Last week a delegation from the European Commission (the TAXE committee) visited Dublin as part of their work examining the structure of the EU corporate taxation system and the reforms it requires.
As somebody who researches various taxation issues, and as a former member of the Commission on Taxation, I was delighted to have an opportunity to meet the delegation. A summary of my remarks to the group are outlined in this blog. Overall, I made three points:
• In Ireland issues of international taxation, and in particular corporate taxation, have not been the subject of critical examination and discussion in the policy and political process over most of the past two decades – that is a regret.
• Judged from an economic perspective, the current system of corporate taxation in Europe (and in Ireland) fails all of the tests of a good taxation system: it is not fair, not equitable and not efficient.
• The objective of creating a common EU corporate tax calculation mechanism (CCCTB), alongside the reforms from the OECD BEPS process, offers an overdue chance to establish greater clarity and transparency on the operation of businesses, and if this paves the way for more appropriate taxation contributions – then this is in the overall interest of society.
Suggesting that change should occur, and indeed is both necessary and in Ireland’s long-term interest, turned out to be a rare message that the committee heard from those who they met in Dublin last week. The general consensus was that the current system works reasonably, where there are problems they are not Ireland’s and that change is not a priority.
*****************************************************
TAXE: Meeting Dublin Thursday 28th May 2015 14:15-15:00
Dr Micheál Collins, NERI – opening statement
First, I would like to thank the committee for the invitation to come and meet this afternoon and to acknowledge the opportunity to participate in the exchange of views on the issues relating to international taxation that you are examining.
My name is Micheál Collins, I am an economist and Senior Research Officer at the Nevin Economic Research Institute (NERI) – an economic research think-tank which operates on the island of Ireland (north and south) and which derives its funding from a number of trade unions affiliated to the Irish Congress of Trade Unions. Included in the areas I research are issues related to taxation and I am also a former member of the Government of Ireland’s Commission on Taxation (2008-09).
I wish to make a number of brief points in these introductory remarks, but first I would like to note the importance of your visit here and your willingness to engage in discussion with those on all sides of the policy process. To me it is a regret that issues of international taxation, in particular corporate taxation policies and choices, have been for the most part been issues that were not available for critical examination and discussion in the policy and political process in this country over most of the past two decades. Indeed the terms of reference of the aforementioned Commission on Taxation, established in 2008 to examine the Irish taxation system, explicitly excluded examination and discussion of the corporate taxation system even through it represented approximately 10% of total taxation revenue. Fortunately, in recent times things have begun to change with the help of greater attention from the EU and OECD; something that is most welcome. However, there remains a cultural perception that international taxation issues are not something the policy and political process should get involved in; implying it should be left to accountants, multi-national firms and external international organisations.
As an economist I tend to approach all taxation issues from the starting point of Adam Smith’s Canons of Taxation. Although first set-out in 1776 his principles, generally summarised to equity, efficiency and simplicity, have changed little since. Judging the current Irish corporate taxation system, or indeed the overall European/International taxation system, against those principles, one could only conclude that:
• it is not simple for anybody (policy makers and governments, firms etc)
• it is not equitable (those who have most do not necessarily pay the most)
• and efficiency is generally judged as a taxation system that limits its distortionary effect on the market – the current system introduces distortions all over the place.
So the system does not work, and has not done so for some time, and so once again your examination is most welcome.
Regarding the various policy issues the committee is presently examining, I wish to make two short points, which can feed into the discussion later:
On the CCCTB and the BEPS process
• There is an underlying logic to the CCCTB process, once which probably has negative revenue implications for Ireland as it would undermine the ability of firms to shift their profits and tax liabilities here. However, if Ireland was on the other side of the divide, and losing its tax base and potential revenue via profit shifting and transfer pricing, there would be much greater policy and political interest here in its reform; certainly it would be more of a priority.
• Likewise, the OECD BEPS process is welcome and has the potential to bring overdue reform and greater steps towards achieving the CCCTB agenda. If the end result is greater clarity and transparency on the operation of businesses, and this paves the way for more appropriate taxation contributions – then this is in the overall interest of society.
• As the current system is broken, from the perspective of society and the state, the changes ahead imply more taxation being paid by multinational firms and consequently, relative to today, lower post-tax profits, dividends and bonuses. Limiting such change represents an understandable agenda for those with a vested interest in these firms and they will battle hard to retain as much of the status quo as possible.
• However, the political and policy process should not be shy in reminding firms that to be part a society, to operate in that society, to sell in that society and to benefit from the human and physical capital of that society there is a small price – making a fair taxation contribution. Indeed there is a gulf between the contributions made by small firms and large ones with the resources and operational footprint to exploit the current system.
On a Financial Transactions Tax
• I am unsure if the committee has or will give its attention to the emerging proposals for an FTT; so I will keep my remarks short.
• The 2008/09 international economic collapse highlighted many economic vulnerabilities, particularly so in this country, and included among these was the lack of a detailed appreciation by Central Banks and Governments of the scale of legitimate (in other words business related) and speculative financial transactions they were either explicitly or implicitly underwriting. We should know this, and an FTT provides a key route to provide that knowledge in real-time; one which would complement and enhance the various regulatory rules that have been slowly introduced since the crash.
• A small tax would also deter some of the most extreme, and economically questionable, speculative transactions. That would be a good thing.
• The tax is so small it would have limited distortionary effects but given the tax base it would raise significant funds which could be put to good use.
Again, I thank the Committee for the invitation to attend and look forward to any discussion now and welcome any follow-ups or future interactions.