It may be risking exaggeration to speak of President Biden’s proposed corporation tax strategy as a tectonic shift in a process - global tax reform - that normally, and understandably is often described as advancing at a glacial pace. However, the strategic change in both attitude to corporation taxation by the leader of the free world, and signs that similar shifts may be occurring in other major countries, notably the UK, all point to the likelihood that, as the Chinese curse has it, that we may be living in ‘interesting times’. But, in any case, there should still be little to fear for a jurisdiction, like Ireland, that has benefited from a clear long term national tax strategy of its own - based on a commitment not to unfairly engage in the erosion of other countries’ rightful tax bases, and a desire to ‘play fair, and play to win’.
Understandably, Government spokespersons, notably the Minister for Finance in his Ireland’s Stability Programme Update 2021 comments are sounding notes of caution, suggesting that in its downside estimates scenario for forward tax revenues, notably the CT head, provisions for a loss of tax revenue (of about €2 bn per annum) have been factored in to the forecasts.
However, and to judge by assessments by some of the panel members in this month’s Irish Tax Monitor there is no reason to not believe that Ireland can not only deal with these headwinds, but prosper from them.
Firstly, the focus of ‘global international tax reform’ is the elimination of tax havens, brassplate-like jurisdictions that offer tax arbitraging opportunities to companies that offer no or little substance. None of the proposals currently offered either at global level (e.g. OECD, and G20) threaten this, and Ireland’s approach, as William Fogarty’s response on aircraft leasing makes clear, is based on real substance (over). As he says: “One of the key aims of the BEPS project is to align profits and taxing rights with economic activity. The Irish tax system has always encouraged aviation lessors who undertake meaningful economic activity within the jurisdiction. The ability to access the 12.5% trading tax rate is linked to the use of Irish employees and servicers. By contrast, non-trading (or passive) lessors were subject to less favourable treatment. This distinction accelerated the growth of an aviation sector that has based senior, skilled employees within the jurisdiction. The alignment of economic activity and profits was a natural product of this. The increased focus on "substance" which arises through BEPS means that aircraft lessors with substantive Irish operations face lower tax risks. In an aviation context, this trend will continue, as successful Irish based lessors consolidate their operations with other entities, frequently migrating key functions to Ireland, or consolidating existing Irish offices”.
This concept of substance has, since the 1990s, always characterised Irish IFS strategy, and continues to do so, under its IFS 2025 strategy.
Other examples of the Irish substance approach are the powerful recent interventions of the Central Bank which is in the process of issuing guidance on substance in fund management operations, many of whom are migrating to the jurisdiction because of Brexit (see also pps 12, and 34 of this issue).
A second point is that corporate tax rates are on the rise, in major competing jurisdictions. That, in itself, makes Ireland more, not less competitive on the CT front - notably for SMEs, the source of most job creation, after all.
The increase in the CT rate in the US proposed by President Biden is from 21 pc to 28 pc, although this increase might be less - for example, influential US Democrat Senator Manchin, saying he is against an increase to more than 25%, for example. In the UK, which does not have to worry so much about a bipartisan and bicameral legislature, Chancellor Sunak is proposing a CT rise from 19% to 23%, the implications of which are analysed by Panel member Edel Webb on page 30.
We should not forget that there is, of course, another sphere of Ireland’s tax system that could be deployed, as a back up, in the battle for international tax competitiveness to the threat of perceived loss of the engine of corporation tax in the years ahead.
That is the sphere of personal taxes, where Ireland is not particularly competitive in global tax competitiveness indices. Indeed, particular aspects of the tax system are ugly, as Panellist Jonathan Ginnelly answer (p 29) starkly indicates. The fact that he can say “The lack of incentive in place for entrepreneurs may result in many individuals opting not to take on the risk of establishing their own business but rather opt to take employment with larger domestic or international employers” should alert us to a long running sore in Ireland’s tax system, and one that should begin to be be rectified sooner than later.