Europe, Ireland, and taxes

The recent German election reminded us that we should never get too excited when a European Commission President, or even a French President, makes a speech about the future of Europe. Ultimately, that future will depend on the decisions of 27 democratically elected governments, including our own, and that will probably continue to slow moves towards deeper integration.

Nonetheless, here are some scattered thoughts on the tax issue, since it is in the news these days. The good news is that Ireland doesn’t have to do anything on taxes that it doesn’t want to. On the other hand, it might be prudent for us to have more to say on the issue than “No, no, no”. If we don’t get pro-actively involved in these (and other) debates, we can hardly blame others for setting the political agenda.

I take it that the core Irish interest is maintaining the right to set our own corporate profits tax rate (and other internal taxes, perhaps, such as labour taxes). If so, then as others have said, it surely makes sense to focus on that core interest and not facilitate schemes that help companies pay less than that — and the good news is that we have been moving in this direction in recent years, notably via the OECD, something that is not sufficiently appreciated by the foreign press. But we and the rest of the world clearly need to do a lot more.

But that’s not what I wanted to write about, since others have done so. Here are some further scattered thoughts on taxes, in the hope of sparking debate.

  1. If a US firm sets up an Irish branch and makes something physical which is sold abroad, we wouldn’t object, and nor should we, if that something were hypothetically to be subjected to local sales taxes in France (say). What matters to us, and the firm, is that the profits arising from this sale are taxed in Ireland. Does it not follow that we should be relaxed about, and probably even actively encourage, a situation where if (say) Amazon.fr sells something in France that would (hypothetically speaking) normally be subject to French sales tax, that transaction is taxed accordingly? There were moves in that direction in 2015, but if more is needed to ensure a level playing field as between the online giants and local retailers, why would we object? In the US, Amazon customers are now paying state sales taxes in several states. The two key principles ought to be that (1) there be no discrimination between online and high street retailers, and no discrimination against US online companies; and (2) that we keep clear the distinctions between sales or revenue taxes, on the one hand, and profits taxes on the other. If Amazon and the rest paid taxes on their French sales revenues, in France, similar to what was paid by French online and high street retailers, might this not defuse a huge amount of political tension? And would that not be good for Ireland?
  2. Now, that previous paragraph used the US language of sales taxes since I think that the US is a good point of reference in these debates. But in Europe we don’t have sales taxes: we have VAT. The current VAT regime is unfit for purpose: it leads directly to tens of billions of euros worth of fraud every year, perpetrated by organised crime (real criminals, not fancy lawyers and accountants). The sums involved are very large, even relative to the moneys lost to multinational tax avoidance strategies. The Irish government agrees that the VAT regime should be overhauled, and so do other governments, such as the French one. This is a first order important issue for the EU. Might it not make sense to consider whether and how to reform the taxation of cross-border e-commerce, within the context of such a broader reform? I don’t see that why Ireland would object to that, and once again, anything that emerged from such reforms that reduced the impression that the online giants are not paying their fair share would lessen the pressure on Ireland to increase the 12.5% tax rate.
  3. Some Europe-wide taxes would surely be in Ireland’s interest. In particular: I’m not a fan of EMU, but since we’re in it we have an interest in making it work as well as possible. We would have saved many billions of euros during the crash if EMU had been a proper monetary union, involving a proper banking union — so anything that moves EMU in a US-style-monetary-union direction, with a common bank deposit guarantee, and a common fiscal backstop, should be welcomed by us. Especially if our financial sector is going to grow because of Brexit. But bank deposit guarantees and fiscal backstops will require common financing, presumably by the Eurozone taxing the financial sector somehow. That would be good for us, not bad for us.
  4. More speculatively: I and many others more eminent than myself have argued that if you really want a monetary union, some sort of fiscal smoothing mechanism would help it function better. If we hadn’t had to impose quite so much fiscal austerity on the economy at the worst possible point in the economic cycle, that would surely have been a good thing for us. Now, I don’t think that such a fiscal smoothing mechanism is on the cards at all, but if it were, it would require some sort of common tax base that would then finance transfers of some sort to countries in difficulty (by reinsuring their unemployment benefit systems, or whatever). Perhaps a common corporate tax might form one part of that common tax base. (I would be keen on an energy tax, since we need it for environmental reasons anyway, its revenues would be pro-cyclical, and it could finance infrastructural projects related to the energy transition that are badly needed.)  But that common corporate tax wouldn’t mean that state corporate taxes would have to be harmonized, any more than the federal corporate profits tax rate in the US means that state corporate taxes there are harmonized. Indeed, I guess that once a common “federal” tax was in place, political pressure to harmonize state taxes would be difficult to sustain.
  5. As I said before, that last argument is extremely hypothetical, since I don’t think we have any hope of achieving a fiscal union in the Eurozone. (Nor do I think that the Euro is inevitably going to last forever.) But let me make a further point in that regard. There is indeed a logical argument to the effect that monetary union means that you need some sort of Eurozone-wide tax base (but only in the context of a proper US-style fiscal system for smoothing regional shocks). But there is no logical argument that I can think of that says that monetary union requires that state-level taxes be harmonized. This is an important distinction which policy-makers in France, Ireland, and elsewhere should remember.

In conclusion, my suggestion is that by making such logical distinctions, and by being clear about what are our core interests, versus those that are merely peripheral, we may be able to avoid being perceived as the DUP of European fiscal policy.

13 thoughts on “Europe, Ireland, and taxes”

  1. All very valid points, but the problem is that deep down Ireland’s relationship with the rest of the EU is even more transactional and instrumental than that of the Brits. In addition, the US, by forgoing corporate tax revenue from its MNEs, is subsidising these MNEs which crystalise these subsidies via the use of the tax arbitarge provided by Ireland’s Leprechaun sub-economy in the MNE enclave. Furthermore, despite shutting down or phasing out many of the previous tax avoidance wheezes, we are still perceived as “stealing” corporate tax revenues from our EU partners.

    We need these additional tax revenues to ameliorate the impact of pervasive and institutionalised rent-seeking and to compensate the excessively large numbers of low work intensity households. It would be far better to work towards minimising our reliance on these tax revenues before the US, the EU or both knife into them. But that, of course, would discombobulate too many powerful vested interests. So instead we’ll go into MOPE mode.

    1. “… the problem is that deep down Ireland’s relationship with the rest of the EU is even more transactional and instrumental than that of the Brits.”

      God bless your naiveté. Who’d have thought it was only we Irish who looked out for our own self interest while all other 26 members just “lie back and think of Europe”?

  2. In 2013 following the US Senate’s report on Apple’s tax arrangements, the Irish ambassador in Washington wrote a letter to US senators Carl Levin and John McCain, protesting that Ireland wasn’t a tax haven because the OECD said so. The ambassador got a curt reply:

    “Most reasonable people would agree that negotiating special tax arrangements that allow companies to pay little or no income tax meets a common-sense definition of a tax haven.”

    Kevin O’Rourke makes some common-sense suggestions here as most people would agree that we could have our 12.5% tax rate but Google moving €14.9 billion ($15.5 billion) to an Irish Bermuda shell company, via the Netherlands in 2015 ( €12 billion from Ireland and the rest from a Google subsidiary in Singapore) is indefensible.

    OK, the Double Irish will end in 2021, but booking €69bn in overseas contract manufacturing as exports (related material import costs were €12bn) when total 2016 custom tracked exports were valued at €117bn, with massive profit-shifting via royalty and business services charges, amount to a lot of scamming from other European countries.

    Germany and France may agree on a common corporate tax rate and as Kevin suggests they (maybe including Italy and Spain) could agree on local initiatives on tax.

    We were always exposed to a possible minimum foreign tax if the US opted to have a territorial system for corporate taxes and Trump’s sketchy proposal to cut the federal rate to 20% says:

    “To prevent companies from shifting profits to tax havens, the framework includes rules to protect the U.S. tax base by taxing at a reduced rate and on a global basis foreign profits of U.S. multinational corporations.”

    We better hope that this rate is not in double digits as it would wipe out the advantage of the 12.5% rate.

    The 2016 national average effective rates of corporate taxes of 0.4% for France and 12.4% for Ireland, cited in the latest Comptroller and Auditor General (C&AG) report , do not reflect the reality for multinational firms.

    http://www.audgen.gov.ie/documents/annualreports/2016/report/en/Chapter20.pdf

    C&AG said in respect of OECD countries in 2016:

    ” “France had the second highest statutory rate at 38% but the lowest effective rate at just 0.4%.”

    This is nonsense.

    France has 2 rates and a lower rate of 15% applies to small firms.

    The effective rate for small firms fell from 7.4% in 2014 to 0.4% in 2016 because of a wages tax credit that was worth 7% in 2016 and 6% in the previous year.

  3. The problem with regard to any discussion relating to taxation is that it is a highly technical subject. For example, there is no such thing as a French “sales tax”. There is only the common VAT regime across the EU. Indeed, new member states are required to adopt the system (although there are voices in the – departing UK – that there should be a move back to a retail sales tax).
    The subject at an “international” level need not, however, get bogged down in technical detail and is best analysed in terms of political objectives shared by all countries to (i) to raise as much tax as possible and (ii) to compete with other countries for scarce FDI on the basis of tax treatment while, at the same time, insisting on the near sovereign nature of the decisions involved which require decision-making on the basis of unanimity.
    Logically, if taxation is to be the subject of any form of harmonisation across the EU, it should ideally be raised by a single federal style tax authority and the proceeds distributed according to set policy objectives for EU countries collectively. Even the US has been unable to achieve such an objective.
    The detailed tax provisions of the EU relate almost exclusively to indirect taxation i.e. VAT and excise duties. The key article is 113 TFEU and the key wording “shall ..adopt provisions for the harmonisation of legislation concerning turnover taxes, excise duties and other forms of indirect taxation to the extent that such harmonisation is necessary to ensure the establishment and the functioning of the internal market and to avoid the distortion of competition”.
    Ominously, the reference to competition was inserted by the Lisbon Treaty. No doubt, this will provide the avenue of attack by the Commission. But exports between member countries still remain zero rated i.e. there is no sharing of revenues raised between member states cf.
    http://www.revenue.ie/en/vat/vat-rates/what-are-vat-rates/zero-rate-of-value-added-aax-vat.aspx
    A suivre…

  4. The problem with regard to any discussion relating to taxation is that it is a highly technical subject. For example, there is no such thing as a French “sales tax”. There is only the common VAT regime across the EU. Indeed, new member states are required to adopt the system (although there are voices in the – departing UK – that there should be a move back to a retail sales tax).
    The subject at an “international” level need not, however, get bogged down in technical detail and is best analysed in terms of political objectives shared by all countries to (i) to raise as much tax as possible and (ii) to compete with other countries for scarce FDI on the basis of tax treatment while, at the same time, insisting on the near sovereign nature of the decisions involved which require decision-making on the basis of unanimity.
    Logically, if taxation is to be the subject of any form of harmonisation across the EU, it should ideally be raised by a single federal style tax authority and the proceeds distributed according to set policy objectives for EU countries collectively. Even the US has been unable to achieve such an objective.
    The detailed tax provisions of the EU relate almost exclusively to indirect taxation i.e. VAT and excise duties. The key article is 113 TFEU and the key wording “shall ..adopt provisions for the harmonisation of legislation concerning turnover taxes, excise duties and other forms of indirect taxation to the extent that such harmonisation is necessary to ensure the establishment and the functioning of the internal market and to avoid the distortion of competition”.
    Ominously, the reference to competition was inserted by the Lisbon Treaty. No doubt, this will provide the avenue of attack by the Commission. But exports between member countries still remain zero rated i.e. there is no sharing of revenues raised between member states.

    1. DOCM – that is just the sort of stuff we DO NOT need. It will be politically impossible to ever render the existing EZ members and then re-constitute them as a single fiscal and monetary entity. But this does not stop the usual articulate fossils from strutting about and waffling complete rubbish.

      The principal obstacle that cannot be overcome is the nature and diversity of the individual EZ economies – and of course their residual sovereignty. There are some pretty angsty folk about and although they are not an overall voting majority – they are populous enough to scupper any further sly moves from Brussels, Paris, Berlin or Frankfurt toward deeper intergration. It just ain’t gonna happen!

      Anyone who really cares about our economic wellbeing would be demanding draconian levels of restraint be placed on any financial institution (National, Regional or Global) which has any operational presence in the EZ. These reckless and mismanaged entities have already caused enough harm to countless EZ citizens. This lesson has NOT been learned. And the likelihood is that it won’t.

      Ireland cannot yet ‘balance’ its annual budgets (nor can any of the other EZ members): yet domestic demands are rising and rising and rising. Economic rates-of-growth in the EZ seem to have (almost) plateaued out at 2% p/a – or less. And our politicians are promising us more of ‘everything’ – including tax cuts! The Math says 2 + 1 – 1 # 4, its = 2. So, at best our public services will simply stay as they are. Some folk are going to be pretty cross about that.

    2. The judgement of the Paris Administrative Court makes for an interesting read. It underlines two particular elements (i) the distinction between direct and indirect taxes, the EU having only a solid treaty mandate for action with regard to the latter (the CCCTB being tackled, if I am not mistaken, on the basis of EU company law) and (ii) the concept of establishment of a firm locally if it is to be taxed locally on any activities. When the firm is in Ireland, as in this instance, and supplying the services over the internet, the situation is more complicated.

      http://paris.tribunal-administratif.fr/Actualites-du-Tribunal/Communiques-de-presse/La-societe-irlandaise-Google-Ireland-Limited-GIL-n-est-pas-imposable-en-France-sur-la-periode-de-2005-a-2010

  5. Neoliberal Ireland sucks. So does the Eurozone. And neoliberalism is dying . The Tories have dropped austerity. The Fed has managed target inflation 5 times out of 120.

    Neoliberalism is a vicious system. Without the features of a monetary union, EZ debt whether public or private is toxic for citizens.

  6. So EU taking us to court for not having bothered to collect the Apple tax. And let’s not mention the lost earnings on €13b over the last year.
    Meanwhile, homelessness roars ahead.

  7. The ECB doesn’t believe in fiscal because Milton Friedman didn’t want tax getting in the way of looting. Milton designed the system the ECB runs.
    1. NO fiscal
    2. The system is always at equilibrium
    3 Only monetary policy generates growth
    And look how accurate those principles are. When was the system last in a state of equilibrium?
    And it blows up every decade or so. There is no fire brigade.
    You could comfortably fit all the people in Ireland who benefit from.the Apple policy stance into the Hogan Stand.

    Kids in care kill themselves every month. The difference in mortality for birth defects is 4x between top.20% and poorest 20%. The system is literally life or death. Credit expansion systems are designed to be.

    1. Great to see you comment, again.
      “You could comfortably fit all the people in Ireland who benefit from.the Apple policy stance into the Hogan Stand.”

      Exactly.
      Except that the people who benefit most are defending their corporate boxes.

  8. Your “scattered thoughts” on the corporate tax are timely.

    The Irish government, and the Ireland polity, have failed until today at least to realise that the EU is taking the matter of corporate tax dodging seriously. And yet this evening, the government is putting up its dukes to defend Apple. Not ‘our’ money. Perhaps not, but we have been asked to collect it.
    It seems that the government is prepared to cause a rift with the EU, while defending large corporation. What a pity the government did not put up its dukes, when we cause to put them up.

    But the Irish population are still expected to put on the green jersey, on behalf of company owners, big and small, while making up the societal deficit from personal taxation.

    Frankly, I have been much more persuaded by the arguments of Michael Hennigan, and take a jaundiced view of the national call to defend our low corporate tax rate, and even lower government-inspired corporate tax dodge facilitation rates.

    Austerity may have been a disaster for individual- paying higher taxes, getting less services, and losing jobs. Where was the increased tax rate for corporations in the midst of the crisis. Had they no responsibility to contribute to the environment where their profits are made?

    Personally I would have no difficulties with an EU tax. The reality is that we, the citizens by and large, are already funding the EU through taxes collected. Why not make that money more transparent, though a specific rate. An increased levy on corporate profits within the EU sound good to me.

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