Speech by Minister Paschal Donohoe, TD
Harvard Kennedy School and Irish Tax Institute
Global Tax Policy Conference
23 May 2019
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Good morning everybody,
I am delighted to be able to join you today at this year’s Global Tax Policy Conference.
I would like to thank Marie Bradley, President of the Irish Tax Institute, and Professor Jay Rosengard from the Harvard Kennedy School for allowing me the opportunity to address you today.
It has been three years since the previous conference in this series was held here in Dublin Castle.
At that time, the focus was on the recently agreed OECD BEPS recommendations and the widespread reforms they would bring to the international tax system.
Just three years later, we find ourselves looking ahead to corporation tax reform proposals that may be even more significant.
Change is Coming
It is very clear that further change is coming to the international tax system. This reality must be recognised and managed.
This change can happen with countries doing their own thing, which I believe would cause serious disruption to global trade and investment.
Or it can happen with countries working together to find a balanced and appropriate reworking of the existing international tax framework.
As a small open economy, having a stable and consensus-based international tax framework is very important for Ireland.
It provides the necessary stability and certainty for investment decisions to be made.
It is very much in Ireland’s interest that we eventually reach a point of certainty following this extended period of change.
While this conference is focused on the work ahead of us, I believe this is an opportune time for us to take a moment to acknowledge the achievements of the recent past.
Ireland’s Reform Agenda
Ireland has a proven track record of taking significant actions to prevent aggressive tax planning.
First, Ireland acted unilaterally to abolish the possibility for companies to be Stateless due to mismatches with US tax rules.
Second, we acted again to change our tax residence rules to bring an end to the Double Irish structure.
Third, we were a committed participant in the OECD BEPS process and acted very quickly to introduce Country by Country Reporting in 2015.
Fourth, we were among the first countries to sign and then ratify the BEPS Multilateral Instrument.
This ground-breaking international agreement significantly reduces the potential for tax treaties to be used for tax avoidance purposes.
We are already seeing the benefits of this Multilateral Instrument which has given Ireland and Malta the necessary tools to bilaterally bring an end to the Single Malt structure.
Fifth, we agreed the EU Anti-Tax Avoidance Directives with our fellow Member States to implement a number of the key BEPS actions consistently across the EU.
On foot of this, Controlled Foreign Company rules and an amended Exit Tax were introduced in Finance Act 2018.
Sixth, we agreed and implemented significant EU Directives on tax transparency to ensure tax authorities have access to tax rulings, to anti-money laundering information and to country by country reports.
Seventh, we agreed a further Directive to expand rules for mandatory disclosure of tax planning arrangements by tax advisors.
Eighth, we agreed a Directive to introduce mandatory binding arbitration for double tax disputes among tax authorities.
And we will continue to take action.
The Corporation Tax Roadmap, which I published last September, set out a detailed plan of the actions Ireland would take and are taking.
It sets out an ambitious range of additional measures which we will introduce in the coming years, including anti-hybrid rules, an interest limitation ratio and changes to transfer pricing rules.
We are also committed to looking at the possibility of moving to a territorial system of taxation, although I believe it is prudent to wait until there is greater certainty around the international taxation environment before addressing this issue directly.
While the process of implementing the BEPS actions remains ongoing, widespread changes have been introduced into legislation across the globe.
When completed, these measures will be transformative in addressing many of the tax challenges that have arisen due to rapid changes to the economy in recent years.
The implementation of the BEPS recommendations is having an effect on business decision making, with companies having greater regard to substance when attributing profits.
I welcome this.
It is consistent with Ireland’s long standing policy of seeking to attract real investment which brings jobs and prosperity.
In particular, the BEPS recommendations seek to bring an end to the days of locating paper intangible assets in one country and the substantive activity that creates value - that develops, manages, enhances, protects and exploits those assets - in another.
It is important that companies’ behaviour and new structures properly reflect these new global standards and that the aggressive structures of the past are not repeated.
Addressing the Tax Challenges of Digitalisation
Of course the main area of concern to us all as we contemplate the future of corporate taxation involves the current proposals at the OECD on addressing the challenges to the tax system arising from increasing digitalization.
I have just returned from Paris yesterday where I engaged with my OECD counterparts in a very productive discussion on this work.
My officials will be back in Paris next week to sign off an ambitious and important Work Plan which will help to maintain the momentum of this process.
There remains, however, a lot of work to be done before we will have a workable agreement.
I have consistently said that the challenges we are facing are global and as such they are best addressed by finding a sustainable globally agreed solution.
The BEPS Inclusive Framework, with over 120 members, the political endorsement of the G20 and the expertise of the OECD, is unquestionably the right forum for these discussions.
While I understand the frustration of some countries that action is needed now, unilateral measures, whether at national or regional level, only add to the problem and make agreement more difficult to reach.
Lack of agreement on a global framework will cause problems but we should not underestimate the scale of the task at hand to build a global inclusive consensus that keeps pace with technological change and works for all.
A Stable and Consensus-based Framework through the OECD
You will hear a lot across today and tomorrow about the Pillar 1 and Pillar 2 proposals.
There will be discussions about more tax being paid in market countries and about minimum effective tax rates.
These are difficult discussions for small open economies like Ireland but they are discussions that must take place.
I believe that Ireland’s interest lies first and foremost in this work being successful at ensuring the continuation of a stable and consensus-based international tax framework into the future.
Eventual global agreement of the work at OECD would have a number of positive benefits for Ireland.
It would provide certainty and stability for the international tax landscape into the medium term.
This would allow greater planning by both companies and countries as to the level of tax payments and receipts supporting economic growth and job creation.
It would prevent unilateral tax measures, such as digital taxes, which create double taxation and exacerbate global trade tensions.
It would also provide yet further concrete proof of Ireland’s longstanding willingness to work internationally to address global tax challenges.
In this regard I was heartened to see that Irish stakeholders, including the Irish Tax Institute, IBEC, and others made a positive contribution to the OECD public consultation in March.
It is my understanding that there will be further opportunities to engage as the process develops and I would encourage all to contribute to it.
Preserving Global and Cross Border Trade
While the BEPS outcomes closed many important issues through consensus and agreement, it was clear that the challenges of adapting the international tax framework to the reality our modern digitalized economy meant that inevitably the key concepts of taxing rights and value creation would need to be addressed at an early point.
We in Ireland have always felt that the BEPS actions would go some way to addressing the concerns in certain quarters of the challenges posed. Others though, who have taken unilateral actions focused on certain sectors and activities, feel differently.
Such unilateral taxes are in my view unwise and are highly likely to exacerbate global trade tensions and damage cross border trade and investment.
It is therefore apparent that the open questions in the BEPS Action 1 report need to be addressed in order to find some stability in the international tax framework.
It is also apparent that the work underway in the OECD on this question poses important challenges for Ireland.
It remains my belief that corporate tax should be paid where value is created in accordance with the arm’s length principle and that we should keep this widely accepted principle in mind as we work towards a mutually acceptable solution.
We must be open however to considering and developing a broader concept of value creation which recognises that some value may arise from scale, from brands or from access to markets.
As I mentioned at the beginning, change is coming to the international tax system and Ireland’s engagement with this work must reflect this reality.
When I look at the Pillar 1 proposals rules, I believe it might be possible to find a globally acceptable agreement within this broad Pillar that provides certainty.
Any eventual outcome must meet certain key criteria.
Criteria for an Agreed Outcome
Firstly, any agreed outcome must follow the well-established principle of aligning taxing rights with value creation.
It must be modest and appropriately targeted to cause as little disruption to the long established international corporate tax framework.
It must be based, to the greatest extent possible, on existing transfer pricing rules which are deeply embedded in the international tax framework.
It must ensure that the bulk of profits remain taxable in exporting countries under the existing corporate tax framework. This can help to ensure that such countries are not disproportionately impacted.
It must also not disproportionately benefit large countries at the expense of smaller ones.
And finally, it must be focused on providing certainty into the medium term for governments and for business.
The Pillar 2 proposals remain more problematic, not least because of a lack of clarity as to what its proponents are trying to achieve.
A minimum effective tax proposal had not previously been part of the discussions at the OECD on addressing the tax challenges of digitalization and I remain to be convinced of the validity and appropriateness of this proposal in reaching an agreed outcome.
Ireland is supportive of measures to limit companies’ capacity to engage in aggressive tax planning.
Artificial profit-shifting for tax purposes poses a real challenge and must continue to be addressed.
However, I do not support measures which have as their core objective the end of legitimate and fair tax competition.
The benefits of tax competition have long been recognised by the OECD and others, as long as this competition is fair.
I believe that fair tax competition is a legitimate tool for small peripheral countries to balance against size, geographical location or resource advantages other countries enjoy, and this is supported by a wealth of economic research.
Competitiveness is not just a prerogative of large countries.
Nevertheless, we are positively engaged in the discussions at OECD and remain open to solutions which respect our right to compete fairly and which respect the legitimacy of Ireland’s longstanding 12.5% corporate tax rate. In all of these discussions my key priority will be to ensure that as this important work advances, Ireland’s interests are central to the process of forming that globally agreed consensus.
It is important that whatever solution is found at the OECD must be underpinned by a sound, intellectually principled basis or it will not be defensible in the longer term.
Any solution at the OECD must be also be workable in practice. In this regard I believe that as stakeholders your input will be vital in shaping the system.
This will require you to engage with an open mind as new ideas are floated and to be prepared to make compromises in the interests of securing agreement.
The themes for today’s conference – Global Tax Reform, Digital Taxation and the Future of Tax – are a perfect framework to allow these important conversions to take place. A first rate panel of speakers will ensure a comprehensive and robust debate.
We need a tax system suitable for the 21st century, one which supports economic growth and helps to ensure an equitable distribution of the benefits that come from that growth.
I urge you all to continue to engage in the debate, bringing all perspectives to the table so that the current ambitious international tax reform programme delivers for all.
I hope you all enjoy the event.
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