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Wednesday, 17th April 2024
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Business friendly? Back  
Tax competition will eventually erode the competitive advantage of low tax states such as Ireland. In the future, tax competitiveness may come to depend not only on headline tax rates, but on being a business-friendly tax jurisdiction.
KPMG Survey
KPMG’s Corporate Tax Rate Survey has been published for 2006. It reflects the impact of continuing tax competition in Europe where the average headline corporate tax rate fell over a period of a year from 25.32 per cent to 25.04 per cent, thanks to rate cuts in six EU Member States. There was also a fall in the OECD average corporation tax rate from 28.55 per cent to 28.31 per cent. The rate of reduction both in the EU, and in the wider OECD, is slow but that is against the background where rates have already collapsed from, typically, approximately 40 per cent down to the current average of close to 25 per cent.

Ireland’s 12.5 per cent rate on trading income is not uniquely low. Cyprus offers 10 per cent; Malta has a headline rate of 35 per cent that conceals a real rate of a little over 4 per cent; Estonia offers zero rate on undistributed profits and a 23 per cent rate on distributed profits; Hungary is at 16 per cent; Iceland is at 18 per cent; Latvia is at 15 per cent and Lithuania is at a mix of 15 per cent and 13 per cent. Poland offers 19 per cent and Romania, a candidate for EU membership, has a CT rate of 16 per cent.

This can be seen from the rates quoted above. Ireland’s 12.5 per cent rate is really a fairly typical rate, and it is the high rates in the UK, Germany, France, Italy, Belgium and Spain which are the anomalies.

Of course, these are simply headline tax rates. Effective tax rates are not as divergent as the figures above might suggest. The effective tax rate in the UK is considerably less than the 30 per cent headline rate, whereas the effective tax rate in Ireland approximates closely to the 12.5 per cent rate. Malta is perhaps the extreme example where, as already mentioned, a headline rate of 35 per cent conceals an effective tax rate of about 4 per cent.

Tax competition is not always conducted at the level of corporation tax rates. Many states, of which the Netherlands and Luxembourg are prime examples, have succeeded in becoming the focus for international investment by careful adaptation of the tax rules that determine the tax base, and by developing special tax regimes for particular types of transactions or companies. The current effort by the EU Commission to introduce a common consolidated corporate tax base, and the previous campaign against harmful tax competition, were aimed at closing down tax competition in the area of the tax base.

What is the future?
The editors of KPMG’s Corporate Tax Rate Survey 2006 made the following comment: ‘More subtle competitive variables include the attitude of governments and the tax authorities to corporate tax payers, ranging from aggressive policing to promoting business collaborations; tax certainty or the lack of it (deriving from such factors as complexity of tax law and the availability of binding agreements) and the efficiency or otherwise of tax administration, and the costs that it imposes on tax payers. In time, as tax competition progressively erodes differences in rates, such factors are likely to assume more importance and one of the keys to tax competitiveness could become the ‘business friendliness’ of a nation’s tax environment’.

We have an attractive headline CT rate. There is nothing much more we can do in that area. How well equipped are we to compete in the arena of ‘business friendliness’?

The stocktaking of friendliness
There are a wide range of areas where we can and must do better in terms of making our tax system ‘business friendly’.

Small business: Too heavy a burden is placed on the small business in terms of administration of tax collection on behalf of the State. If an individual wishes to start up a business, they are faced immediately with the intricacies of PAYE, PRSI, VAT, computation of benefits in kind, dividend withholding tax, withholding taxes on some interest payment (and not others!), and on patent payments – and none of that has anything to do with the individual or a company’s own tax liabilities! Even if it involves returning to the Revenue, some of the burden of tax collection, it should be possible to grant a new business a moratorium of either a few years, or until certain predetermined turnover in employment levels are reached, from some or all of these administrative, tax collecting, obligations. If the Revenue are frightened at the thought, why not do a test-run?

Tax payment dates: Companies are obliged to pay 90 per cent of their final tax liability approximately five to six weeks ahead of their year end. This has been previously commented on in the KPMG Tax Monitor. It is a ridiculous system. It should be changed to permit the pre-year end tax payment to be based on the prior year liability.

The payment dates for tax and capital gains also should be reviewed. It seems unnecessary that there should be no less than two CGT payment dates in a year. Payment dates should revert to the pay & file dates for individuals and for companies. There is a further issue in that capital gains tax in a transaction may be payable before the closing date for the transaction and before receipt of consideration. At present, payment of the tax can be deferred until consideration is received only on payment of quite penal interest rates. It is fundamentally impractical and unfair to require payment of capital gains tax before the proceeds of sale have been received. There is a need to ensure that payment is not indefinitely deferred between connected parties, but subject to that, the injustice is disproportionate to the revenue needs of the State.

Revenue powers & papers: The financial services industry is awash with Declaration Forms from their customers. Typically these have to be retained for up to six years. If a Revenue audit occurs and a six-year-old form cannot be located, a legitimate financial service business can find itself significantly out of pocket due to something that fundamentally is nothing to do with their business, since their business is not that of acting as tax collectors.

There is a tension between the fact that a large part of the customer base of important areas of the international financial service industry is overseas and of no interest to the Irish Revenue, and the concern of the Revenue to impose taxes by way of withholding tax on resident tax payers. The result can be a vast mass of paperwork designed to prove that the international customer is not within the Irish tax net. Is the saving of cost to the Revenue Commissioners by having taxes collected for them by the financial service industry outweighed by the cost to that industry?

And even if all the forms are required, does the Revenue really need six years in which to make up their minds as to whether or not they wish to carry out a Revenue audit? Is it unreasonable to expect that the transactions of any year would be audited (if they are going to be audited) within one year of the end of that year, and that thereafter all documentation could be destroyed?

Most Revenue audits are conducted fairly efficiently. Unfortunately, some Revenue audits have dragged on for years even in the case of a legitimate compliant business. Would it be sensible to require the Revenue to seek permission from the Appeal Commissioners to continue with a Revenue audit more than twelve months after it has been initiated, on the basis of a proven need that outweighs the dislocation they are causing to a business?

Handling change: The last two Finance Acts in particular have shown that we are bad at handling changes to the Tax Code. Fundamental changes to our tax regime have been introduced without meaningful consultation. The change to the rules relating to gross roll up funds and the curtailment of the remittance basis are merely two examples out of many.

When change is introduced, we have not always‘grandfathered’ existing arrangements to protect the legitimate expectations of taxpayers. The introduction of a cap on tax reliefs in the 2006 Finance Act is an example of reliefs being restricted after a tax payer had already incurred the expenditure that entitled them to the relief.

We also have too many rules in our Tax Code. It would be useful to carry out a systematic review to see which rules, accumulated over two centuries of Finance Acts, could be dropped without significant impact on the tax take. For example, how vital is the restriction on the deductibility of the running costs of expensive cars, or capital allowances on those cars? Cannot audited provisions for bad debts be accepted for tax purposes without a separate calculation of specific bad debts being needed? The Direct Taxes Legislation, as printed by Butterworths in 2005, runs to approximately 3,000 pages. There is scope to take quite a few pages out of there without loss to the State.

Certainty: Broadly, four-years after a tax return is filed, the tax payer may hope that it will no longer be reopened by the Revenue, and that his liability on foot of the tax return is final. That is an illusion. The four-year limit is specifically excluded in a case where there is ‘negligence’.

Negligence is the failure to apply the appropriate level of care that a return demands. In a circular definition, it can be argued that any error in a return is the result of negligence and that therefore there is no cut-off point at which a return can be regarded as ‘final’.

In contrast, the tax payers’ right to reopen a return (be it negligent or otherwise!) is strictly limited to the four-year period. It is understandable that there is no cut-off point for fraud. But surely there should be a cut-off point even for negligence. If the Revenue do not exercise their right to audit the return in the four-year period after having received it, surely certainty in the business world and simple justice requires that a line be drawn under the matter.

Public attitudes: The minutiae of our tax system will never in itself achieve business friendliness if the climate of public debate is hostile to business success, to legitimately earned and created wealth, and is nurtured by lies repeated so often that they are accepted as truth. We need public representatives with a belief in private enterprise, in democracy, and in personal freedoms to be heard loudly and frequently in defence of those values. We need lies, such as that the most successful in our society do not pay their fair share of taxes, to be challenged until those political and media individuals who propagate them no longer dare to do so. Unfortunately, we are a long way from achieving that position, at present.

Let’s do it!
The current strengths of our tax system, such as the low corporation tax rate and the low taxes on labour, were the result of reviews carried out, such as that by the Culliton Group a decade ago. They have yielded huge dividends to the nation. Cannot bodies such as IBEC, the Small Firms Association, the ESRI, the IDA, the Financial Services Clearing House Group, the Bankers Federation, the FSI, the Insurance Institute, the Dept of Finance and the Revenue Commissioners put together a work party with a one-year time frame, to come up with a recipe for ensuring that Ireland will be perceived internationally as the most business-friendly tax jurisdiction in the developed world?

Being business friendly
The government has established a Business Regulation Forum to examine the impact of regulation and competitiveness. The EU are establishing work groups to examine the impact on cross-border trade of regulation in various key sectors. The Department of Finance should take the initiative and bring the interested parties together and plan how we can make Ireland’s tax regime to be perceived as the most business-friendly tax regime in the OECD, and EU.

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