 2011 and titled “Is it time for your country to consider the ‘patent box’?”, which read: “Intellectual property is highly mobile and can be easily separated from the jurisdiction where it was developed and migrated to low-tax jurisdictions.” Gauke had said earlier this year that the patent box was introduced to “spur innovation”. But that proposition was “disingenuous”, Quentin suggested.

Earlier this month Gauke defended the UK’s regime. In a speech to the Securities Industry Conference he rejected any suggestion that it facilitates profit shifting. “Categorically, it does not create an opportunity for businesses to reduce their taxes without increasing their value to the UK economy,” he said.

“To gain the advantages of the patent box, a company must either have developed the IP itself, or actively manage the commercial exploitation of the IP. This is a substantial amount of activity for a business to undertake. If all a business wanted to achieve was to shift their profits in order to receive a lower tax rate, then this simply would not be worth the hassle.”

Related articles:

Ireland to close 'double-Irish' tax loophole

BEPS: UK’s patent box under scrutiny

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