Last week started with Philip Hammond’s extraordinary threat to the EU that he would turn the UK into a tax haven, a sort of “Caymans sur la Manche”, if you will. All because Michel Barnier and his fellow negotiators are unlikely to give the UK what it wants, a free ride. Mr. Hammond gave the Welt am Sonntag the ill advised interview, available here (in German), during a short trip to Germany to meet the former tax inspector and current Federal Finance Minister Dr. Wolfgang Schäuble. His aggressive words may reflect the tone of that meeting, rather than the Chancellor of the Exchequer’s perspective on taxation, but in saying them he opened himself & the UK Government to a whirlwind of abuse and ridicule from those with whom he will have to negotiate.
The Houses of the Oireachtas returned during the week with the normally flurry of written questions, turning into an avalanche of snowy white paper, built up over the adjournment. Going through Wednesday’s questions, one in the name of, Róisín Shortall, the Social Democrat TD, caught my eye. It was, what a former Revenue colleague, who spent much of her time collating responses to PQs, called a “Joan Burton”question, i.e. complex, detailed and requiring special care in approach, as the Deputy knew what she was talking about, or was being advised by someone who was knowledgeable on the subject.
The Dáil question was about correlative adjustments and advised among other things, that the Revenue Commissioners had 43 open applications for refunds of Corporation Tax, arising from transfer pricing audits in other countries. The answer also makes clear that there may be far more claims, in the pipeline, as the figures did not include those received in December.
(A correlative adjustment arises from a transfer pricing audit. If the profit is increased in one country, it follows that the profit falls somewhere else. When this is agreed the company claims an adjustment in one country, reducing the profits there, while paying additional taxes on the uplift in the first State.)
The problem for Ireland is the 43 open cases are all likely to be complex cases, perhaps with multiple jurisdictions involved and substantial liabilities attached.
Life as a tax haven is becoming more and more difficult. Ireland spent much of 2016 fretting over the Apple case. The Italian tax authorities, the first to hammer Apple (see this story from Dec 2015 in the www.thelocal.it) have, based on this scoop (in Italian) from La Repubblica, now agreed a deal with Google for €280M plus. This means that the profits of Google Italia have been adjusted upwards by approx. €1,000M (Italian tax rate 27.5%) and Google Ireland Ltd., will be adjusting its profits downwards by a similar amount. This leaves a refund of €125M winging its way in the direction of Barrow St. Ominously, the article suggests the Italians next target is another US company with an Irish sales structure in place, Facebook.
Mr. Hammond should carefully consider the road he is suggesting. On Thursday evening Dr. Honohan, the former Governor of the Central Bank warned that low tax FDI models were in trouble. The extremely lean and fit Dr. Honohan has changed little in the past 50 years as this picture of him from his Coláiste Mhuire days shows.
He should note that any move to taking aggressive tax positions will be challenged, as the Irish are finding out. The current UK arrangements for foreign individuals (non-doms) are bad enough, without even considering the role of London as the world’s premier money laundering location. The UK may find that all of its current activities come under the scrutiny of re-energised fiscal authorities in other States, who perhaps will all have one major target.
The recently silent Michael Taft, in his blog http://notesonthefront.typepad.com, made reference to the over dependence on Corporate Taxes in one of his last blogs last November, available here. Ireland’s willingness to put in place favourable structures for MNCs has led to a flood of cash, which is of course now under threat from the activities of other tax authorities in Europe and beyond. The Dept. of Finance mentioned a repayment of €150M as the reason for a fall in CT in December, which can only have arisen from a correlative adjustment. This perhaps shows the danger of dependence on a “one club” economics.
The failure to appreciate that the EU is based on a rules based Civil Law structure, rather than based on a Common Law,” make it up as you go along” approach (precedent) will be the undoing of UK negotiations. Fifty four years after joining, sixty two years after the Messina Conference , they still don’t get it. After the referendum the Guardian published this extract from the late Hugo Young’s masterpiece, This Blessed Plot: Britain and Europe from Churchill to Blair (1998). I quote just a few lines,
“This is the story of 50 years in which Britain struggled to reconcile the past she could not forget with the future she could not avoid. It is the history of an attitude to history itself. It is a record not of triumph, but rather of bewilderment concerning a question that lay in wait, throughout the period, to trouble successive leaders of the nation, and which latterly tested some of them to destruction. Could Britain, the question ran, truly accept that her modern destiny was to be a European country?”
Modern taxation depends on agreed sets of rules, and for the most part the UK played by them. These rules are agreed at different levels, OECD, EU and even bilaterally through Double Taxation Agreements. However it is no coincidence that almost all major tax havens are Common Law jurisdictions from Delaware to Caymans, most of whom are outside tax treaty networks. If the UK wishes to opt out, it will be the main loser, but it is also difficult to see how it can do so without the main losers being its own citizens.