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.

The Silicon Docks and the Housing-Rental Crisis

The latest Irish rental price report has just been released. As always, Ronan Lyons has done great work documenting rental-price inflation.

Rental prices are at an all-time high. But Dublin is clearly diverging from the rest of the country, with what can only be described as rampant and runaway rental-price inflation, which is completely unsustainable.

The media – and housing economists more generally – have correctly pointed out the importance of high-demand and weak supply. In turn, the focus is explaining the weak supply of rental properties: AirBnB etc.

But what about the role of income-demand in driving up rental prices?

Surely, the high-wage ICT sectors of the economy have a role to play in driving up the price of domestic non-tradeables in Dublin city?

The elephant in the room is the role of inward migration, and the impact of non-Irish employment in Dublin’s Silicon Docks.

The two graphs below are taken from my research on FDI flows into the ICT sector. It shows two things: FDI in the ICT sector is central to the Irish recovery, and ICT is the highest paid sector in the economy.

So, who are these workers, and where do they all live?

Google opened it’s offices on Barrow Street in 2004. An additional 80+ Silicon Valley firms have since followed. By 2016, the sector had grown to around 16,000 employees. Most of the growth (labour market cluster effect) is driven by inward-migration of skilled multi-lingual graduates.

Might the Silicon Docks, and the inward migration of high-paid sales/tech workers from across the EMEA, explain the rental-price inflation?

This is not an argument against inward migration, nor the positive effects of Dublin’s high-tech sector. It’s been great. But it has a cost, which policymakers are clearly incapable of responding to: the rapid increase in non-tradeable prices, particularly housing-rental prices in Dublin.

It seems to me that it’s only a matter of time before a populist rhetoric emerges along the following lines: the Irish government use low corporate taxes to lure global MNC’s from Silicon Valley to employ mobile multi-lingual graduates from across the EU/globe, who pay 2,000 euro a month for 1-bed apartments, whilst the Irish serve them pints in the local bar.

FDI projects

Source: Regan & Brazys (2017); IDA and authors calculations.
Weekly wages

Source: Regan & Brazys (2017); CSO and authors calculations.

Why people prefer unequal societies

Some readers might be interested in this post/article just published in Nature – Human Behaviour. The title is “Why People Prefer Unequal Societies” (a slightly misleading title), and the main findings are:

Drawing upon laboratory studies, cross-cultural research, and experiments with babies and young children, we argue that humans naturally favour fair distributions, not equal ones, and that when fairness and equality clash, people prefer fair inequality over unfair equality.

 

Figure 1: Income inequality in Europe and the United States, 1900–2010.

Income shares

 
Figure 2: The actual US wealth distribution plotted against the estimated and ideal distributions across all respondents:

Ideal and actual distirbution

 

Figure 3: Percentage of children earning more than their parents, by birth year.

Parental earnings

Radical economics, rethought, an episode from Financial Times on Spotify

Some readers might be interested in this podcast with FT writer Martin Sandbu and Cardiff Garcia. They discuss economic ideas that would have been considered unthinkably radical a few years ago, but which are now generating serious discussion. Well worth a listen!

https://open.spotify.com/episode/09DY5Q3AwBtk9ZwKnBupmP

 

Central Bank – Revisiting the 26% Growth Debate

Readers might be interested in the first quarterly central bank bulletin of 2017.

Unsurprisingly (and importantly) the bulletin focuses on the downside risks to the economy associated with Brexit, which are well worth reading.

But something else caught my attention whilst reading the piece. They briefly return to the 26% growth rate and conclude:

the large and increasing share of intangible assets, mainly held by multinational firms, and the assets of Irish based aircraft leasing firms can use headline investment figures to diverge from underlying investment trends.

This would imply, officially at least, that the role played by contract manufacturing, intangible assets and aircraft leasing are recognised as the core determinants behind the 26% growth rate, and leprechaun economics?

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Launch of World Wealth and Income Database

Readers might be interested in the new World Wealth and Income Database, which was just launched at the American Economic Association (AEA) annual meeting in Chicago.

It is coordinated by a small core team located at the World Inequality Lab at the Paris School of Economics.

The presentation slides from the AEA are available here and the corresponding explanatory paper is visible here.

The database aims to offer open access to the most extensive available database on the historical evolution of the global distribution of income and wealth, both within and between countries.

From an Irish perspective, what’s most notable is the paucity of data on the distribution of income and wealth, something that Patrick Honohon commented upon as governor of the central bank in 2014.

However, there does seem to be updated data (most likely from Brian Nolan), on the top 1% income share from 1938-2009.

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Celtic Phoenix or Leprechaun Economics?

Readers might be interested in this UCD Geary working paper, which was featured in the Sunday Business Post yesterday. The title of the paper is “Celtic Phoenix or Leprechaun Economics: the Political Economy of an FDI-led Growth Model in Europe”.

Our core argument is that Ireland’s post-crisis economic recovery was driven by foreign direct investment (FDI) from Silicon Valley, and whilst this growth model was made possible by Ireland’s low corporate tax rates, it was also a result of inward migration, with these firms using Ireland to directly access the European labour market.

We also demonstrate that Irish fiscal and wage policies have not redistributed gains from the FDI recovery to the broader population. As a result, the economic recovery has been most actively felt by those in the FDI sectors, including foreign-national workers from the EU and beyond.

We suggest that this experience indicates that Ireland’s FDI-led growth model has created clear winners and losers. The FDI growth regime been made possible by inward migration and European integration, but given the unequal distribution of the economic benefits that this generates, it is unlikely to be politically, or electorally, sustainable.

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