tsg 14/09 corporation tax policy introduction · 2019. 5. 17. · offering launch a public...

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TSG 14/09

Corporation Tax Policy

Introduction

A competitive corporation tax (CT) system remains central to Ireland’s attractiveness for

foreign direct investment. Ireland’s corporation tax policy has three key elements: rate, regime

and reputation.

The tax rate is settled policy.

The competitiveness of Ireland’s overall corporate tax regime is evaluated on an on-

going basis as countries are increasingly competing for mobile foreign direct

investment (FDI).

Increasingly, tax reputation is also a key factor in winning mobile foreign direct

investment.

Last year’s TSG paper on CT policy set out in some detail the principal risks facing Ireland’s

CT system. The principal risks, mitigation proposals and possible actions as set out in last

year’s paper are summarised in the table below.

Principal Risks Mitigation

Proposals Possible Action

International pressure

for harmonisation of

corporate tax rates Take Specific Steps

to Improve Ireland’s

Tax Reputation

Publish a Strategy Statement on Ireland’s

International Tax Policy.

Amend company tax residence rules to

address ‘Double Irish’.

Co-ordinated

International Action on

‘Harmful’ Tax Practices

Commission an independent Economic

Impact Assessment of the benefits of

Ireland’s Corporation Tax Regime.

Increasing International

Tax Competition

Continue to Improve

the Competitiveness

of Ireland’s Tax

Offering

Launch a Public Consultation on

measures to boost the competitiveness of

Ireland’s Corporation Tax Regime.

High Concentration of

Corporation Tax

Receipts

Diversify Sources of

CT Revenue and

Economic Growth

Department’s Medium Term Economic

Strategy could address this issue. Fiscal

Policy Division should continue the

renewed policy focus on small /

indigenous enterprise which is reflected

in the last Budget and Jobs Action Plan.

Many of the actions have been progressed since then:

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1. The Minister for Finance published a new international tax strategy statement on Budget

Day last year which sets out Ireland’s objectives and commitments in relation to

international tax issues.

2. Company residence rules were partially amended in the Finance (No.2) Act 2013 to address

the particular issue of ‘stateless’ companies that was highlighted at US Senate Hearings

last year.

3. The Department of Finance has undertaken an ‘Economic Impact Assessment of Ireland’s

Corporation Tax Regime’ which confirms the importance of CT policy in FDI decisions

and quantifies the impact of the resulting FDI on the economy. A summary of the key

findings of this research is attached at Annex A for information – it is intended to publish

the full analysis on Budget Day. Overall, the research highlights the importance of a

competitive tax regime for the economy.

4. In June this year, the Department launched a Public Consultation on the ‘OECD BEPS

Project in an Irish Context’ with the ultimate aim of ensuring that Ireland responds

appropriately to the BEPS initiative and, in so doing, place itself in the best position

possible to become the country of choice for mobile foreign direct investment in a post

BEPS environment. This public consultation process is feeding into the ‘Economic Impact

Assessment’ and the Department’s wider Budget considerations.

5. The ‘Economic Impact Assessment’ also contains a more detailed analysis of the CT

concentration risks and highlights that this issue needs to be addressed through broader

enterprise policy.

Update on International Tax Developments

Over the last 24 months, the international rules for taxing multi-national companies have been

a focus for much discussion across the world and certain aspects of Ireland’s tax system have

featured heavily in the debate.

OECD BEPS

The first non-binding but highly influential agreed set of actions of the OECD Base Erosion

and Profit Shifting (BEPS) project will be presented to the G20 in late September 2014 and,

although the proposals have not yet been formally adopted and remain highly confidential, it

is understood that the proposed changes to the OECD’s Transfer Pricing Guidelines will signal

the end of two-tier tax structures such as the ‘Double Irish’ by dramatically reducing the

proportion of company profits that can be attributed to intellectual property assets located in

jurisdictions with little or no accompanying activity.XXXXXXXXXXXXXXXXXXXXXX

XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX

XXXXXXXXXXXXXX The final set of main OECD recommendations will follow in

September 2015. The OECD BEPS recommendations will essentially set the benchmark for

international tax rules over the coming decade. The extent to which countries implement and

adhere to these new rules will impact significantly on their international reputation and on their

attractiveness for future foreign direct investment.

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EU State Aid

The EU has leant considerable weight to the OECD BEPS initiative and the wider international

focus on aggressive tax planning by multi-nationals by deploying its armoury, including State

Aid rules, to challenge certain tax arrangements. In June this year, the Commission launched

formal State Aid investigations into the ‘tax ruling’ systems of Ireland, the Netherlands and

Luxembourg as applied to an individual company in each case. It is understood that the

Commission is also considering further state aid investigations against other member states,

primarily focussed on those states’ patent box regimes.

Inversions

Most recently, Ireland was singled out and referred to by U.S. President Obama in his criticism

of the practice of U.S. companies ‘inverting’ or changing their nationality for tax purposes.

While Ireland is by no means the only location where U.S. companies are inverting into, the

focus on Ireland in both international political and media circles is unhelpful.

While the prospect of comprehensive tax reform in the U.S. has diminished, the U.S. remains

a vital source of FDI and U.S. tax developments are carefully monitored.

When a multinational group “inverts” to Ireland, this means that it has decided to change the

tax domicile of the top holding company or headquarters (‘HQ’) of their whole corporate group

and to become “Irish”. [In so doing, because the HQ of the group is now Irish, the corporate

nationality of the whole group is also Irish for national income statistics purposes].

The term itself refers to the fact that the relocation normally happens by way of a merger in

which the US company becomes a subsidiary of the newly merged ‘Top Company’ entity.

From a practical perspective, Ireland has essentially gained the ‘brain’ of the group but not

necessarily the substantive activities.

What has happened is that the company that sits at the top of the group holding structure (the

‘TopCo’) will now be Irish tax resident. The types of activities that the TopCo would typically

be involved in (at minimum) would include holding quarterly board meetings for the group

directors.

It should be noted that when there is a re-domiciliation or inversion, the rest of the group

subsidiary companies, including those with substantive operations have not necessarily also

moved to Ireland.

There were a number of re-domiciliations from the UK previously but the trend halted, and

reversed, when the UK amended its controlled foreign company legislation.

International Focus on Taxation of International Property

If the BEPS actions are implemented across the world, multinational corporations would find

it increasingly difficult to use tax structures that involve tax havens. This has resulted in

intensified competition among countries seeking to attract that Intellectual Property ‘onshore’.

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A number of countries have introduced an incentive, known as a patent box or IP box, which

provides a low effective rate of tax on income derived from patents and other IP, generally by

deducting or excluding a certain percentage of income from the tax base. For example, the

Netherlands has a regime which disregards 80% of income from patents and other qualifying

IP and thereby provides an effective tax rate of 5% on such income. Similar regimes are

available in Belgium and Luxembourg, while Hungary and Spain have regimes which provide

a 50% deduction for qualifying IP income. France offers a reduced corporation tax rate of 15%

on income or gains from the licensing, sale or transfer of patents and other qualifying IP. In

2013, the UK introduced a patent box providing an effective tax rate of 10% on qualifying

patent income, phased in over a four year period.

Scrutiny of these regimes is a central element of the OECD and EU efforts at international tax

reform. As referred to earlier, within the EU, the Competition DG of the European

Commission has initiated an examination of these regimes under the State Aid rules, while the

EU Code of Conduct Group on Business Taxation is assessing whether the tax benefits

available under patent box regimes are linked to real economic activity (a requirement for a tax

measure to be considered as not harmful under the Code). XXXXXXXXXXXXXXXXXX


XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX. Within the OECD, the Forum

on Harmful Tax Practices is seeking to impose onerous restrictions by linking tax benefits

under a country’s IP regime to R&D actually undertaken in that country and expenditure

incurred in developing the IP. The tax relief on IP income would be limited to a percentage of

income by reference to local R&D spend as a percentage of overall expenditure on the IP

concerned.

Main Policy Considerations for Budget 2015

Company Residence Rules – the ‘Double Irish’

Last year’s TSG paper contained a detailed description of the so-called ‘Double Irish’ tax

strategy and outlined the relevance of Ireland’s company residence rules in that regard.

For convenience a summary of the Double Irish structure, contained in last year’s TSG paper,

is reproduced in the box below.

Notwithstanding the fact that it is primarily the tax laws of other countries that are deficient,

and the broader reality that international tax-planning can only be effectively addressed through

coordinated international efforts, nevertheless it is increasingly apparent that the continued

existence of the ‘Double Irish’ is undermining Ireland’s international tax credibility.

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Box: The Double Irish Tax Structure

The ‘Double Irish’ structure involves two Irish–registered subsidiaries of a US multinational group:

1. an Irish registered non-resident (IRNR) company, generally resident in a tax haven – ‘X Ireland Holdings’, and

2. a substantive Irish company for the group’s Irish operations which is Irish registered and tax-resident – ‘X Ireland

Ltd’.

Typically, the IRNR - ‘X Ireland Holdings’ - owns and manages the intellectual property rights (“IP”) used in Ireland. The

IRNR sublicenses this IP to the substantive Irish trading operation - ‘X Ireland Ltd’ in return for royalty payments from ‘X

Ireland Ltd’. The substantive Irish company sells to unrelated third parties and uses the sub-licence for the purposes of this

trade.

From the Irish perspective, the IRNR is managed and controlled outside the State— typically in the Caribbean. As a result, it

is not resident in Ireland for tax purposes even though it is registered in the State. This is because it meets the criteria to be a

“relevant company” within section 23A of the Taxes Consolidation Act 1997 as it is:

ultimately controlled by ‘X Incorporated’ in the U.S., a treaty partner country, and

a related company, ‘X Ireland Ltd’, is carrying on a trade in the State.

As a result, the profits of the IRNR, including the royalties received from the substantive Irish trading company, are not

chargeable to Irish tax.

In this type of structure, a ‘check the box’ election is typically made, for US tax purposes, to disregard ‘X Ireland Ltd’ (the

substantive Irish company) and treat it as part of the same entity as ‘X Ireland Holdings’. This means that the royalty payment,

which would normally trigger an immediate taxation event in the US under their ‘Subpart F’ anti-abuse rules*, is ignored for

US tax purposes. (The U.S. ‘CFC look-through’ rule and ‘same country exception’ rule can also be used to the same effect.)

As illustrated, the structure exploits the difference between the U.S. and Irish treatment of the IRNR – the US treating the

company as Irish-resident and Ireland treating it as Caribbean-resident - to reduce overall tax. Entities that are characterized

differently by different countries are referred to as “hybrid” entities. In this case the hybrid is the IRNR and it enables the Irish

profits to be reduced by royalty payments without triggering the US anti-deferral Subpart F rules.

* U.S. tax rules generally allow companies to defer paying US tax on foreign profits until those profits are repatriated to the US. However,

US Parent

(X Incorporated)

Irish Registered Non-Resident Co. - IRNR

(X Ireland Holdings)

Substantive Irish Co. -registered and tax-resident in Ireland

(X Ireland Ltd )

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It is possible to amend the Irish company residence rules to remove the exemption that allows

companies incorporated in Ireland to be tax resident in a tax haven (these ‘Irish-Registered

Non-Resident’ (IRNR) companies are a central feature of the structure). The change would

not prevent the companies concerned from moving the place of incorporation of the ‘IRNR’ to

another jurisdiction (to match the current place of tax residence) and continuing to use a two-

tier structure to achieve the same low effective rate of tax. The change would, however, prevent

companies from using an Irish label (of incorporation) as a flag of convenience.

Until quite recently, the precise mechanics of the ‘Double Irish’ structure have not been widely

understood. Over the last 12 months however, there has been an increased focus on the role of

Ireland’s company residence rules in relation to the structure.

[XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX

XXXXXXXXXXXXXXXXXXXXXXXXXXX.]

BEPS Public Consultation Process

In that context, the Department of Finance launched a Public Consultation on the OECD BEPS

Project in June of this year which included a specific question asking: “Are Ireland’s company

residence rules appropriate in the context of BEPS and other international tax developments?”

Of the 25 formal submissions received, relatively few submissions were either outright in

favour of or against change now, and it was notable that a number of the submissions that were

against change in 2014 are still amenable to change if done as part of the BEPS process. There

was a clear message of change only when necessary - as the respondents saw it, as part of the

BEPS process.

There was however, a general consensus that if change were to be made the existing rules

should be ‘grandfathered’ with the range of years being proposed between 5 to 7 years.

A number of submissions made the connection between:

- making a change (when necessary),

- the need for ‘grandfathering’, and

- the need for Ireland to stay competitive - in particular they called for introduction of a

patent box (see below).

This message was also borne out in a number of stakeholder meetings the Department

conducted with interested parties as part of the consultation process.

Inversions

The phenomenon of company ‘inversions’ out of the United States has accelerated rapidly over

the last 12 months. The specific issue of ‘inversions’ out of the United States is separate to the

OECD’s current review of international tax rules under the Base Erosion and Profit Shifting

Project.

It is important to highlight at the outset that many of the recent announcements have involved

relocations to countries other than Ireland, such as the UK and Switzerland.

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While our understanding is that such transactions are entirely driven by ‘push’, rather than

‘pull’, factors – i.e. - tax issues in other jurisdictions rather than Ireland, they nevertheless can

create negative perceptions in relation to Ireland when we are identified in associated reports.

Direct Cost to the Exchequer from Inversions

Once the headquarters of a group of companies becomes resident in Ireland – all of the global

profits of the entire group may be counted as part of Ireland’s Gross National Income.

It is estimated that company relocations (primarily a result of the previous wave of UK re-

domiciliations) have resulted in an increase of approximately €7bn in Ireland’s Gross National

Income or GNI.

The relative level of a Member State’s Gross National Income (GNI) vis a vis that of other

members is the primary determinant of its contribution towards the EU budget. It is estimated

that the impact on Ireland’s EU budget contribution for 2012 is of the order of €60m.

In light of the direct cost of these inversions to the Exchequer, the Department is exploring the

possibility of targeted tax measures to address the issue. It is important to ensure that, in doing

that, we do not damage real investment or jobs coming to Ireland.

Maintaining Competitiveness

The ‘Economic Impact Assessment of Ireland’s Corporation Tax Regime’ confirms the

importance of CT policy in FDI decisions and quantifies the impact of the resulting FDI on the

economy. This emphasises the importance of a competitive tax system.

With the strong signals from the OECD Base Erosion and Profit Shifting (BEPS) Project that

international tax rules must change, Ireland needs to place itself in the best position possible to

become the country of choice for mobile foreign direct investment in a post BEPS environment.

The public consultation referred to above also suggested a need to balance any possible changes

to company residence rules against enhancements to the tax regime for income from intellectual

property. Such enhancements have to be considered in the context of international scrutiny of

taxation of IP income.

On foot of the public consultation, the following competitiveness issues have been identified

as requiring further consideration in the context of the Budget:

a. Tax regime for intellectual property (including s.291A and consideration of a

‘patent box’)

b. Personal taxation regime for mobile foreign executives (SARP), and

c. Resourcing of the Revenue Commissioner’s ‘Competent Authority’ Function

d. Further enhancements to the Research and Development Tax Credit

e. Improved double taxation relief through continued expansion of the network of

Double Taxation Agreements and possible amendments to domestic provisions

The Tax Strategy Group may wish to consider these issues.

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Annex A –

Economic Impact Assessment of Ireland’s Corporation Tax Regime

It is intended that a full Economic Impact Assessment of Ireland’s Corporation Tax Regime

will be published as part of Budget 2015.

This Annex presents the summary and conclusions of the economic impact assessment which

was carried out by the Department of Finance over the last 12 months.

There are 6 separate but complimentary components to the full Economic Impact Assessment

report.

1. A Background Paper setting out a review of the international economic literature on the

importance of corporation tax policy.

2. Research by the Department of Finance Economics Division on the importance of FDI

to the Irish economy

3. Econometric modelling commissioned by Department of Finance from the ESRI to

model the importance of corporation tax on the location decisions of multi-national

firms

4. Analysis by Revenue Economists of the component elements of Ireland’s CT revenue

and the concentration risks associated with same

5. Analysis by Dr Seamus Coffey of UCC and the Department of Finance of available

data to estimate what is Ireland’s effective corporation tax rate

6. Analysis by Department of Finance Fiscal Division of the potential impacts for Ireland

of the OECD Base Erosion and Profit Shifting Project (including drawing on the results

from the public consultation process carried out on OECD BEPS)

Key Conclusions from the Economic Impact Assessment

The foreign owned sector is very large in terms of total output and employment in Ireland,

though its contribution in terms of total employment hasn’t changed markedly over the last

decade. Workers in foreign owned companies are more productive and higher paid than

counterparts in domestic enterprise.

The sector is very active in terms of investing in R&D and innovative activity but is less

integrated into the domestic economy with a high import content in final output and a low

multiplier. Significant disparities, both positive and negative, exist between domestic and

foreign enterprise in terms of productivity and innovation levels and integration with the rest

of the economy.

Based on econometric analysis, Ireland has a 3.1% probability of being chosen as a European

location for newly established subsidiaries of multi-national companies. For context, Irish GDP

is 1.4% of the EU-26 total, so this demonstrates the attractiveness of the country as a destination

for foreign investment well in excess of its size.

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As a policy experiment, it was simulated how the ‘predicted probability’ of 3.1% for Ireland

would have changed if Ireland had an alternative corporation tax rate over the period. The

authors found:

If the Irish tax rate had been 15% over the period in our sample, the number of new

foreign affiliates entering the country would have been 22 % lower

If the tax rate had been 22.5% (the sample average), the number of new foreign

affiliates would have been 50 % lower

Ireland’s overall tax revenue is dependent on the main tax heads, in particular income tax and

VAT, however CT remains a significant contributor:

CT is the 4th largest tax head in Ireland after (IT, VAT and Excise)

There was a decline in CT receipts between 2007 and 2010, which was in line with the

collapse in profitability of Irish firms

In line with the economic recovery, since 2011 the amount of CT collected has

increased (by 18%)

CT as a percentage of the total tax take had remained relatively steady over the past 5

years, but has increased slightly since 2011

Comparing Irish CT receipts to other EU countries, Ireland collects around the EU average of

CT as a percentage of GDP, so is as reliant on CT receipts as any other European country

[This is in contrast with other jurisdictions such as Cyprus, Malta and Luxembourg,

who are (significantly) more reliant on CT for their total tax receipts]

CT Concentration

CT in Ireland is very concentrated and receipts are dependent on a small cohort of large,

multinational taxpayers

Since 2009 CT receipts have become even more concentrated

Ireland is very reliant on a small number of firms for annual CT receipts

In the period 2008-2012 just 10 companies accounted for nearly 24% of the total CT

paid

When account was taken of related group companies, this is even more concentrated,

with 10 groups accounting for nearly 34% of the total CT

Ireland is reliant on a small number of sectors1for CT receipts

In the period from 2008 to 2012:

o 68% of all CT paid in Ireland came from just 5 sectors

o 87% of all CT paid came from 10 sectors

o The sector that makes the largest contribution is Financial and Insurance

Companies, 2 which accounted for 27% of total CT receipts

Size of Firms

The largest companies pay the most CT

1 Based on the NACE Codes provided to the Revenue Commissioners

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Based on Revenue analysis3, in the period 2008-2012, 80% of total CT receipts were

paid by large multinational firms

Foreign Owned Firms

Foreign owned firms pay a large proportion of Irish CT

Based on Revenue analysis4, foreign owned multinational make up almost 75% of total

CT receipts in the period 2008-2012

Employment - Individual Firms

Ireland is very reliant on a small number of firms for annual CT receipts

Such firms generate significant employee numbers, but their contribution to overall

employment in the State is not as significant/concentrated

According to the Revenue data the large groups that make up a high concentration of

CT receipts5 have a much lower contribution to the total number of employees in the

State: the Top 50 groups that account for 57% of the total CT paid in that period only

account for just over 3% in the same period.

This would appear to point to the fact that direct employment in Ireland may depend

more on the domestic sector rather than the foreign owned (although both are

significant)

Section by Section Summary of Economic Impact Assessment

Each section of the Economic Impact Assessment is summarised below.

1.Economic Literature on the Importance of Corporation Tax

The OECD’s Tax and Economic Growth study established a hierarchy of taxation in terms of

its impact on economic growth with corporate income tax ranking above all other forms of

taxation in terms of harmfulness.6 The research produced during this OECD study has proven

especially useful in guiding corporate tax policy in Ireland in recent years. In particular the

work of De Mooij and Ederveen on behalf of the OECD which showed that a one percent

increase in corporation tax rates would reduce FDI by 3.7%.

3 Based on companies who fall under the remit of Revenue’s Large Cases Division (LCD)

4 Based on a marker developed by the Revenue Statistics & Economic Research Branch which is still being

piloted

5 Paid in 2008-2012

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Figure : Hierarchy of harmful taxes

Source: OECD

To build on the evidence base, the Department of Finance’s Economics Division undertook at

detailed review of the economic literature on corporation tax policy. The review synthesised

the theoretical and empirical literature from international and domestic research on corporation

tax focusing on a number of key questions:

Where does the incidence of corporation tax fall? In other words, who actually bears

the burden of corporation tax, companies, their workers, or others;

What is the impact of corporation tax on economic growth;

How do capital investment and foreign direct investment respond to corporation tax;

What impact does corporation tax have on productivity and innovation, the key drivers

of sustainable long run growth; and,

Are there any spillover benefits from FDI for domestic enterprise

Despite calls from some quarters for companies to pay a higher share of tax, the economic

literature is clear in demonstrating that in reality the burden of corporation taxation is shared

between the company it is levied as well as its workers, suppliers and customers. The exact

distribution of the burden depends on the relative bargaining power of each party. The impact

on workers is particularly interesting with recent research in Germany suggesting that a €1

increase in corporation tax liability yields a 44 to 77 cent decrease in the wage bill. It should

be noted of course that the higher the elasticity of labour supply, all things being equal, the

lower burden that will ultimately fall on labour.

The findings in respect of growth are clear and unambiguous and complement both the tax and

growth research of the OECD and the locational decisions work of the ESRI on behalf of the

Department of Finance. Corporate taxes lower economic growth by reducing the return for

firms and people who invest in capital and innovative activity such as research and

development.

Empirical work estimating the relationship between corporation taxes and economic growth

indicates a negative relationship of between 0.6% and 1.8% of economic growth for each 1%

change in the statutory corporate tax rate (Lee & Gordon, 2005). In the case of Ireland tax

policy has played an important role in Ireland’s growth story. Research indicates that the level

of GNP in Ireland was 3.7% higher due to the extension of the 12.5% corporate tax rate a subset

of firms in the business and services sector alone (Fitzgerald & Conefrey, 2011).

Corporation

taxesPersonal income

taxes

Consumption taxes

Property taxes

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One of the ways in which corporation tax impacts on growth is by affecting the incentives to

invest in capital. Very recent research by Bond & Xing from the University of Oxford which

looked at how tax affects the user cost of capital demonstrated a strong negative effect on the

accumulation of equipment capital assets. Of particular interest for small open economies like

Ireland that depend on foreign capital for investment and knowledge spillovers is the finding

from De Mooij and Ederveen that a 1% rise in corporation tax results in a fall in FDI of 3.7%.

In terms of spillover impacts, evidence exists from the Irish economic literature of positive

impacts on labour productivity spillovers in the manufacturing sector. However evidence also

exists of labour market crowding out throughout higher wages.

Overall therefore the Irish and international economic literature confirms that higher rates of

corporation tax lead to lower rates of economic growth. Higher rates of corporation tax reduced

the incentive to invest in capital and innovative activities. Foreign direct investment can have

positive spillover benefits in productivity levels in the domestic economy but is highly sensitive

to corporation tax rates. Finally, the incidence of corporation tax does not necessarily fall on

the companies that the tax is levied on, with workers shown to bear a significant burden in

international empirical literature.

2. The Importance of Corporation Tax on the Location Decisions of FDI Companies

In order to build on the useful results captured in the literature review, the Department of

Finance commissioned the ESRI to drive deeper into firm level decisions on FDI locations.7

This would help to address a critical research question regarding the importance of corporation

tax on the location of FDI controlling for a range of factors suggested in the literature as also

being important for FDI, such as market size, education, infrastructure etc.

Using firm level data on over 3000 newly established multinational subsidiaries across 26

European countries from 2005 to 2012 the ESRI study examined the effects of country

characteristics, including a range of different estimates of statutory and effective average tax

rates (EATR),8 on location decisions.

The results found strong negative effect of corporation tax on the locational decision of firms

controlling for a range of other important factors. In other words when the impact of other

factors is taken into account tax still has a negative impact. The results also showed that the

impact of tax declines in importance at higher rates, meaning that tax is more important for a

country like Ireland with a low policy rate relative to a country with a high rate.

The main summary finding from their research is that the EATR has a ‘marginal impact’ of

1.15 percent on the locational choice of FDI controlling for other factors. Thus a one percent

increase in the EATR would lead to a reduction in the likelihood of choosing a destination by

1.15 percent, described in the table below as a ‘marginal effect’.

7 The Department of Finance would like to acknowledge the role of Professor Ron Davies of University College

Dublin who acted as an independent peer reviewer of the ESRI work.

8 The use of the EATR picks up variation across countries in taxes due to differences in allowances and

exemptions along with the direct effect of the headline tax rate.

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Financial sector firms are most sensitive to changes in corporation tax rates, with an estimated

marginal effect more than double those of the other sectors. This is likely to be a reflection of

the more footloose nature of these firms, and has important implications for the potential effect

of a tax change in Ireland, given the weight of the financial sector in foreign investment in this

country. For manufacturing firms, the effect is similar to the overall result but for service firms

the effect is noticeably smaller. Services firms may be more likely to make location decisions

based on the need to be close to their identified customer base and if so this would reduce their

sensitivity to tax rates

Table: Marginal Effects of Corporation Tax Rates on Locational Decision

Policy Rate EATR

Main model -0.68 -1.15

Manufacturing -0.63 -0.94

Services -0.31 -0.75

Financial Sector -1.36 -2.58

Source: ESRI

One of the most interesting aspects of the research was the finding that corporation tax had the

single largest marginal effect of all relevant factors. This means that on average across Europe

corporation tax has the largest impact on the decision of where to locate FDI. The natural

resource dependence is the second highest marginal effect (0.332) while motorway density

(0.288) is the third largest, though both of these are substantially lower than the marginal effect

for corporation tax (1.152). From a policy perspective, the finding that multinationals are

sensitive to both the taxation environment and quality of infrastructure when deciding where

to locate affiliates is very revealing given these are both within the instruments available to

governments.

Table: Marginal Effects of Corporation Tax Rates on Locational Decision

Policy Rate EATR

Market Potential 0.126 0.145

GDP Growth 0.132 0.130

Distance 0.040 -0.042

Motorway Density 0.309 0.288

Common Language 0.013 0.015

Continguity

(Common Border)

0.015 0.013

Colonial

Relationship

0.012 0.013

Natural Resource

Dependence

0.372 0.332

EU 15 0.036 0.031

Corporation tax -0.689 -1.152

Source: ESRI

When all of the effects of tax and country characteristics are accounted for, Ireland had a 3.1%

probability of being chosen as a location for the newly established subsidiaries over the period

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investigated. This is the ‘predicted’ or ‘fitted’ value of the model. For context, Irish GDP is

1.4% of the EU-26 total, so this demonstrates the attractiveness of the country as a destination

for foreign investment well in excess of its size.

As a policy experiment, the ESRI simulated how the ‘predicted probability’ of 3.1% for Ireland

would have changed if Ireland had an alternative corporation tax rate over the period. The

authors found:

If the Irish tax rate had been 15% over the period in our sample, the number of new

foreign affiliates entering the country would have been 22 % lower

If the tax rate had been 22.5% (the sample average), the number of new foreign

affiliates would have been 50 % lower

The results are summarised in the table below and demonstrate the harm that would have been

caused to Ireland’s FDI prospects had the policy rate changed in recent years.

Table: Policy Experiment of impact on FDI of alternative policy rates

Alternative Policy Rate 12.5% 15% 17.5% 20% 22.5%

Probability of locating in

Ireland

3.12% 2.44% 1.98% 1.65% 1.43%

Change in percent of

new affiliates opened in

Ireland

0% -22% -37% -47% -54%

Source: ESRI

3. The size and Importance of the FDI Sector in Ireland

The Department’s literature review and the work of the ESRI established the link between

corporation tax and corporation tax and FDI. Given that corporation tax has a significant impact

on the choice of FDI location (ESRI), and the size of FDI flows (de Mooij and Ederveen), the

Department’s economics division undertook an analysis of the size and key features of the

foreign owned sector in Ireland so as to determine how important FDI is for Ireland’s economy.

The results summarised herein show

The foreign owned sector’s share of Irish economic activity is large and in 2011 accounted for

57 per cent, of the business economy while almost 25% of GVA is accounted for by a small

set of sectors that are dominated by foreign firms.

Table: Composition of Foreign-owned multinational enterprise dominated sectors and Other

sectors

Description NACE Code Percentage of 2011

GVA

Chemicals and chemical products,

basic pharmaceutical products and

pharmaceutical preparations

20-21 10.1%

Software and communications

sectors

58-63 10.2%

Page | 15

Other NACE sectors dominated

by Foreign-owned MNEs

(Reproduction of recorded media,

Computer, electronic and optical

products, Electrical equipment,

Medical and dental instruments

and

supplies)

18.2, 26, 27 and 32.5 5.0%

Total Foreign owned MNE

dominated

25.3% (€36.3bn)

“Other” Sectors 74.7% (€106.9bn)

Total 100% (€143.2bn)

Source: CSO9

The sector contributed five percentage points to economic growth in Ireland during the 2008-

11 period however Ireland is at the lower end of the domestic value added share of exports, at

58 per cent. In other words the import content of exports is very large in Ireland. Larger, closed

economies display much higher ratios with the United States contributing 89 percent of

domestic value added to its exports. The large foreign owned sector has a very large impact on

Ireland’s output statistics with a large wedge between GDP and GNP driven by factor flows

from MNCs to parent companies abroad.

Figure: GVA at constant factor cost growth 1996-2011 by foreign-owned MNE and other

sectors

Source: CSO, Department of Finance calculations

9 Gross Value Added for Foreign Owned Multinational Enterprises and Other Sectors, Annual Results for 2011,

CSO, December 2012.

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

199

6

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

All other sectors

Foreign-owned MNES

GVA growth

Page | 16

Figure: Domestic value added in gross exports (%, 2009)

Source: OECD, TiVA database

Note: Series is Value Added Export Ratio - total domestic value added share of gross

exports, %

Foreign-owned firms directly employed 152,000 full time staff in 2013, an increase of about

4,000 jobs (2.9 per cent) over the previous year. Recent years has seen a decline in

manufacturing employment numbers with 14,120 job losses (14.9 per cent), however it is still

the largest source of foreign sector employment. On the other hand services overall and the

majority of services sub-sectors have made a positive contribution to overall growth in the

foreign sector and largely offset the losses in manufacturing. Overall employment in the sector

has more or less remained static over the last decade representing about 8% of total

employment in the economy and about 22% of those employed in the so-called business

economy.

Figure: Agency Assisted Foreign-Owned Firms - Employment 2004-2013

Source: Forfás, Annual Employment Survey 2013

58

7383 86 89

0

20

40

60

80

100

Ireland Germany UnitedKingdom

EU27 United States

149,259 151,723 155,088 155,034 153,761

139,860 138,353 142,191147,971 152,189

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Permanent, Full-time Temporary, Part-time

Page | 17

Foreign owned companies are highly productive with GVA per worker significantly

outstripping domestic enterprise. Unsurprisingly wages are also higher in foreign companies

given higher productivity levels. Foreign companies also invest heavily in R&D and innovation

expenditure and have significantly contributed towards Ireland’s overall R&D performance.

However the foreign sector as a whole is however less integrated into the domestic economy

with lower output and employment multiplier impact relative to domestically dominated

sectors meaning that greater economy-wide impact is generated from domestic enterprise than

foreign owned.

Table: Type 1 multiplier and employment effect of foreign MNE dominated sectors and rest

of economy

Sector Output Multiplier Employment effect

Foreign-owned 1.2 3

Rest of economy 1.4 10

Source: Department of Finance calculations Note: The multiplier effect is the marginal whole-economy impact on output of an increase in final demand

for either sector’s products

The employment effect is the marginal economy-wide impact on employment of a €1m increase in demand in

a sector

To conclude, the foreign owned sector is very large in terms of total output and employment,

though its contribution in terms of total employment hasn’t changed markedly over the last

decade. Workers in foreign owned companies are more productive and higher paid than

counterparts in domestic enterprise. The sector is very active in terms of investing in R&D and

innovative activity but is less integrated into the domestic economy with a high import content

in final output and a low multiplier. Significant disparities, both positive and negative, exist

between domestic and foreign enterprise in terms of productivity and innovation levels and

integration with the rest of the economy. The challenge for policy is to address these disparities.

4. Concentration Risks in Ireland’s Corporation Tax Receipts

The work of the ESRI and the Department’s Economics Division demonstrated the importance

of corporation tax on the location choices of FDI and the macroeconomic importance of FDI

to Irish economy. However the foreign sector is also very important in terms of its contribution

to exchequer revenues.

Research by the Revenue Commissioners has quantified the fiscal contribution of the sector in

terms of corporation tax receipts. The research has also identified risks to the exchequer arising

from the concentrated nature of receipts from the foreign owned sector both at a firm and

sectoral level.

Corporation tax revenue is the fourth tax revenue source in Ireland accounting for €4.2 billion

(12 percent), or one euro in every eight collected 2012. As a share of the tax base this is

relatively high in the European context with Ireland ranking in the top ten of the EU-27 that

Page | 18

year.10 A similar amount was collected in 2013 reflecting a recovery in yield form this source

following a low of €3.5 billion in 2011, the lowest level collected since the 1990s. As a share

of GDP Ireland’s corporation tax yield was marginally below the EU-27 average in 2011.

Figure: Corporate Income Tax as a share of GDP

Source: Taxation Trends in the EU, European Commission, 2013 and author’s calculations

A sectoral analysis shows that the yield from corporate profits is highly concentrated in a small

number of sectors, indicating a relative riskiness underlying the relatively healthy aggregate

yield. The top five sectors in terms of total CT paid in the period 2008 to 2012 account for over

68% of total CT period in the period, with the top 10 sectors accounting for over 87% of total

CT paid.

Table: Corporation tax paid by top five Sectors

NACE Sector 2008-2012 Amount Share of Total

Financial & insurance activities €5,445 27%

Manuf of pharmaceuticals €3,515 17%

Information & communication €2,285 11%

Wholesale trade €1,655 8%

Manuf of wood, paper products &

printing

€1,065 5%

Top five total 68%

Total CT yield €20,457 100%

Source: Revenue Commissioners

10 Source: Taxation Trends in the European Union, European Commission, 2014

2.7 2.4

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Page | 19

In terms of the foreign owned sector, a recent innovation by Revenue, which is still under

development, has enabled MNCs to be separately identified from other tax payers. It is

estimated that these multinationals in total account for almost three quarters of CT paid

between 2008 and 2012 (over €15bn of the €20.5bn collected). These companies match fairly

closely with Revenue’s Large Cases Division (LCD) case base, suggesting that foreign MNCs

and Ireland’s largest tax paying companies overlap closely. This is a particularly crucial point

given that an analysis of LCD case files indicates that the top 10 companies in terms of

corporation tax payments account for almost one quarter of CT payments over the period 2008-

2012, with the top 50 companies accounting for over 46% of CT over the same period.

Table: CT paid by top 10, 20 and 50 companies, 2008-2012

Total corporation tax (€,m) €20,457

Payments by top 10 companies (€,m) €4,874

Share of total corporation tax yield 24%





Source: Revenue Commissioners

The concentrated level of corporation tax receipts in general and the large contribution from

the foreign owned sector creates a significant policy challenge. Given the significant link

between corporation tax rates and FDI location decisions, changes to the policy rate would not

just affect the level of FDI in Ireland but also significantly reduce the overall corporation tax

yield.

5.What is Ireland’s Effective Corporation Tax Rate

In April 2014 the Department of Finance published a technical paper on effective rates of

corporation tax in Ireland. The Technical Paper considers calculations for an effective tax rate

on corporate profits in Ireland. This is done under three broad headings: using model

companies; using official national statistics; and using company financial reports. Between

these, eight approaches for calculating the effective tax rate on company profits were identified.

An effective tax rate is simply the tax burden as a proportion of the tax base. For companies

this is corporate income tax as a proportion of corporate profits. Although relatively simple in

theory the eight approaches considered in the Technical Paper resulted in a wide range of

estimates ranging from 2.2 per cent to 15.5 per cent for the most recent data available.

The Model Company Approach

The first method is a comparison of the estimated tax liability in different jurisdictions for a

model or benchmark company. It is based on the creation of model companies which are

endowed with certain characteristics. The analysis then examines how the profits of such model

companies would be taxed across a range of jurisdictions. While this is a strength in terms of

comparability across jurisdictions, it does mean that the model cannot represent the

composition of all companies that operate in each country. This methodology does calculate

the appropriate effective rate for the model company, providing a good comparison of effective

Page | 20

tax rates across countries in a standard setting. It can also give an insight into the breadth of

the taxable base by comparing the calculated effective rate to the headline or statutory rate. It

cannot, however, calculate an effective tax rate for a company that operates across multiple

jurisdictions and it offers limited insight in respect of companies that operate across borders as

international trading is usually excluded as a feature of the model company.

Two reports using the model company approach are assessed in this Technical Paper, one

undertaken for the European Commission by ZEW Centre for European Economic Research

(Approach No.1 – 14.4 per cent in 2012) and a second for the World Bank by PwC (Approach

No. 2 – 12.3 per cent in 2012). However, the conclusion is that neither is suitable for providing

an estimate of the effective rate of Corporation Tax on the aggregate total of corporate profits

earned in Ireland.

The National Aggregates Approach

The second approach to determining effective corporate tax rates is to look at the average

corporate tax burden of the entire corporate sector in a country using statistics commonly

available from the relevant tax authority or statistical agency in each country. The idea here is

to look at a measure of the total amount of corporation tax in a given year and to divide it by

the total amount of profit earned by companies operating in the country. Within this approach,

a number of measures of taxation (tax paid or tax due) and income (taxable income or operating

surplus) can be used. Using data from the Central Statistics Office and the Revenue

Commissioners, four estimates of the effective tax rate on profits earned in Ireland are

analysed.

The Technical Paper shows that the most appropriate measures of the effective corporate

income tax rate applying to the total of corporate profits in Ireland are the tax rate as calculated

based on ‘Net Operating Surplus’ from the National Income Accounts which are produced by

the Central Statistics Office (Approach No. 3), and the tax due as a proportion of Taxable

Income from the Corporation Tax Distribution Statistics produced by the Revenue

Commissioners (Approach No. 5). The most recent figures are 8.4 per cent for the former and

10.4 per cent for the latter, and their averages since 2003 are 10.9 per cent and 10.7 per cent,

respectively. The two measures are similar in concept but there are notable differences between

them.

The primary reason the effective rate on Net Operating Surplus (Approach No. 3) is, on

average, below the headline 12.5 per cent rate is because a portion of the interest expenditure

incurred by non-financial corporations is not deducted when determining Net Operating

Surplus in the national accounts. This interest is attributed to the financing rather the operating

of non-financial corporations in the national accounts. In 2011, non-financial corporations

incurred €7.5 billion of interest expenditure of which €5.2 billion was excluded from the

determination of Net Operating Surplus as it was attributed to the financing rather than the

operating of the companies. This lowers the effective tax rate on Net Operating Surplus as it

increases the measure of profit on which the effective rate is based

The average of tax due as a proportion of Taxable Income (Approach No. 5) is lower than the

12.5 per cent rate because Taxable Income includes the foreign-source profits of Irish resident

companies, all of which are granted relief for any corporate income tax paid in other countries

on these foreign-source profits so as to avoid double taxation. In 2011, this relief was €567

Page | 21

million and once account is taken of that the Revenue Commissioners’ data indicates a

corporate tax burden in Ireland of 11.8 per cent of Taxable Income (Approach No. 6).

Eurostat publish an annual set of implicit tax rates (ITRs) for a range of tax bases including

corporate income. Using Eurostat’s methodology the 2012 figure for this implicit tax rate on

corporate income in Ireland is estimated in this Technical Paper to be 5.9 per cent (Approach

No. 4). The rate has averaged 8.3 per cent since 2003. There are a number of issues that mean

this is not an appropriate measure of the tax burden imposed by the Irish system of Corporation

Tax on company profits subject to tax in Ireland. Foremost amongst these is the inclusion of

interest and dividend income received by investment funds which are valued at around €1

trillion based in Ireland, which have a disproportionate impact on the Irish measures relative to

most other EU countries. These receipts are counted as part of the income of the corporate

sector in Eurostat’s measure but are an artificial inflating of the measure of corporate

profitability in Ireland. The income of such collective investment funds is taxed at the level of

the investor rather than the fund, as is standard international practice.

In recent years the measures of effective corporate income tax rates based on the data from the

CSO’s National Accounts have been falling. The primary reason for this is the treatment of

capital gains and trading losses carried forward under Corporation Tax which caused the

effective rate in the National Accounts to be higher in the years up to 2007 (because of

Corporation Tax due on the capital gains of companies) and lower in the years since then

(because of use of trading losses carried forward to reduce tax due). Net Operating Surplus is

not affected by capital gains or losses carried forward but corporate tax can be higher or lower

depending on these gains and losses. The recent trend in Ireland has been for those factors to

result in a decreasing effective rate on Net Operating Surplus.

The Combined Company Approach

A final methodology is to aggregate firm-level data according to some fixed criteria. The

National Aggregates Approach described in the previous section is based on aggregating firms

by country, either for national accounts or taxation purposes. The Combined Company

Approach equally aggregates firm-level data but the criteria for inclusion do not necessarily

match jurisdictional boundaries. The approach uses published or reported company accounts

and determines an aggregate or average measure of tax paid on company income using the data

collected. The approach may not be informative in determining the effective tax rate on profits

by country as the company data is usually not disaggregated by each country of operation, as

would be required under a system of country-by-country reporting. The approach is appropriate

for determining the effective tax rate of the companies included. However, if the companies

included operate across multiple jurisdictions the approach can give an accurate estimate of the

global effective tax rate for those companies but will not necessarily be reflective of the

corporate income tax imposed by any particular country.

The Irish Times aggregate the tax paid for their set of ‘The Top 1000 Irish Companies’ but the

extent to which the aggregated data reflect profits earned in Ireland and tax paid only in Ireland

is not clear (Approach No. 7). The federal economics statistics agency in the United States, the

Bureau of Economic Analysis (BEA), aggregates the data of all foreign-owned subsidiaries of

US companies (Approach No. 8). The BEA provides a by-country breakdown of the figures

but the country allocation is done on the basis of place of incorporation rather than location of

operations. For all countries in the BEA data the figures are the profits earned and tax paid of

Page | 22

companies incorporated in those countries, which may represent the profit and tax outcomes

for those companies in many other countries. The BEA figures attributed to Ireland relate to

the Irish-incorporated subsidiaries of US companies. There is no restriction on these companies

to limit their operations to Ireland. The figures in BEA data represent their operations

everywhere, not just in Ireland (to the extent they have any in Ireland at all). The profits

reported by these Irish-incorporated subsidiaries of US companies are far in excess of the totals

that appear in either the CSO’s or Revenue Commissioners’ data. The BEA data does highlight

the ability of certain US companies to achieve very low effective rates for the foreign tax paid

on their non-US sourced profits arising from their operations across multiple jurisdictions

(including Ireland) but cannot give an appropriate measure of the effective corporate tax rate

applying to their Irish profits.

Conclusion

The conclusion of the Technical Paper was that the data from the CSO and Revenue

Commissioners provide the best estimate of the effective rate of Corporation Tax on the total

profits that are subject to Irish tax (Approaches No.3 and No. 5). The figures in the Technical

Paper show that, since 2003, these have averaged 10.9 per cent and 10.7 per cent respectively.

6.Potential Impact of OECD BEPS project for Ireland

Prior to discussing the potential impact of the various BEPS actions it is important to stress

that the OECD BEPS project as a whole, or via any of its individual actions, is not focussed on

Ireland’s, or indeed any other jurisdiction’s, tax rate. The Irish 12.5% rate will not change and

is not under discussion as part of the BEPS project.

The finalisation of the 2014 BEPS reports has given significant food for thought in relation to

the impact that the recommendations stemming from these reports and the 2015 reports could

have on Ireland and our tax regime.


XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX It

is clear that structures which use ‘tax haven’ locations, with little substance, are in their winter

and as such there are huge opportunities for Ireland to become a location of choice for groups

who wish to bring their intangible assets onshore.

Ireland’s FDI policy has always centred on substance and as such Ireland is well positioned to

compete in the global FDI market for any new investment as a result of the BEPS process.



XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX

It is clear that over time some multi-nationals have been able to divorce tax rights from profits

through the manipulation of the current transfer pricing guidelines but this does not necessarily

Page | 23

mean that the foundations of the arm’s length principle11 are not sound. Ireland supports the

arm’s length principle XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX


XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX

The main conclusion of the OECD BEPS Digital Economy Task Force that it is not possible to

separate the digital economy from the economy as a whole, is to be welcomed. This conclusion

aligns with the principles of the Irish taxation regime, a fair, open and transparent regime

offering similar terms to all industry groups. It should be noted however that the work of the

Task Force on the Digital Economy is not complete as it was concluded that many of the

broader BEPS challenges related to the digital economy would potentially be dealt with by

other BEPS actions. One such example is the proposal of some form of digital permanent

establishment (PE)12, which would be dealt with under Action 7 in 2015.









XXXXXXXXXXXXXXXXX. Further work in this area is however necessary as it will be

important that unintended consequences (for example in relation to regulatory requirements)

are avoided. This work will come under the guise of the commentary on the application of the

proposed rules which will be finalised in 2015. Prior to the commencement of the BEPS

project, Ireland made changes to its securitisation regime to address the potential abuse of

hybrid instruments.

Ireland is not mentioned in the interim report on harmful tax practices (Action 5) and on that

level there should not be an immediate impact on Ireland from this report. However the general

outcomes and recommendations could have a significant impact on how the Irish tax regime is

shaped in the medium term. A large portion of the final report is expected to focus on

preferential IP regimes and to the extent that, on the basis of the findings of this report, it was

possible to design and implement an income based regime that was not considered harmful, it

may be in Ireland’s best interests to introduce such a regime. Further, the analysis of a transfer

pricing approach compared with the nexus approach to establish “substantial activity” could

have a significant impact on Ireland’s FDI offering and the consequences of this would need

to be considered in detail. At a very high level the transfer pricing approach would determine

“substantial activity” based upon the allocation of risks and capital whereas the nexus approach

11 The arm’s length principle determines that all transactions between related parties should be valued as if they

had been carried out between unrelated parties, each acting in its own best interest.

12 The idea of a digital PE is that a company may be deemed to have a taxable presence in a jurisdiction where it

has a significant digital presence, irrespective of whether it satisfies any of the other permanent establishment

criteria.

Page | 24

would align it more closely to expenditure and people functions. It would need to be considered

whether the implementation of the nexus approach could affect the way in which smaller

countries could compete for investment with the larger countries.

The proposals for action on treaty abuse need further work in relation to both what is to be

included and also the wording of the specific articles for inclusion. As currently worded the

Limitation on Benefits clause13 would cause significant issues for Irish companies especially

if a “Derivative Benefits” clause was not included. It is also clear that without significant

guidance, the inclusion of a Principal Purpose Test14 could cause uncertainty in relation to

treaty access. Due to these potential issues, Ireland along with a number of other nations wrote

to the OECD and requested that more time be taken to devise the correct solutions to the treaty

abuse problems which would work for small and large countries alike. The OECD have taken

these comments on board and it has been agreed that further work is needed in 2015.

It is also the case that these anti-abuse provisions could have unintended consequences for

some industry groups and further work is needed in relation to alternative investment vehicles

to the extent that countries do not wish to deprive them of treaty benefits.15

The potential adoption of CFC rules by all countries will need to be examined in 2015. Ireland

operates a worldwide system of taxation and so while income of foreign subsidiaries is not

taxed as it arises it is taxed once remitted. XXXXXXXXXXXXXXXXXXXXXXXXXXXXX.





Clearly though, if there was an international push towards unilateral adoption of CFC rules

Ireland would need to do this in context of our current dividend and capital gains tax regime

and potentially look to make changes in these areas.






XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX

13 A Limitation on Benefits clause contains a number of different tests which allow a company to qualify for

benefits under the treaty. The tests are largely objective tests of qualifying residence status by virtue of

ownership, or business substance that must be satisfied.

14 The principal purpose test seeks to disallow the treaty benefits where one of the main purposes is securing a

treaty benefit.

15 Collective investment vehicles are used by the funds industry and is any entity that allows investors to pool

their money and invest the pooled funds, rather than buying securities directly as individuals. They are generally

managed by fund managers. Some of the more common types of collective investment vehicle are unit trusts,

investment companies, exchange traded funds and REITs. Alternative funds relates to any other type of fund.

The premise of collective investment is that the investment vehicle should be tax neutral to ensure that the

investor does not suffer any more tax by investing through the pooled vehicle than they would if they invested

directly.

Page | 25

At present it is not possible to determine the level of impact of any recommendations which

may be proposed under Action 4 (Interest). However, as is the case in relation to treaty abuse,

it will be important that these rules do not unduly impact on some industry groups.

Advancements in this area will be of significant concern to financial services companies but

also to all groups with significant amounts of intra-group debt. On this basis we would urge

those stake holders to engage with any potential upcoming OECD consultations on this, or any

other action.

As the 2015 actions approach finalisation next year a very important consideration will be the

interaction between the various actions. It is clear that some of the actions have significant

overlap and as such a co-ordinated approach towards implementation will be of utmost

importance. This is an area which is of concern for many tax payers and one which Ireland will

be actively involved in at OECD level.

Conclusion

The BEPS process is likely to bring about considerable changes in the world of international

tax. The project is timely in that this multilateral approach should reduce the instances of

potentially harmful unilateral action by individual countries.

The BEPS project is built upon two pillars which are to align profits with substance and to

address harmful tax regimes, each country’s tax rate is not open to discussion.

The actions dealing with changes to the transfer pricing guidelines are central to the attempts

to align profits and taxing rights with substance and it appears likely that the changes being

proposed will bring an end to “cash box” tax haven locations. Such changes could provide

significant opportunities for Ireland to become one of the locations of choice for multinationals

who are looking to “onshore” certain operations or intellectual property.




XXXXXXXXXXXXXXXXXXXX

There have been many interesting outcomes and recommendations in the 2014 reports. Ireland

supports the findings in relation to the digital economy and is also in favour of the rules in

relation to hybrid mismatches, although, as has been noted by the OECD, further work is

needed in this area to ensure that unintended consequences do not occur. Further work is also

needed in the area of measures to prevent treaty abuse, but significant progress towards

agreeing a way forward has been made.

Reforms relating to documentation and transparency are very important from both a risk

analysis and reputational standpoint. There are concerns from tax payers in relation to their

increased administrative burden and these concerns have been noted by the OECD which has

sought to redress them and indeed the current recommendations are far less onerous than those

sought by some nations. It is clear, however, that going forward there will need to be some

form of alignment between tax/transfer pricing and regulatory reporting.

Page | 26

The final outcome from the Forum on Harmful Tax Practices work on Action 5 (Harmful tax

practices) will be interesting for Ireland as a relative bystander in the debate relating to patent

boxes. There is no doubt that these regimes are very attractive for MNEs, but the current lack

of certainty around them means that the adoption of such a regime at present would be unwise.

Many of the 2015 actions could have an impact on Ireland. The concerns relating to both the

potential adoption of CFC rules and to potential restrictions on interest deductions, have been

noted. While Ireland does not operate a CFC regime, we have many rules which provide similar

results. Similarly Ireland has significant legislation relating to interest deductions and as such

any further recommended changes would need to be brought about in line with other potential

reforms.

Hence, while the BEPS project offers a lot of positives, there will also be challenges for Ireland.

It is for this reason that the Department of Finance has sought the views of tax payers on various

issues and will continue to participate in this form of dialogue as the BEPS project moves

forward towards finalisation and implementation.

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