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Minister for Finance, Michael Noonan
Corporate Tax: Fairness, Responsibility and Leadership
Thursday 16 February 2017
09:45 Plenary Session 1 – International Developments
Good morning Ladies and Gentleman.
I would like to thank the Taoiseach for organising this Conference and inviting me to give this address.
In my time as Minister for Finance, and throughout my political career, I have seen Ireland engage in the World across every aspect of Irish life: culturally, socially, politically and economically. This has been a complex transition, however it has been an overwhelmingly positive one.
Tax has long been debated and discussed at international fora in which Ireland participates. In 1961, Ireland became a founder member of the OECD, which has become the recognised international thought leader in tax. Since 1973, Ireland has been a fully committed member of the European Union. Throughout that period we have made a significant contribution to the development of tax policy across Europe, while defending the core Member State competence in taxation, which is protected by the European Treaties.
In recent years, corporation tax reform has become a priority issue at the highest political levels across the world. The group of 20 of the World’s largest economies, known as the G20 has, together with the OECD, pursued an agenda of modernising international tax rules. That is an important forum not only as they can play a leadership role but also as they represent a large proportion of global economic activity and therefore can capture an enormous amount of the wealth generation that is at the heart of global prosperity. Such economic activity is in turn used to fund the tax take across all nations which is then used to finance the work of Governments.
It is widely acknowledged that aggressive tax practices are neither sustainable from a tax point of view, nor acceptable from a societal point of view. I, like many others, believe that corporations should contribute more.
In recent years there has been a widespread acceptance that consistent but urgent action was needed to address the corporate tax landscape across the globalised economy.
The last Irish Government was willing to take unilateral action where needed to amend our corporate tax residence rules to prevent companies exploiting mismatches between our rules and the rules in other countries. Acting on our own initiative, Ireland has moved to provide certainty and fairness by amending our tax residency rules to eliminate the possibility of a company being stateless for tax purposes. We have also moved to eliminate the so-called ‘double-Irish’ mechanism designed and used by multinationals to exploit mismatches in tax systems. However, Ireland alone cannot prevent aggressive tax planning, which by its very nature relies on mismatches between different countries’ rules and on tax authorities not seeing a clear picture of multinationals activities.
The international community has recognised that the global problem of aggressive tax planning requires unprecedented global solutions. This led to the OECD Base Erosion and Profit Shifting Project which has created a new global framework for international tax.
What Ireland has done
The BEPS project, as it is known, has produced a remarkable international consensus on the steps that now need to be taken to tackle aggressive tax planning and harmful tax practices. The OECD deserves a huge amount of credit for delivering this work in a timescale many believed was unachievable.
It’s important to consider what’s at issue here; Base Erosion is a practice which has emerged where companies seek to minimise the amount of profits which are considered for the purposes of calculating their liability for tax. They have not made less profits they simply seek to have less profits reckonable for taxation. Profit Shifting involves the practice of moving profits from where they are earned to a different location for the purposes of paying tax on those profits. Typically this involves moving the profits to a tax jurisdiction with a lower corporation tax rate than in the location where the profits had been generated.
The BEPS recommendations are now being implemented around the world. Ireland has committed to the BEPS process and is playing a full part in implementation.
- We began by implementing Country by Country Reporting in the Finance Act of 2015 and many other countries have since followed suit. Country by Country Reporting is a very important initiative which will ensure that tax authorities around the world have information on the activities of multinational companies. This will ensure aggressive tax planning can be identified and challenged by tax authorities. Tax authorities across the world can now collect and share this information with each other. This means that they each can have sight of a given company’s global operations and plan their audits and interventions accordingly.
- Ireland has continued to sign up to all new international best practices and standards on exchanging tax information among countries. Ireland remains committed to the highest international standards in tax transparency and has consistently attained the highest international rating on transparency.
- I agreed the Anti-Tax Avoidance Directive with my fellow EU Finance Ministers in June of last year. The Directive is an important step in efforts to combat aggressive tax planning across Europe. Member States agreed to five significant corporate tax anti-avoidance measures, three of which derive directly from the OECD BEPS process. Ireland played a very active role in shaping the Directive. The Directive is now being transposed with a timeline that allows business to plan ahead and which should ensure that the EU acts consistently with the rest of the world.
- Finally, the BEPS multilateral instrument has been agreed by more than 90 countries. This will provide the mechanism for extensive changes to tax treaties globally without undue delay. This is especially critical as Double Taxation agreements often take a long time to agree and to replace. Ireland has played an active part in this work and will look to sign up to this Instrument when that becomes possible.
Ireland will continue to take the action needed to implement the BEPS reports. The review of Ireland’s corporation tax code, which was launched with Budget 2017, will include consideration of what further actions Ireland may need to take to ensure we are fully compliant with the OECD BEPS recommendations. Ireland will continue to be heavily involved at the OECD table.
As I mentioned in my discussions with the EU Parliament in late 2016 it is important that we implement what we have agreed. International agreements are important but action at the national level is even more important. Ireland has implemented and continues to implement these international agreements. Angel Gurría of the OECD commended Ireland's progress on this front and encouraged other EU Member States to seek to match our record on implementation of agreed measures.
The importance of consistent international action
A key success of the OECD BEPS project is that it has been endorsed by over 90 countries which have signed up to the BEPS Inclusive Framework.
Proper and full implementation of the BEPS reports will result in over 90 countries having similar anti-avoidance rules and common rules on exchanging tax information, including Country by Country reports. This level of agreement and co-operation was unthinkable before the BEPS project was launched.
It is now vitally important that this consensus holds and that the BEPS reports are implemented.
While EU Member States acting together have taken significant actions to combat aggressive tax planning, the actions agreed to date have largely built on the BEPS consensus. The work at EU level should continue to focus on implementing the BEPS recommendations. European Commission proposals on improving dispute resolution mechanisms and requiring the mandatory disclosure of aggressive tax schemes in line with the relevant BEPS reports are welcome. Ireland is one of a small number of countries to already have a mandatory disclosure regime in operation and encourages all countries to introduce similar rules. Ireland is in favour of improving dispute resolution mechanisms to provide certainty for taxpayers and business.
However, where EU action moves away from the BEPS consensus, caution is needed. No man can serve two masters, and no country can implement two competing philosophies on how companies should be taxed. The European Commission proposal for a Common Consolidated Corporate Tax Base, the CCCTB, would see a move away from the arm’s length principle towards allocating profits by formula. This idea was rejected by the BEPS process in favour of stronger, more modern transfer pricing rules.
Similarly, the Commission’s proposal for Public Country by Country reporting goes against the BEPS consensus that the value of these reports is in enabling tax authorities to see what is really happening and carry out more informed audits and assessments. Other non-EU countries have suggested that any public reporting requirement could result in them no longer sharing the Country by Country reports filed with their tax authorities. Ultimately, it is important that a consistent global approach is taken on this issue as with other issues.
There is a danger that proposals for any reforms that are inconsistent with the BEPS recommendations could create a backwards momentum – countries may not take the vitally important step of implementing what has already been agreed and which they had committed to implementing. In the worst cases we could even see countries abandoning positive processes they had only recently begun implementing.
If a lever was pulled and all countries implemented the BEPS reports overnight, it remains to be seen what problems would remain. Once these actions have been taken, Country by Country reports will give tax authorities a clear picture of what multinationals are doing and where tax is being paid. This information will help to determine what future global actions may be needed in the post-BEPS world.
Tax and developing countries
A key focus of today’s conference will be on tax and developing countries. I am pleased that many developing countries have joined the BEPS Inclusive Framework which has become a true global tax body. The coming together of almost 100 countries, together with the experience and expertise of the OECD, provides an important forum for continuing discussions on the direction of international tax.
Very positive efforts have been made by Ireland in recent years in this area. The Department of Finance commissioned the IBFD to undertake a spillover analysis to look at the possible effects of the Irish tax system on developing economies. The Report was published on Budget Day in October 2015 and is available on the Department's website. Ireland is only the second country in the world to undertake such a spillover analysis and I have consistently called on all countries to undertake a similar analysis.
There has been some inaccurate criticism of Ireland’s engagement with developing countries on tax in recent times. I strongly disagree with reports which paint a misleading and inaccurate picture of the small number of tax treaties which Ireland has with developing countries. None of those treaties were entered into without the agreement of the counterparty country. Ireland’s treaties with developing countries take elements from both the OECD and the UN model treaties. Some points of concern in relation to our treaties with Zambia and Pakistan were noted in the spillover analysis. These treaties were two of Ireland's oldest double taxation agreements and both were already under re-negotiation when the study started. They have now been renegotiated and the new treaties were signed and ratified by Ireland in 2015. The new treaties with those countries reflect a more appropriate allocation of taxing rights between both countries.
In closing, I want to make very clear that this Government strongly supports global tax reform and our commitment to the OECD BEPS reforms remains strong. This has been proven by our track record of taking action over the last number of years. Business is global in nature and therefore tax reform must continue to be global in scope.
Over the coming years, Ireland will continue to bring forward the necessary changes to meet our international commitments by the required deadlines, while ensuring that we remain competitive and responsive to changes in our environment. At times of uncertainty and change, we have shown ourselves to be sure-footed. We remain confident that our core offering remains competitive and robust.
In the coming days we will facilitate a public consultation into a Review of the corporation tax code which Seamus Coffey is undertaking as an independent expert.
We should remember that there is widespread internationally agreement that Ireland’s 12.5% tax rate is not a BEPS issue. In fact it has been widely agreed that it is not at issue at all. Taxing rights and the setting of rates are a sovereign matter. This has also been recognised by both Commissioners Moscovici and Vestager in the last two months.
The Knowledge Development Box is an example of how Ireland will continue to act. This measure applies a 6.25% tax rate to profits on investments in Intellectual property which is the result of specific research and development that has been carried out here in Ireland. It was introduced only when rules were agreed internationally for how such incentives should be designed. The OECD has reviewed our Box and found it to be fully compliant with these rules. By contrast, both France and Italy continue to have Boxes which have been found to be harmful. So all countries need to take the necessary steps to bring their systems into line with the BEPS recommendations.
We needed to engage with other countries on new and better rules. The new rules that have been agreed can be effective at tackling aggressive tax planning while also being respectful of the right of nations to protect their people and their economy. They can encourage and facilitate mutually agreed trade and the development of healthy and productive relationships. We have engaged and our standing in global discussions aimed at improving these international terms of doing business is continually improving. Reputation is not only important to Ireland’s standing in the World and our ability to engage with other countries in a mutually respectful way. Reputation is also a proxy for certainty. By building our tax system around policies and principles that are recognised as best practice internationally, we can provide the stability and certainty that businesses at home and abroad are crying out for.
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