Brexit: Accelerating the Drive Toward Corporate Tax Harmonisation?

Brexit means the UK is no longer bound by EU Directives aimed at tackling tax avoidance and aggressive tax competition, an issue that has become a high salient electoral-political issue among citizens in EU member states.

The UK will not be bound by the forthcoming Anti-Tax Avoidance Directive (which contains five legally binding anti-abuse measures that all member-states must implement by 2019); the Directive on Administrative Co-Operation (aimed at improving cross border transparency and the exchange of information); and they will most certainly not be bound by the proposed Common Consolidated Corporate Tax Base (CCCTB), should it be agreed and implemented by the Council.

The UK was the loudest and most vociferous opponent of the CCCTB, and successfully blocked its implementation in the Council in the past. Whilst the “unanimity” rule still applies to fiscal policies, which means Ireland still has a veto in the Council, there can be no doubt Ireland has lost its biggest ally in arguing against a common consolidated tax base.

In the context of uncertainty (and in the absence of a CCCTB), most legal-accountants are correctly pointing out that Brexit provides an opportunity for Ireland to take advantage of the present international tax situation. UK firms no longer benefit from those Directives aimed at the Single Market. Brexit means UK firms will no longer have a “one stop shop” for their EU trades. Many have an incentive to merge their businesses to an Irish subsidiary. Some will also consider moving their EU parent companies to Ireland, to ensure they can continue to transfer prices.

Of course, in the medium-to-long run, everything depends on the EU-UK negotiations. As it stands, it would appear that some sort of Swiss+ type deal is the most likely outcome, with priority accorded to a sectoral-industry specific deal for London finance, including the question of passporting and equivalence. Whatever the outcome, a Swiss+ type deal (or the WTO default) will give the UK much greater scope to adopt an aggressive corporate tax regime, which, whilst subject to WTO and OECD rules, would encourage a regulatory race to the bottom in Europe.

This is not good for Ireland.

Further European integration reflects the direction of travel for the remaining EU member-states. This is particularly the case for those countries in the Eurozone (with growing calls for a Eurozone Treasury/Budget and even parliament). Macron and Merkel, and their finance ministers, have made it perfectly clear that the Franco-German preference is for more integration. They know the risk associated with turning the UK into the Singapore of northwest Europe, and they have publicly declared that the harmonisation of corporate income tax systems will be central to their drive toward more integration.

The Commission fully support this Franco-German preference for greater tax harmonisation, which is best reflected in their recent proposal for a CCCTB. It is no surprise that Pierre Moscovici put it back on the agenda directly after the Brexit vote, despite it being defeated previously. Anyone who spends time in Brussels will know that the CCCTB is now a core priority for the EU, and they will persist until it is eventually agreed.

The new CCCTB proposal is slightly different to the previous proposals. It will take place over two stages. The first stage will seek to agree a single set of EU rules to calculate the profits of MNC’s in Europe (i.e. establishing the common tax base). The second and more controversial stage will be aimed at agreeing how to divide up the profits, which is the taxable income given to member-states (based on assets, labour and sales). Ireland will lose out as MNC’s based in Ireland will no longer be able to transfer the profits of their sales in other countries back to Ireland.

The second big change is that the CCCTB will be mandatory for all firms with revenue in excess of 750 million, and that there will be an R/D scheme aimed at supporting small and medium sized enterprises. But perhaps the biggest change is that the CCCTB is now being framed to explicitly tackle corporate tax avoidance in Europe. The Commission have launched a concerted campaign aimed at EU citizens to win support.

Brexit will accelerate the drive to harmonise corporate income tax systems, and the probability of this being successfully passed has increased, not least because of a change in the number of votes. The EU Council now looks completely different: the votes are significantly stacked in favour of the Franco-German alliance. But on CCCTB, qualified majority voting cannot be used, as unanimity is required. However, what this means is that Germany and France will seek to win Irish, Danish, Dutch and Baltic support through consensus, and side-payments.

Whether or not Ireland chooses to completely veto any attempt to introduce a CCCTB is, of course, a political question, and likely to be determined by the partisan colour of elected government. But it is worth asking whether Irish citizens would support policies aimed at harmonising the tax base, even if Irish elites would not? Ireland is already in the spotlight for facilitating global tax avoidance (not least with the Apple case). Further, Ireland makes up less than 1% of the EU population (even if one adds the Dutch, Danes and Baltic states, combined they are only a small percentage of the EU whole). Hence, is it really in Irelands long term strategic interest to veto those EU policies aimed at strengthening the problem solving capacity of Europe, post-Brexit?

The future of the Eurozone is a Franco-German growth model, not an Anglo-American one. Ireland needs to decide which way to go.

Mark Blaug Student Essay Prize

In honour of the great critical economist Mark Blaug (1927-2011), the Foundation for European Economic Development (FEED) is financing and awarding an annual student essay prize.

Eligible essays for the prize must be critical discussions of any aspect of modern economics.

Rather than applying economics to a particular problem, eligible essays must reflect critically on the state of economics itself, as Mark Blaug did in many of his works.

Critical reflections may include the assumptions adopted, the suitability of the concepts deployed, the mode of analysis, the role of mathematical models, the use of econometrics, real-world relevance, the presumed relationship between theory and policy, the unwarranted influence of ideology, the use (or otherwise) of insights from other disciplines, and so on.

The required language is English. Eligible essays are by university undergraduates, or by graduates who obtained their Bachelor’s degree no earlier than 1 January 2016. There is no residential or geographical restriction.

Undergraduate dissertations must be converted to essay format and reduced to 6,000 words (inclusive of references and appendices) or less. Author names, affiliations and email must be placed on the first page, below the title of the essay.

Up to two prizes will be awarded each year, depending on the quality of the best papers. The respective awards will be £500 and £300. FEED will reserve the right to award no prize, or one prize only, if there are inadequate essays of quality. The prizes will be judged by a committee of leading scholars.

Essays should be submitted by email to by 1 October 2017. The awards will be announced in late 2017 or early 2018.

The Mark Blaug Student Essay Prize is promoted in collaboration with Rethinking Economics.

The Domestic Budgetary Rule and the Fiscal Stance in 2016

The Fiscal Council published its Ex-Post Assessment of Compliance with the Domestic Budgetary Rule in 2016.  The assessment is summarised in this table:

Main Assessment

The budget condition for 2016 was a structural balance of 0.0 per cent of GDP which was not achieved in 2016 as the structural balance was -1.7 per cent of GDP.

The adjustment path condition required an improvement of 0.6 percentage points of GDP in the structural balance.  This was not achieved as the improvement was 0.3 percentage points of GDP.

The expenditure benchmark is designed to give the real change for an adjusted measure of government expenditure (net of discretionary revenue measures) that corresponds to the required change in the structural balance.  Discretionary revenue measures (including non-indexation of the tax system) amounted to -€0.7 billion in 2016. The assessment is that Ireland was in compliance with the expenditure benchmark in 2016.

This contradiction between failing to achieve the required improvement in the structural balance yet complying with the expenditure benchmark is largely explained by a one-off transaction relating to AIB preference shares that took place in 2015.  As the AIB transaction was not repeated in 2016, the €2.1 billion from that transaction could be replaced with other government spending without breaching the expenditure benchmark.  The outturns show that around half of the €2.1 billion “space” was used for expenditure in 2016 (which will continue in subsequent years).

If this one-off item is excluded from the 2016 assessment of the expenditure benchmark then it would have been breached by 0.4 per cent of GDP.  The breach net of one-offs roughly corresponds to the shortfall in the required improvement in the structural balance (0.3 percentage points of GDP) which does take one-off items into account.

Under the 2012 Fiscal Responsibility Act the Fiscal Council is required to assess the fiscal stance using the structural primary balance.  That is, the general government balance excluding interest costs and one-off items and adjusted for the cyclical position of the economy.

Fiscal Stance

The primary balance itself is relatively straightforward to measure and the figures from the CSO show it to have been +0.7 per cent of GDP in 2015 and +1.7 per cent of GDP in 2016.

To get the underlying changes the impact of one-off items must be removed.  The Fiscal Council assesses that there were three such items in 2015 and 2016.  These were the AIB transaction in 2015, while in 2016 there was the return to Ireland of a pre-paid margin related to borrowing from the EFSF and part of the EU contribution assessed to Ireland that will be non-recurring.  Accounting for these, the table above shows that the primary balance net of one-offs showed close to no change in 2016 – it improved by 0.1 percentage points of GDP.

The structural primary balance depends on the cyclical position of the economy, that is the difference between the actual and potential growth rates of the economy.  The measurement and estimation involved in this are significant.  The CSO put the real GDP growth rate for 2016 at 5.2 per cent while the potential real GDP growth rate estimated using the method set out by the European Commission is 5.1 per cent.

These closeness of these numbers implies that the impact of the business cycle on the government balance in 2016 was relatively small.  The change in the primary balance net of one-offs and the change in the structural primary balance are pretty much the same.  The structural primary balance is estimated to have been unchanged in 2016 which would correspond to a “neutral” fiscal stance.

Your views on the fiscal stance will depend on how appropriate you think the 5.2/5.1 figures are as indicators of the real/potential growth rates of the economy in 2016.  Was the Irish economy growing above its potential in 2016?  What is the appropriate fiscal stance given the cyclical position of the economy? The Fiscal Council will assess these and other issues in its forthcoming Fiscal Assessment Report which is set to be published next week.

Interpretation in fiscal space

The suspension of belief is commonly needed for science fiction.  Most space dramas require alien races to speak English or the existence of some form of instantaneous universal translator.  It now seems that something similar is required when moving in fiscal space.  Fiscal space is the money available for new measures while achieving minimum compliance with the rules.   Lots of words are being used to describe this but can we tell what they actually mean?

Continue reading “Interpretation in fiscal space”

Recent Research on Income-Contingent Student Loans

(This is a joint post with Darragh Flannery of UL and Kevin Denny of UCD).

Income-contingent loans (ICLs) for students were one of the options proposed by the Cassells Report on Future Higher Education Funding when it was published last year (see here). The topic has been back in the news again in recent weeks because of the dissemination of a paper[1] by Shaen Corbet and Charles Larkin, which claims to show that an ICL could not work in Ireland.

Two of us (Doris and Flannery) have done research directly in the area of ICLs – indeed Doris’s research ended up being used by the Cassells Expert Group to provide illustrations of how an ICL might work in Ireland. We both found, using different data sets and different ICL parameters (income thresholds, repayment rates etc.) that the discounted value of loan repayments would be about 75% of the loan values, even when accounting for graduate emigration.[2] Under these repayment rates, there would be no problem operating an ICL in Ireland.

The third poster (Denny) has written papers on the determinants of participation in higher education (HE), the returns to education and related topics and so has a strong research interest in the effects of funding on access to HE.

We were all surprised by the reports of Larkin and Corbet’s results and so went off to read the paper. This had added interest as the research appears to be influencing policy makers.  Given this context and with apologies for the length of the post, we have decided to make our assessment of it public.

Continue reading “Recent Research on Income-Contingent Student Loans”

Paper on the recovery in the public finances following the crisis

Next Thursday (May 25) I will present a paper to The Statistical and Social Inquiry Society of Ireland (SSISI) on the recovery in the public finances following the financial crisis. The meeting takes place at the Royal Irish Academy on Dawson Street at 5.30pm. Details (including the paper) are available on the SSISI website here.