Ireland can play fair and win the global tax game

A decision on Northern Ireland’s bid to have the right to set its own corporate tax rate is due after next month’s referendum on Scottish independence. Conor O’Brien reflects on the latest controversy surrounding the Republic’s corporation tax regime

5 AUGUST 2014

President Obama’s recent remarks about the practice of US companies engaging in “tax inversion” practices has again fuelled a bout of speculation about threats to Ireland’s corporate taxation regime. The OECD’s base erosion and profit shifting initiative, combined with initiatives at an EU level and the ongoing debate in the US, means that we are in a period of extraordinary volatility with regard to international tax rules.

While this may contain threats for Ireland, it ultimately may present more opportunities than threats. There is a huge amount of detail in current international tax proposals, but in very broad terms many of the initiatives are designed to make it harder for multinationals to separate the location of taxable profit from the location of economic substance.

For instance, if you have substantial numbers of staff (particularly senior staff) and premises in a country, you may be able to justify locating a significant proportion of your global profits there, but it will become much harder to locate profits where you merely have a brass plate operation.

This is potentially bad news for tax haven locations where substance may be minimal and good news for Ireland where multinationals typically have large numbers of employees and substantial activity. We may therefore see activities and profits moving out of the tax havens and into Ireland.

In our recent evidence to the Oireachtas Committee on Global Taxation, KPMG set out what we believe are the pros and cons of various policy options open to Government in light of criticism of Ireland’s corporation tax regime. It is critical that policy options best place Ireland to secure its economic future in the evolving landscape.

Firstly, we believe that Ireland should be nimble and responsive to the evolving landscape as we have been in the past. Our corporation tax system has been overhauled several times in the last 40 years to deal with changing international tax rules – in each case successfully.

As we see how the various OECD and EU initiatives conclude, we should consider what measures are needed to remain competitive.

Secondly, it may be appropriate to consider amending our corporate residency rules, at the appropriate time, along the lines that the UK did a number of years ago – bringing UK incorporated companies within the charge to UK tax except where they are deemed non-UK resident under a tax treaty.

This ought to deal with the criticism that certain features of Irish residency rules have attracted.