Teasing out the implications of international tax reform

Ongoing reform of the global tax framework may spell good or bad news for Ireland depending on who you are listening to, but one thing is certain, changes in the US could have profound impacts here. But recent statements from the US administration in relation to tax should not necessarily be a cause for alarm here in Ireland, according to Cormac Kelleher, international tax partner with Mazars in Ireland.

“The Biden proposals seek to discourage organisations from shifting profits abroad to lower-taxed jurisdictions,” he says. “While Ireland and its 12.5 per cent rate are well known globally, it is equally known for its talent and track record. Effective group internationalisation should focus on factors other than tax. Drivers may be the need to access talent to support product growth, language capabilities to operate customer support services or EU market access. Attributes such as these continue to be offered by Ireland. These attributes will be invaluable in the era of an administration that is more open to globalisation than localisation.”

Mazars head of tax Frank Greene echoes this view. "Traditionally US companies have enjoyed an advantage over businesses in other countries due to their tax laws permitting the deferral of tax on foreign profits until they are repatriated. This gave rise to significant financial advantages when expanding into other countries or doing business acquisitions. The USA has benefitted substantially from an economic perspective due to the dominance of their technology and pharma entities and Ireland has played a significant role in this development and is likely to do so into the future, irrespective of any proposed tax reform."

And US support for a global minimum rate of corporation tax may actually be good news for Ireland which is a strong supporter of the OECD tax reform process. "The Treasury Secretary, Janet Yellen, is understood to be an advocate of the OECD," says Kelleher. "The announcement by the US of this new proposal is hugely beneficial to the OECD. What is yet unclear is if the OECD will be aligned with the Biden proposal, or whether it will have its own variation on the theme of minimum taxation. If there are variations on scope, definitions and applications, this could prove problematic to implement and challenging to enforce."

And that may see the EU going its own way, according to Kelleher, who points to a decision by the EU Competitiveness Council to approve the introduction of country by county tax reporting (CbCR) for multinationals with revenue in excess of €750 million. "Not only will this lead to major multinationals having to provide a breakdown of profits and costs across jurisdictions there is a belief that this is possibly a first step towards an EU minimum corporate tax rate," he notes. "The belief is that if the OECD tax reform plans do not materialise, the EU proposals may gather traction."

Implications

On the thorny issue of digital taxation, Kelleher believes it is no longer a question of if, but when. And this could have serious implications for the Irish exchequer with some estimates putting the cost at €2 billion annually.

“Ireland has been supportive of the OECD work in this area. The concern that if there is no one single set of guidelines, jurisdictions will unilaterally implement their regimes. We have already seen the result of the French digital tax and the US retaliation by levying extra charges on French products such as champagne.”

Irish companies may have become unwittingly exposed to the complexities of international taxation as a result of to shift to remote working during the Covid-19 pandemic. Where employees have returned to their homes overseas this may result in the tax authorities there seeking to impose payroll taxes on them.

“Not only could this lead to double taxation, but it could also lead to employee dissatisfaction and HR implications,” Kelleher explains. In addition, if a company has employees working in a foreign jurisdiction, it could inadvertently create a branch for tax purposes and profits would need to be attributed to that branch. This could lead to higher tax compliance costs and increased complexity for the Irish company. This is in part the reason some of the larger US multinationals have requested employees to return to their original employment jurisdictions.”

Not surprisingly, he advises Irish companies considering entering new markets to put tax considerations front of mind. “An early focus needs to be placed on employee taxation. The total employee costing needs to be established, factoring in local social security costs, relocation costs and so on. VAT, or the local equivalent to VAT, should also be determined.”