What next as Ireland’s tax deal for investors runs out of road?

Web Summit founder Paddy Cosgrave has been out making the case that the Irish tax system is offering a sweet deal to foreign investors, highlighting in particular foreign funds who have invested in the Irish property market. There has followed a sometimes confused and confusing debate mixing in property, various types of funds and the tax structures used by multinationals here. We could spend a lot of time looking at the the detail – and tax is all about the small print. But let's step back and look at the bigger picture.

There is a class of people and companies who have more scope than you or me to cut their tax payments – legally. It involves those who can operate and move money internationally. Most of us face tax rules written in black and white. But the super-rich and the multinationals operate in a world where their advisers talk to revenue authorities about how rules are interpreted. Like it or not, this is the way it works – not just here, but pretty much everywhere.

Tax breaks and complex tax structures are key to how rich individuals and big companies cut their tax bill. Often these involve moving money between countries and taking advantage of the gaps and opportunities this can create. You need a lot of cash, as an individual, or international scale as a company, to pull this off.

Typically these things go in cycles. Tax breaks are discovered, pushed to the limit – and often beyond – by advisers and their clients and then there is a backlash and they are closed off. This is essential to understand what has happened here – and internationally – over the last few years.

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Special funds

One area highlighted by Cosgrave was the use – or misuse – of special funds and structures , designed mainly for companies operating from the IFSC. These are intended to hold international assets and thus not be subject to Irish tax.

However, after the crash, Irish advisers started to use some of these funds to hold Irish assets, offering serious tax breaks to their clients in a way not intended when the rules were established. One group of companies was used to hold the assets of distressed Irish loan books bought by foreign investors. Other funds were used to hold Irish property assets. Investors were getting in on the cheap and getting to channel money out of Ireland largely tax-free.

This led to a lot of controversy around 2015-2016, when the tiny tax payments many of the investors were making were reported.The tax advisers and their clients had pushed their luck too far – and we moved into the inevitable political response. In the 2016 Finance Act restrictions were introduced to ensure that any return to investors from these funds was subject to a kind of withholding tax, at a rate of 20 per cent.

We did introduce one tax break for property investors on purpose, you might say, with the establishment of real-estate investment trusts (reits) in 2013 special investment vehicles in which people could invest their money into Irish property. Investors are subject to tax in the normal way, but the reits themselves are not liable to corporation tax. The role of reits as big holders of rental property and the resulting huge profits as rents soared have led to controversy. This is a legitimate debate, though it is probably more about the structure and operation of the rental market here than specifically about tax.

The context of all this was a State desperate to attract in cash – any cash – after the bust. The wider story, of course, has been the use of Ireland by major manufacturing and digital multinationals as part of their tax planning. Just as we were desperate to attract in investors after the bust to buy assets, we became hooked years earlier on multinationals as a source of providing jobs. And so, aided by the best lobbyists, tax rules were established which suited their purposes.

But, just as with the property tax breaks but on a much larger international scale, everyone started to realise that the companies and their advisers had pushed their tax planning too far. Ireland was one link in a long international chain allowing many companies to – generally legally – pay ridiculously small amounts of tax. Now the backlash is on.

Ironically, Ireland has benefited from phase one of the crackdown. Multinationals have restructured in response to tightening rules and moved parts of their operations out of tax havens to countries such as Ireland, helped by tax breaks here. Despite the tax write-offs, corporate tax revenues here have soared.

OECD moves

The danger now comes from international tax moves led by the OECD,rumoured to be potentially very significant. These will lead to more tax being paid where companies make sales and less where they have headquarters operations, as many do here. We are exposed, though by how much is unclear.

We are completely bought into the OECD process, which we have previously used to shelter us from separate demands for change from the European Union. Our ability to influence this debate is limited. But change is on the way and we have to be ready.

What does this mean? First, we need to be really careful about planning extra spending on foot of soaring corporate taxes. The employers’ organisation Ibec has pointed out that since 2015 we have collected €14 billion more in corporation tax than expected, and committed it all to higher spending levels. We can’t keep doubling down on this bet.

The final issue for us is more fundamental. What does a levelling of the tax playing field mean for our efforts to attract mobile investment here? We start from a strong position, but in terms of both investment and tax revenue other countries are now enviously looking at Ireland, putting us right in the firing line.