National economic plan must be guided by long-term vision that looks past Covid

The budget always takes the limelight, and this year deservedly so with the absolutely necessary focus on keeping the economy alive for the duration of this health crisis.

Now it’s time to pivot. Time to change gear. It’s not enough to merely keep our heads above water – it’s time to swim through and beyond this crisis. We must make space now to think and plan. We can’t waste this time. Other’s certainly aren’t.

Even while the global health crisis reignites, global trade dynamics continue to develop, Brexit trundles towards a conclusion and international institutions have re-intensified their efforts to overhaul corporate taxation.

The Organisation for Economic Co-operation and Development has just published its blueprint for nothing less than a rewrite of global corporation tax rules, or BEPS2.0 for short.

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Meanwhile, here in Ireland any longer-term economic policy starts with the humble Finance Bill. This does the heavy lifting for the budget. It also tends to include a lot of technical provisions that generally tend to attract little interest, but which can be of enormous benefit for Ireland's economic place in the world.

But this year, unfortunately some of these provisions actively undermine domestic Irish business. I’ll talk about one of these. Please don’t stop reading when I mention transfer pricing.

Exemption

The core purpose of transfer pricing rules is to properly allocate profits across borders for tax purposes. It should not impose and increase tax within domestic businesses by forcing income out of the 12.5 per cent tax rate and into the 25 per cent rate.

Yet that is what is proposed, with a supposed exemption for purely domestic transactions effectively abandoned. And this is wholly unnecessary given the necessary provisions are already in place for cross-border and trading transactions.

A couple of examples might help to illustrate the point. Many businesses own property that is used by a number of companies across the group. Forcing payments of rents internally will take business profits out of 12.5 per cent tax and into the higher 25 per cent charge.

Another common need is to move cash from one part of the business to another. Forcing interest on such loans not only results in 25 per cent tax but often without any tax deduction on the other side – effective double taxation. And forcing entrepreneurs to charge interest on loans to support their businesses makes no sense at all.

All complicated enough, but the net result is an increase in corporation tax that will fall disproportionately on indigenous businesses. Not to mention all the additional compliance costs.

The rules are now such that the only sensible solution is to scrap them entirely and start again.

Seen in the current global context and actions that are happening locally, the upcoming national economic plan is critical. It cannot be simply a plan to survive coronavirus. It must look to the future, and position Ireland in the world as it is likely to exist in two, five, and 20 years’ time.

It needs to encapsulate the sort of vision propounded 60 years ago by TK Whitaker. We are talking about a vision that takes account of the big issues, from climate to demographics to global trade.

To take one part of this, I know some people are concerned that the BEPS2.0 developments might be damaging for Ireland. I disagree, but in any event I think this is to misunderstand what Ireland has to offer. Tax, it is true, is important, but ultimately not as important as being a bastion of free trade and sound predictable rules based firmly on the rule of law.

Ireland has, throughout this pandemic, shown itself as a safe place to do business. It is now time to bolster this with legislation and say it loud with policy intent. Ireland can be the global business hub of the next century.

Entrepreneurial culture

Ireland does not confiscate products owned by other governments or private companies and Ireland ensures the continued flow of trade and secure global supply chains in the most difficult of circumstances. Ireland abides by the rule of law. The national economic plan should major on these positives.

This is important for all the Irish economy, both for foreign companies located here and for domestic Irish businesses.

It is a vital element in supporting the competitive entrepreneurial culture that is now endemic in Ireland and provide businesses with the base from which to compete with the world.

So what is needed? The national economic plan needs to be guided by a long-term vision of the next stage of Ireland’s development, building on our climate commitments and recognising our strengths as a global business hub. In the meantime, we can’t miss opportunities, such as in this year’s Finance Bill.

Liam Lynch is a partner with KPMG in Ireland