Ireland regains its swagger in the tax arena

Something unusual is happening with the Irish corporation tax in 2015 — so unusual that Ireland’s top tax man felt obliged to write to the parliament to explain what is going on. But the explanation left a lot to be desired.

According to government data, Ireland received 57.7 percent more corporation tax between January 1 and November 30 than what was originally projected. The total tax received during the period was €6.23bn, as compared to an expected €4bn. This pattern became established in January.

The explanation offered by Revenue Commissioner Niall Cody was that the increased tax take was due to better trading conditions and foreign exchange differences. While this sounds vaguely plausible, it becomes less so when you consider that the original projections for tax receipts anticipated a negative corporation tax during the month of April 2015 of €13m.

Ireland has never refunded more corporation tax than it received in a month, so that April projection is surprising, especially when considering that €41m of corporation tax was received in April 2014.

So, why was the tax take in 2015 so high? What could have caused the Revenue Commissioners to believe that they would need to pay out such large corporation tax refunds in April? And, what would have caused them to be so wrong about that prediction?

On the question of the April tax refund, the only feasible tax charge which could result in those sort of numbers is a corresponding adjustment under a double taxation agreement for a transfer pricing issue. If an anticipated corresponding adjustment request was later was delayed or defeated, that could explain why Ireland received €73m in corporation tax in April, as opposed to paying out a net €13m, as projected.

Assuming tax receipts similar to those in 2014, that would mean the government originally expected to refund about €54m in corporation tax in April, which equates to a profit adjustment of €432m at 12.5 percent tax. This would be one rather large corresponding adjustment.

The large corporation tax take in general for 2015 also appears to be the result of transfer pricing. The Irish Times recently reported an anonymous source (likely to be a senior civil servant or Revenue official) as saying that base erosion profit shifting (BEPS) defense work by large corporations, including transferring IP onshore into Ireland, is largely behind the surprising corporation tax receipts.

This seems likely for a couple of reasons. The first is that, with BEPS, MNE groups need to consider their transfer pricing of intangibles, and Ireland is a conduit for intangible royalties.

Recent Central Statistics Office data shows a reduction in the growth of royalty payments being made by Irish resident companies, while at the same time a marked increase in the amount of money Irish resident companies are spending acquiring IP, either through paying for R&D activities or for payments for the acquisition of the completed intangibles. This supports the analysis that companies are engaged in defensive tax planning bringing the IP onshore.

In addition, Ireland grandfathered certain transactions when it introduced the OECD transfer pricing rules in 2010, which could be problematic under State aid rules. Indeed, in the Apple case, the Commission seems to be arguing that the OECD transfer pricing rules form some kind of customary international law which did not require any implementing legislation by Ireland.

Moreover, the grandfathering is often misunderstood. If there have been any changes since the transfer pricing rules became effective, the grandfathering no longer applies. As many companies using the double Irish structure are in the technology and pharmaceutical sectors, ongoing development of the IP would have been expected and could impact the availability of the grandfathering.

The sensible thing, therefore, is for companies to review their transfer pricing to ensure that it complies with current OECD rules, while starting to prepare for the new BEPS guidelines on transfer pricing of intangibles.

There are other possible explanations for the increased tax revenue. On the ground we are seeing Revenue fight competent authority requests much more robustly than they did in the past. While they were happy to make almost all corresponding adjustment requests in years gone by, at present they are applying far more reasoned and often technical arguments to defeat them.

While Revenue announced it was hiring more transfer pricing personnel to deal with competent authority requests, it seems likely that this staff will also be supporting Revenue audit teams locally.

Ireland and BEPS

So what does this mean for Ireland? In the first instance, we are seeing Ireland regain some of its swagger in the international arena. Ireland knows that it will likely be a net beneficiary of BEPS and as such is supporting the process fully.

Ireland is at the forefront of introducing a BEPS compliant knowledge box and country-by-country reporting, and will follow suit on the transfer pricing of intangibles, but does not want to be seen as an early adopter of the BEPS recommendations from which it will most benefit.

Ireland’s GAAR is already one of the strongest in the world in terms of putting all of the onus on the taxpayer to disprove its application and to some extent this negates the need for more specific BEPS anti-avoidance measures within the Irish tax code (although such measures multiply with each Finance Bill in keeping with other jurisdictions). Similarly, Ireland’s notification requirements for aggressive tax planning largely mirror those in the UK and gain complexity with each passing year, it seems. The tweaks required to fully adopt the BEPS rules in these areas will cause Ireland little concern.

Ireland is not so keen on certain other BEPS actions points, such as interest deductions limitations, but in part that is a function of having a different tax system. Ireland does not have a generous tax system on corporate debt, and does not have a history with egregious interest based erosion. So, Ireland’s lack of enthusiasm can be explained in part by the fact that this is not perceived to be an Irish issue. With a tax rate of 12.5 percent, Ireland has similarly not had huge issues with controlled subsidiaries being used to divert profits offshore so, again, this is a low priority for Ireland.

The CCCTB and financial transactions tax

Of further interest is the Irish approach to the EU common consolidated corporate tax base (CCCTB). While much of what the CCCTB sought to address will be dealt with via the BEPS project, Ireland is against restating its opposition to the CCCTB in full. Ireland’s position is that any EU measures to deal with direct taxation must be based on Article 115 and, as such, Ireland retains a veto. To remove the Irish veto here would require ratification by the Irish people in a referendum, which won’t happen any time soon given how wedded the Irish electorate is to tax competition. We saw evidence of this position in a December 1 speech by the Irish Finance Minister Michael Noonan to the EU Finance Ministers. Noonan said Ireland is “constructively engaging” in the CCCTB while making clear it is highly unlikely it will accept the final outcome.

Noonan also made reference to the financial transaction tax, which is not an initiative Ireland will support without the UK. The perception is that if Ireland adopted without the same tax applying to transactions taking place in the City of London, then Ireland would lose such transactions to the City. This perception is likely to be correct, since London is the most attractive financial centre in Europe for non-tax reasons and, as such, other centres are playing catch up.

However, the Finance Minister went further and issued a veiled warning that the implementation of the tax had better not impede on the free movement of capital within the EU.

Three years ago, when Ireland was in an EU IMF programme, the notion of Ireland taking legal action against other EU Member States to protect her interests seemed impossible. With the fastest growing economy in the EU, the bailout programme exited early, and buoyant CT receipts, such a prospect is now possible, although more likely as a joint action with the UK. If the UK pursues litigation over the tax, Ireland is likely to support, not complain.

Ireland, unlike Luxembourg and other perceived havens, appears to have reached the right mix on early adoption of some BEPS action points and early unilateral action against some of the more abused elements of the Irish tax code so that it can now start reaping some rewards.