Change in tax treatment of intellectual property and subsequent and reversal hard to fathom
about 17 hours ago
Michael Noonan: in the 2015 budget, he ended the double Irish tax scheme and abolished the 80 per cent rule so firms could claim tax relief on up to 100 per cent of profits from their IP investment. Photograph: Jock Fistick/Bloomberg
Ireland has always tended to give the benefit of the doubt to multinationals when it comes to tax matters. The challenge in recent years has been trying to balance the goal of attracting investment here with international demands to tighten up the rules.
Pretty much every country has been caught up doing the same thing – but we are in the spotlight because of the huge size of the multinational base here and the small size of our economy.
To illustrate this, it is worth looking at a tax change introduced by then finance minister Michael Noonan in the 2015 budget and how this was reversed by his successor, Paschal Donohoe, in last month’s package.
It concerns the rules under which companies write off investments in what are called intangible assets. In the case of big multinationals, this mainly concerns intellectual property (IP) – the copyrights, patents and licences and trademarks related to the design, development and marketing of their products.
Ireland introduced a regime for writing down investment in intangible assets in 2009. Up to the end of 2014, companies could shelter a maximum of 80 per cent of the profits which resulted from the use of the intangible asset in any one year, using the capital allowances. So at least 20 per cent of the profit would be subject to tax.
Under pressure after revelations of how little tax Apple paid on its international profits – and the role of Irish subsidiaries in this – Michael Noonan announced key changes in 2013 and 2014. He first ruled that a company incorporated in Ireland must – from the start of 2015 – have a tax residency, in response to Apple’s infamous use of a subsidiary which was tax-resident nowhere.
Then, in the 2015 budget, presented in October 2014, he ended the controversial double Irish tax scheme, though companies already using it can continue to do so until the end of 2020. However, in tandem with doing this, Noonan made a concession. He abolished the 80 per cent rule, meaning that companies could now claim tax relief on up to 100 per cent of the profits arising from their IP investment. In layperson’s terms, this means they could write off their investment more quickly.
Fast forward a few years and in Budget 2018, Paschal Donohoe – following a recommendation from economist Séamus Coffey in a report on corporation tax – reinstated the 80 per cent limit. However, crucially, he only did so for investments undertaken after budget day. This meant that previous investments could still qualify for the 100 per cent relief.
We now know from the Paradise Papers, published this week, that Apple restructured its operations during 2014. A new subsidiary in Jersey was central to this. What I believe happened is that the IP was owned by one of the companies moved to Jersey and it was then sold back to an Irish subsidiary. This investment in Ireland then qualified for a significant tax write-off – and Apple had a new route to shelter profits from tax. If this sequence is correct, then Apple would appears to have been a beneficiary of the Noonan rule change, along with other companies who relocated big IP investments here in recent years.
Two questions arise. Why did Noonan change the rules in the first place? And why did Donohoe decide that the change back to the 80 per cent rule should only apply to new investments?
On the face of it, we appear to be talking about tweaks in rules. But here we come back to the big impact which large multinationals can have on a small economy. Coffey has run the numbers and looked at the massive inflow of IP assets to Ireland in 2015 – the bit that caused the “leprechaun economics” jump in 2015 gross domestic product – and trends since then. He reckons the exchequer could have collected €700 million-plus in 2015, if the rules had not been changed by Noonan. This could have risen to €1 billion more next year, had Donohoe opted to reinstate the 80 per cent rule on IP already here, he says. Coffey does caution that this is an estimate as we do not know the impact of the rule changes on the decisions taken by companies on where to locate their IP.
Ireland will still probably collect the revenue over the years – the key concession here is on timing. However, Coffey does point out that there is no absolute guarantee of getting the revenue. Companies’ circumstances could change, as could US tax law, or the profitability of the IP.
He also points out that Ireland does face a price, as moving IP here increases our national income and this pushes up our contribution to the EU budget – by as much as €2 billion over the next decade, or €200 million a year, given the big value of the recent moves.
We know that there were consultations with the tech industry before the Budget 2018 changes. Sources say most companies did not appear to object to the cap being reimposed, but we can only assume there was some opposition to the 80 per cent rule being reapplied on IP that was already here . Otherwise, as Coffey asks in his blog, “why are we waiting when those taxpayers may be willing to pay the money now?”
Minister says working group to examine amalgamation will be set up in coming weeks
Tue, Nov 7, 2017, 19:46
Minister for Finance Paschal Donohoe said his plan to merge the universal social charge and PRSI into a single social insurance payment would take between three and five budgets.
Appearing before a select committee on finance to consider the Government’s Finance Bill, Mr Donohoe said a working group to consider how best to manage the amalgamation would be established within weeks and would brief Government on its findings ahead of next October’s budget.
“The objective of the approach will be to strengthen the contributory principle [of social insurance] and not, in any way, to dilute it,” he said, noting the change to the tax code would be complicated and take between three and five budgets to carry out.
Asked by Fianna Fáil’s Michael McGrath if the new combined charge or contribution would define the benefits received, Minister Donohoe said it was too early to definitively answer this question.
“One of the matters I’d want to be careful with is that if we do move to a purely contributory system that we would not in any way undermine the ability of taxpayers, as citizens, to be able to access a certain number of core benefits,” he said, noting that the current social insurance system often had deficits that had to be topped up via general taxation.
The plan to merge USC and PRSI is a move away from the Government’s previous commitment to gradually abolish the charge.
“I don’t want to put in place a system that deepens some of the problems we have at the moment where people are aware of benefits – benefits that they feel they’re entitled to – and then they find out that their contributions are nowhere near enough,” he said.]
Earlier Minister Donohoe had a long wrangle with Sinn Fein’s Pearse Doherty o ver what wage profile best reflected middle-income earners.
Mr Doherty also disputed the Minister’s assertion that the high marginal tax rate in Ireland acted as a “drag on employment”.
He said there was no evidence to suggest that Ireland’s marginal tax rate negatively impacted on employment that Fine Gael’s tax cutting agenda was misplaced and occurring while people were dying on the streets because of homelessness.
Mr Doherty also argued that investing in childcare instead of cutting tax would have a greater impact on employment.
Minister Donohoe rejected Mr Doherty’s description of the budget as a tax cutting budget, noting it raised taxes in other areas
He also said Ireland was a statistical outlier in the OECD by having average income earners start paying the higher rate of tax at income levels of just €33,800.
The Finance Bill, which was published last month, has now moved on to the Committee Stage of the legislatory process, with over 100 amendments set to be considered, ahead of being signed into law.
Action spurred on by publication of Paradise Papers, meeting of finance ministers told
Tue, Nov 7, 2017, 18:32
Patrick Smyth in Brussels
Swiss minister for the economy Johann Schneider-Ammann and Estonian finance minister Toomas Tõniste at an EU finance ministers’ meeting in Brussels on Tuesday. Photograph: Yves Herman/ Reuters
The publication of the Paradise Papers will give an important impetus to EU plans to blacklist and act against states which persist in acting as tax havens, EU Commission vice-president Valdis Dombrovskis said on Tuesday.
Speaking at the conclusion of the meeting of EU finance ministers in Brussels, he said ministers had expressed confidence that the list could be completed and agreed by December. He hoped that the meeting would also give teeth to the list by agreeing “countermeasures”.
At the meeting, ministers were told that letters have gone out to 92 states with which the EU has economic relations. Their responses between now and December to assurances sought would form the basis of any blacklist. Around 22 of the states have already been “cleared”.
Sources say that there was no discussion of the specifics of any countermeasures, which could range from “naming and shaming” to financial sanctions, but French minister Bruno Le Maire called publicly for the cutting-off of international funding from the World Bank and international institutions to states which continued to shelter and provide secrecy to tax evaders.
Economic and financial affairs commissioner Pierre Moscovici told reporters the EU blacklist should be more ambitious than the existing list of the Organisation for Economic Cooperation and Development (OECD), a global group of mostly rich nations that has so far been leading the fight against tax avoidance.
Ireland has not taken a view on what sanctions should be applied.
Meanwhile, progress on the EU’s directive covering VAT on e-commerce stumbled.
Germany blocked the directive and two accompanying regulations, which required unanimity to pass, after it raised objections to key parts of the cross-border package including the extension of the “one-stop shop” and elimination of VAT exemption on small parcel imports.
The commission and Estonian presidency, however, expressed confidence that the measures would pass in December after further discussions. Moscovici said the German objections were “political” rather than technical, and made clear he did not see the text undergoing significant change.
The directive would impose an unfair burden on German tax authorities which would be required to oversee the tax collection in 27 EU member states, acting German finance minister Peter Altmaier had said.
Courier companies such as FedEx and United Parcel Service (UPS) as well as postal companies such as Deutsche Post have been lobbying intensely against the removal of the VAT exemption on small parcels which they believed would enormously raise their costs.
The EU electronic commerce industry was also opposed because of provisions that will make online marketplaces such as eBay, Amazon and others liable for collecting VAT on purchases by EU citizens from non-EU online merchants.
Luxembourg finance minister Pierre Gramegna insisted more information about implementing rules about making online platforms liable for collecting VAT was necessary.
The European Commission proposed the legislation in December 2016 to simplify rules for online merchants and to reduce fraud that it estimates costs governments €5 billion a year.
Statistical agency collates data to better capture impact of Brexit on Ireland
Tue, Nov 7, 2017, 12:46
The CSO webpage, which complements the CSO’s Brexit: Ireland and the UK in numbers report from last year, pulls together information on trade, employment, migration and travel.
The Central Statistics Office (CSO) has launched a new Brexit-themed webpage to track how Ireland’s relationship with the UK is being impacted.
The page, which complements the CSO’s Brexit: Ireland and the UK in numbers report from last year, pulls together information on trade, employment, migration and travel.
Similar to the CSO’s “key economic indicators” page, the new page is generated using up-to-the-minute information from the agency’s statbank.
The CSO has also generated 12-month rolling averages for trade and travel statistics, which give a more accurate account of the changes in key metrics on a month-to-month basis.
In August this year, just under 24 per cent of imported goods in the Republic were from the UK while 13.3 per cent of exported goods went to the UK. Despite the ongoing slump in sterling, the trade data since the start of the year appears largely unaffected.
In 2016, 6.4 per cent of all imports of services were from the UK while 16 per cent of exports of services went to the UK. The UK accounts for a significant amount of the State’s IT exports.
The CSO’s Brexit data suite also contains migration figures, which show that in the 12 months to the end of April, nearly 19 per cent of all emigrants went to the UK while 22.1 per cent of immigrants arrived from the UK.
On the employment front, just under 3 per cent of all persons employed in Ireland in the seond quarter of this year were UK nationals.
Also in the second quarter of 2017, more than a quarter (26.3 per cent ) of all outbound trips by Irish residents were to Britain in the second , while 14.3 per cent of total expenditure by Irish residents on outbound travel was in Britain.
Residents from Britain, meanwhile, accounted for 38 per cent of all overseas trips to Ireland in the third quarter of 2017, and they accounted for 22.1 per cent of all expenditure (excluding air fares) in the second quarter.
“This webpage is a snapshot of the most recent CSO data on the UK for trade in goods, services, employment and migration and for travel to and from Great Britain,” senior statistician Orla McCarthy said. “Over time we plan to add further topics and indicators of interest,” she said.
Wolfgang Münchau: Necessary qualities of unity and strategic thinking are largely absent from UK government
Tue, Nov 7, 2017, 01:04
Updated: Tue, Nov 7, 2017, 12:04
Port Talbot steelworks. If the UK manages to extricate itself from the rentier economy model it has pursued while an EU member, and adopt an industrial policy based on innovation and rising productivity growth, that could work. The trouble is, I see no signs of that happening.
The number of newspaper comments calling for, or even predicting a revocation of Brexit is close to an all-time peak. The one prediction I am confident to make is that their number will rise as we approach March 30 2019.
I think this is a shame. Pro-Europeans are wasting their energy on a futile tactic. A much more fruitful strategy would be not to try to undo Brexit itself but Theresa May’s Brexit blueprint: the departure from both the single market and the customs union.
It is far from clear, in any case, whether it is possible to revoke Brexit. Even if it was, the EU would attach conditions that would be hard to accept for the UK – such as a permanent end to the British rebate, and a political commitment from the two largest parties not to invoke Brexit until the end of the next parliamentary term.
Revoking the blueprint is no easy exercise either, but not nearly as onerous. If the UK were to ask to join the European Economic Area, otherwise known as the Norway option, the EU would without a doubt accept it – even during the transition period after Brexit.
The dynamics of events in the next few months might open up such a discussion. I have no doubt that the EU will agree in December that sufficient progress has been made, so that the Brexit discussions can move on to the transition period and trade.
The main issue about the transition will be its length, and whether it can be renewed. Trade talks, by contrast, will be really tough. One of the things that will become apparent early on is that there will be no such thing as a Canada-plus trade deal. The EU’s agreement with Canada covers trade with an investment component. The UK wants that, plus a specific section on services, and a wider co-operation agreement.
Once the reality of a limited trade deal sinks in, we are left with only two logical strategies: either join the EEA, or go for a minimalist agreement
There are legal complexities, as EU officials keep on pointing out. There always are. But the real obstacle to Canada-plus is not legal but political. From the EU’s point of view, the single market is binary and non-divisible. You are either in the whole of it or in none of it. There is no such thing as the Swiss option unless you are Switzerland. I always cringe when I hear UK politicians talk about access to the single market. There is no such thing. You are either a member or not.
The EU wants a trade agreement, similar to the one it reached with Canada, Japan and South Korea. And it wants an association agreement that would preserve political co-operation in foreign and security policy, the fight against crime, and maybe nuclear materials.
I can see sectoral transition agreements above and beyond the overall two or three year transition. Nobody has an interest in an immediate collapse in air travel, but at the same time I cannot see UK airlines enjoying preferential access rights to EU airports forever. Nor can I see a deal on financial services, energy or other big-ticket items relating to the single market.
The binary choice is even more stark once you think about the likely political reaction to it. As part of the Article 50 exit deal, the UK will be asked to fork out £20 billionn, £40 billion or more to settle its liabilities to the EU. All the UK will get back in return is a rather lousy trade deal, and one that covers only manufactured goods. What makes it worse is that the EU27 runs a large trade surplus with the UK. No doubt somebody in the UK will make the point that the EU should pay money to the UK for such a deal, not the other way round.
Once the reality of a limited trade deal sinks in, we are left with only two logical strategies: either join the EEA, or go for a minimalist agreement and focus on making that work.
I am not saying that Mrs May’s plan to leave both the single market and the customs union is necessarily wrong. But for this strategy to be carried out successfully, the UK government would require unity and strategic thinking. These qualities are largely absent.
The problem is not the short-term economic effects. Naturally, the more radical the Brexit, the greater the frictional cost. But this should not be a factor in a decision as fundamental as whether to stay or leave the EU. The trade-off between long-term economic costs and benefits, on the other hand, matters. This will depend on future policies. If the UK manages to extricate itself from the rentier economy model it has pursued while an EU member, and adopt an industrial policy based on innovation and rising productivity growth, that could work. The trouble is, I see no signs of that happening.
There is no sane alternative to joining Norway, Iceland and Liechtenstein in the EEA.
Copyright The Financial Times Limited 2017
Survey by Dutch bank ING highlights the growing affordability gap
Tue, Nov 7, 2017, 10:23
It’s not just Irish renters who are struggling to get on the property ladder. Nearly half of Europeans who do not own their own home have given up hope of ever doing so, a survey showed on Tuesday. Photograph: Dan Kitwood/Getty Images
Nearly half of Europeans who do not own their own home have given up hope of ever doing so, a survey showed on Tuesday, with pessimism highest among Britons and Germans.
The survey of 15 countries by Dutch bank ING did not include Ireland, where affordability is a major issue with property price inflation now running at over 12 per cent.
Overall, it found 48 per cent of people in 13 European countries who do not yet own their own home reckoned they probably never will. And it mattered to most of them. A majority of the non-homeowners – 65 per cent – said they considered owning their own place to be a symbol of success, suggesting that buying is not just a financial decision.
Poles (72 per cent), Turks (70 per cent) and Romanians (70 per cent) topped the list of those judging homeownership as a sign of success. Ian Bright, senior economist and managing director of group research at ING, said the survey findings suggested many people may become disenchanted with their lot.
“Most people want to buy a house. Yet many now accept that they are unlikely to buy,” he said. “If you combine this with our findings that a higher proportion of home owners are happy with their housing situation, compared with renters, then it seems that more people will feel incredibly frustrated with their housing choices in the future.”
The survey made no reference to politics, but a number of European elections in the past years have shown a rising anger among voters at what is perceived as a growing gap between the haves and have-nots. Hopes for being able to afford to buy a home, for example, were lowest in Britain and Germany, where about 56 per cent of non-homeowners in both countries believed they would never be able to buy.
In what were seen as at the very least snubs to the status quo, Britons last year voted to leave the European Union, and Germans this year put a far-right party into the Bundestag for the first time in half a century.
House prices have long been out of reach for many in Britain and even with uncertainty over Brexit, they continued to rise in the summer. In Germany, though relatively cheap compared with other European countries in the past, house prices have risen sharply in recent years, partly as record low European Central Bank rates have encouraged households to take on debt. Average real estate prices in cities including Berlin, Hamburg, Munich and Frankfurt have increased by more than 60 percent since 2010, the Bundesbank estimates.
Finance ministers vow to take action following the leak of records exposing prominent members of the global business A-list
Tue, Nov 7, 2017, 08:32
Finance ministers representing the world’s largest market, including acting German finance minister Peter Altmaier, vowed to take action following the leak of records exposing prominent members of the global business A-list. Photograph: STEPHANIE LECOCQ/EPA
The days in paradise may be numbered for those seeking refuge from heavy tax burdens in remote islands. Finance ministers representing the world’s largest market vowed to take action following the leak of records exposing prominent members of the global business A-list.
“We will examine the new documents and will discuss the consequences this has for upcoming EU legislation,” acting German Finance Minister Peter Altmaier said ahead of a meeting with his euro-area counterparts on Monday. “We will take a very close look at this,” he said, referring to the so-called Paradise Papers reports by the International Consortium of Investigative Journalists and partner news outlets.
The new set of data taken from an offshore law firm again exposed the hidden wealth of individuals and shows how corporations, hedge funds and investors may have skirted taxes. A year after the Panama Papers, this new massive leak of confidential information from the Bermuda law firm Appleby Group Services Ltd. has shone another light on the use of offshore accounts.
Apple, which has clashed with the European Commission over taxes, was ensnared in the leak. The BBC reported that the iPhone maker moved its unit holding most of its large untaxed offshore cash reserve to the Channel Island of Jersey after a 2013 “crackdown on its controversial Irish tax practices.”
The Paradise Papers put “renewed emphasis on the work which the European Commission is doing to fight tax avoidance,” Valdis Dombrovskis, vice-president of the bloc’s executive arm, told reporters in Brussels. The bloc’s anti-trust chief, Margrethe Vestager, agreed, saying in a tweet that the leaks enable “the work against tax avoidance, for transparency.”
The EU has been working on finalising a so-called blacklist of uncooperative tax jurisdictions by the end of the year. This list of tax havens will be discussed at a meeting of EU finance ministers on Tuesday. While the discussion was originally planned for the ministers’ December meeting, the matter was put on the agenda following the Paradise Papers revelations.
“A black list is always a difficult exercise,” Luxembourg’s Finance Minister Pierre Gramegna said on his way into the meeting on Tuesday. “It’s an EU initiative that we have to agree together and we stand behind this idea.”
A common EU list will set out all the jurisdictions the bloc’s countries essentially deem to be tax havens. The bloc hopes the list will work primarily through a reputational incentive, forcing countries to become cooperative in order to avoid being “named and shamed.” However, if the countries remain persistently uncooperative, the EU hopes to have some credible sanctions too.
The bloc has stepped up its efforts in recent years to tackle tax avoidance and evasion by multinational companies and wealthy individuals. While politically contentious, the blacklist has received fresh impetus following successive revelations which shed light on such practices and drew the public’s outrage.
“If one tax oasis closes, another one opens,” said Austrian Finance Minister Hans Joerg Schelling. “We should toughen measures and those who don’t participate in OECD rules — be it on information exchange or other measures” should automatically be put on a blacklist so that everyone becomes willing to close these tax loopholes, he said.