| ‘Who’s afraid of the ECJ?’ - not Ireland any more! |
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| Over the past number of years the European Court of Justice (ECJ) has become a major force in determining Irish tax policy, as indicated in numerous cases such as Cadbury Schweppes and Marks & Spencer. However, a new book, ‘Who’s Afraid of the ECJ’, by Rosemary Healy-Rae and Dr. Frank Barry, challenges this assumption, and the authors find that going forward, ECJ cases are not likely to make much difference. In this review, Aidan Walsh agrees with the book’s main conclusions, but notes a perverse attitude to financial services in its economic analysis, which declares that the sector has, ‘little impact on the productive potential of the economy.’ Moreover, Walsh adds that Ireland’s taxation policy needs to move on from its past, and look beyond opportunities offered by our network of tax treaties. |
In the recent 20th anniversary issue of Finance, a poll asked ‘What was the most important factor behind the success of the Irish financial services sector?’. Seventy per cent of respondents said tax. Thus, any book that looks at the Irish tax system from a larger policy perspective is always going to be welcome and of interest not just to tax professionals.
This, short, book is focused on the implications for Ireland of the recent stream of European Court of Justice (ECJ) judgments on corporation tax issues.
The book is divided into two sections. The first is an analysis by Healy-Rae of the cases themselves and the Irish tax issues flowing from them. The second part, by Dr Barry, is an economic analysis of what the cases might mean to what is often called ‘Ireland Inc.’
The conclusion of both parts of the book is that the ECJ cases are not likely to make much difference. But this summary does not do the book justice. In particular, Healy-Rae’s analysis of the ECJ tax cases is a welcome subtle analysis of judgments that are often more complex than the resulting newspaper headlines would lead you to believe.
The ECJ has no formal jurisdiction over corporate taxes. The cases arise because the ECJ, as the ‘protector of the basic principles of the EU Treaty’, strikes down national laws that discriminate, directly or indirectly, between EU persons or restrict the exercise of the fundamental freedoms in the EU Treaty (freedom of movement, freedom of establishment and free movement of capital). As has frequently been pointed out, the Court’s power is purely negative; it can only strike-down rules, it cannot put in place an alternative.
Healy-Rae concludes, correctly in my view, that by the Marks & Spencer judgment of 2005, the high-water mark of the ECJ’s activism in the corporate tax arena had already passed. Contrary to all previous cases, the Court accepted the UK government’s defence that its cross-border loss rules were necessary to defend the coherence of its tax system and to prevent tax avoidance.
In any event, even if the cases continue, Healy-Rae can only find a few discrete remaining provisions in the Irish tax legislation that might run into trouble with the ECJ.
Dr Barry’s economic analysis is also not worried about the impact of the cases on Ireland from an economic perspective. If anything, his view is that any changes will be marginally beneficial.
Dr Barry’s economic section is a useful review of how taxes and economics interact. For example, Barry explains the major policy mistake ‘old Europe’ and the US is making in retaining high corporate tax rates. Corporate taxes are a distorting indirect tax on labour and savings. They cause a misallocation of resources as compared to a simpler, more appropriate but more visible, direct tax on labour.
Barry makes a number of useful points that are worth repeating, such as, ‘US investment in Ireland is not solely a matter of tax, but economists can show that other factors like culture, language and the cluster-effect must also be quite important’. He also points out that the Irish package has probably encouraged more investment, in total, into the EU - tax competition is not just a matter of a race to the bottom. In this light, the effects of corporate tax base/rate harmonisation are likely to be negative for the EU overall. Finally, the key role of foreign investment by Irish companies in moving Ireland up the value chain is explored.
Dr Barry’s analysis, given his brief of investigating the effects of the ECJ’s judgments on the Irish economy is, understandably, based on a static view of the Irish economy; it is based on the assumption that Ireland retains its position as the preferred EU location for inward investment. ‘Were this to change, Ireland’s interest in these matters could change significantly,’he writes.
Here a tax practitioner’s perspective might be useful. A tax regime should not rest on static assumptions. The tax rules that helped build the Tiger are not the same as the tax rules needed to sustain it.
The old model of attracting US multi-nationals to set-up large-scale operations here as a springboard to the rest of the EU is of rapidly declining importance. Ireland needs to look to the whole world for the generation of wealth in the future; the current preference in our tax system for dealing with EU member states and countries with which Ireland has a tax treaty needs to go. The tax profession in Ireland has been saying this for some time, but no-one seems to be listening.
The book gives us a clue as to why no-one is listening. The book opens with a brief history of the Irish economy since independence. The post-independence policy of national ‘self-sufficiency’ is described as ‘leading to a considerable increase in industrial employment, but by the 1950s it had become apparent that it offered little scope for further expansion.’ This is topsy-turvy. Ireland was poor in the 1950s because of our policy of self-sufficiency. Making our own cars, tyres, buses, shirts, ties and shoes meant that Irish people were engaged in activities that others elsewhere in the world could have carried on more productively. Making our own cars made, overall, every Irish person poorer and people in Detroit and Dagenham poorer as well; it was quite an achievement.
But the conventional economic wisdom still favours industrial jobs. Barry quotes a Forf?s report from 2000 that notes that as financial services related capital inflows into Ireland are usually matched by capital outflows there is ‘little impact on the productive potential of the economy.’ What all you highly-skilled, dynamic and hard-working people do in Ireland is somewhat neglected.
As the Irish economist George A Duncan wrote, ‘There is, as we know, one valid programme for economic expansion, and that is that everyone use his wits to expand his saleable production...’ The current Irish tax system hobbles this programme in many ways.
The book is a very successful joint effort by the authors and the ITI and the IEA. Readers wanting to understand more about the ECJ, the economics of tax and how tax affects decision-making, often in subtle ways, will find it most useful. However, the danger is that we continue to focus on the successes of the past and on intra-EU activities and do not raise our eyes to the whole world of opportunities out there. |
Aidan Walsh is a tax partner in Ernst & Young. This article reflects the views of the author and are not necessarily those of Ernst & Young.
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| Article appeared in the August 2007 issue.
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