What could the UK say on the border before getting to the second stage?

You sometimes hear the British say that they can’t make progress on the border before getting to the second stage of talks. While superficially plausible, the claim strikes me as disingenuous: there are surely several things that they could say right now that would make a lot of difference. For example, they could pledge that

  1. The United Kingdom will remain in an equivalent of the customs union and the single market, if that is required in order to avoid a hard border
  2. Northern Ireland will remain in an equivalent of the customs union and the single market, if that is required in order to avoid a hard border
  3. They will change their red lines regarding the nature of their exit from the EU and their future relationship with it, if that is required in order to avoid a hard border

As I think about it though, perhaps the key thing they should say is that (a) they accept that a customs union is defined as a group of countries surrounded by a common external tariff barrier and border; (b) that in addition, the European Single Market has always been and needs to be protected by an external border of some sort in order to maintain its product standards and so forth; (c) that they accept that Ireland will remain a full member of the EU, and hence of its customs union and single market; and (d) that there will therefore continue to be a border between Ireland and all third countries or regions not belonging to the European Single Market and a customs union with the EU.

None of these points is a matter of opinion, or subject to negotiation. (1) to (3) are a matter of fact or definition, and (4) is a logical consequence of (1)-(3). And it is very difficult to accept that you are negotiating with someone in good faith if they refuse to accept that black is not white and that 2 + 2 = 4. Right now the UK seems to most outsiders to be talking out of both corners of its mouth, claiming it doesn’t want an Irish border, while preparing to do things that will require one. How can you negotiate seriously with such a country?

If the UK were to accept (1) through (4), publicly, then its claim to want to avoid a hard border in Ireland — including any physical infrastructure, something that Mrs May very helpfully added in Florence — would sound rather different. (Right now, it sounds like hypocritical posturing.) Publicly accepting (1) through (4), and saying that they were willing to do whatever it takes to avoid a hard border, involving any sort of physical infrastructure, would mark a big step forward in my opinion. And it doesn’t seem like a lot to ask for.

 

Conference on Exchange Traded Funds

The Central Bank of Ireland will be hosting a Conference entitled “ETFs – Stability and Growth” on 29 November 2017 in the Convention Centre Dublin.

Are ETFs still the safe, simple, transparent product they are understood to be? Is the ETF structure appropriate for any type of product? Should there be limits? What impact do ETFs have on their underlying market and what liquidity concerns are relevant and valid in an ETF context?

Participation is free of charge and you can register your interest in attending by emailing ETF@centralbank.ie

Final details will be available on our website.

We look forward to seeing you and to engaging in a frank and open discussion on ETFs!

Rewriting the rules

From an Irish perspective the most significant announcement made yesterday by Commissioner Vestager was in relation to Amazon not Apple.  The Commission announced that Luxembourg had granted €250 million of illegal sate aid to Amazon.  The structure used by Amazon in Luxembourg is close to a replica of that used by US companies in Ireland.  It is a double-luxembourgish.  Here is the Commission’s description of the Amazon structure:

Continue reading “Rewriting the rules”

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.

The Life and Death of Protestant Businesses

I’ve been asked to take this post down for copyright reasons, though the draft is not the version that will eventually be published. It has in fact been changed to reflect a number of the points made here and in other discussions.