A new world order in corporate tax?

The long-awaited OECD Action Plan on Base Erosion and Profit-Shifting (BEPS) has been released this morning, in time for the G20 meeting in Moscow. This was promised back in February, and aims to tackled multinational corporate tax avoidance through a unified approach by the world’s most powerful economies. For background on the issue of corporate tax avoidance and why it matters, see my earlier post here, and for a summary of the OECD’s earlier missive which gives their logic for tackling it, see here. 

This topic was top of the agenda at the Lough Erne G20 meeting, and so this report, which sets out what the OECD plan to do and how, has been eagerly awaited. So what are the highlights? Is it, in fact, a new world order on corporate taxation? Well, before getting into the detail of the actions, here are five observations on the plan as a whole:      

     1.  Politics: As OECD’s Pascal Saint-Amans said at the launch, what we have here is not only technical, it is highly political. The plan now has the support not only of the 34 OECD countries of which Ireland is one, but also of the entire G20, including the eight countries which are outside of the OECD (South Africa, Russia, China, India, Indonesia, Argentina, Brazil, and Saudi Arabia). The combined block represents considerable power, both economic and political, all of which lends strength to the proposals

    2.  Timing: All the actions in this plan have short time-lines for implementation – one to two years, with a few of the deadlines bleeding out to December 2015. The reason for this is two-fold; the OECD want to seize the initiative to create something unified here while there is widespread political consensus on the need to tackle corporate tax avoidance, and secondly, they want to come up with an international response quickly before impatient politicians in the individual countries develop their own independent strategies, which might not be coherent. 

    3.  Absence of scapegoats: Unlike OECD actions in the 1990s, there is little emphasis on rogue regimes, tax havens or even very much on tax competition. This is a working document, aimed to provide solutions by neutralising tax avoidance schemes, rather than naming and shaming countries

  

    4. A top-down, multi-lateral approach: Cleverly, although the individual taskforces will come up with different recommendations under the various headings, all of these will be incorporated into a single, multilateral tax treaty by the end of the process. The (ambitious) aim is that this will then be adopted by most if not all of the countries involved, effectively replacing the current network of 3,000+ tax treaties which have been painstakingly negotiated on a bilateral basis over decades. This network is used with shocking ease by multinational firms to whisk profit in and out of various jurisdictions, exploiting minute differences to avoid billions of taxation, worldwide. If the multilateral treaty is widely adopted, and contains measures to close down some of the more egregious practices, this will mean a real change in the environment.

    5.  Limited innovation: There is a lot here that is new, but apart from the promised multi-lateral treaty, there is no radical change in the architecture of international tax. Some of what's new is essentially new to the OECD. We will have standards on information gathering, and moves to spontaneous, automatic exchange of information between taxing authorities; we will have action on residence, and on mis-match schemes including the Double Irish. There is country-by-country reporting, but not publicly. And there is no radical action on how multinational firms are taxed – no move to a single tax base, for instance; to unitary taxation; no move away from the arms-length as standard for transfer pricing. A large part of this is almost certainly political – what’s here is perhaps as much as they feel is achievable given the expanded group of countries they are now addressing with this plan. Not exactly a new world order - no central government, but a serious change nonetheless.

So what is the detail?

The plan contains fifteen separate but interlocking actions, each of which is assigned a taskforce. Two address the over-arching themes of the digital economy and the development of the multi-lateral instrument, while the central thirteen can be loosely arranged under the headings of gaps, frictions and transparency, OECD-speak for double non-taxation, double-taxation and secrecy. 

Gaps: four taskforces operate under the theme or pillar of gaps, addressing hybrid mismatches, of which more here, Controlled Foreign Company (CFC) rules, interest deductibility and harmful tax practices with a dishonourable mention here for patent box legislation. These taskforces are looking at coherence, tackling any instruments or rules which are interpreted in one way by one country, and another by a different one, leaving a little gap which can be exploited by a multinational firm. A simple example is the use of convertible shares to finance a subsidiary. In some circumstances, the profit returned to the parent company can be treated as (tax-deductible) interest when paid by the subsidiary, but as (tax-free) dividends when received by the parent – an obvious opportunity to gain a tax advantage while moving profits. However, at the launch of the report Pascal Saint-Amans specifically referred under this section to Ireland, the Netherlands, and the US check-the-box rules, so we can expect this taskforce to also address the now-infamous Double Irish (of which more here). 

Under frictions the OECD is on more familiar ground – they are aiming to restore the effectiveness of existing standards, and so taskforces here will look at countering tax treaty abuse (of which more here), and tightening up the rules on permanent establishments, possibly with an eye on making it impossible for companies to be entirely stateless. Three taskforces will look at transfer pricing, specifically examining ways to make the arms-length standard effective for intangibles, for the transfer of risk and capital and to address the greyer-than-grey area of management fees and other such payments. What’s interesting in this cluster is that these actions look to reinforce and tidy up existing ways of doing business rather than taking a radical approach, such as unitary taxation or even the type of apportionment of taxing rights envisaged by the European Commission with the Common Consolidated Corporate Tax Base (CCCTB). 

Finally, under transparency, four taskforces will look at the mechanics of gathering data which can be exchanged between taxing authorities. This is no easy task, and involves issues of data protection, IT compatibility, a common template for reporting, etc. Companies will be obliged to report more on their aggressive tax plans, but not publicly, not yet. There will be more mutual assistance among taxing authorities, and common approaches to dispute resolution, etc. 

When will we see change? 

Some of the taskforces will report in a year, and the new standard is slated for the end of 2015. As every finance student knows, however, the market anticipates change, and so as soon as this has been absorbed by the tax planners, we can expect to see a change in tax plans, and a knock-on impact on how investments are structured and how and where groups of companies are arranged. Climate change doesn’t happen overnight, but still it happens, and has real and present impact. 

How solid is the support for this?

Pascal Saint-Amans insists there is extremely solid and widespread support for these measures, even beyond the OECD and G20. He acknowledges that some large firms should end up paying more tax if his plan works, and so some in the business community may be less than thrilled. Interestingly, while they are invited to submit observations, they are not a formal part of any of the taskforces. Nevertheless, he explains that while some countries or companies will protest publicly, they accede privately, and will support the measures once they are developed. Or as he put it: “the conversation in the room and the conversation in the corridor are not the same.” It should not take long to see which conversation carries the most weight. 

Sheila Killian

@islandtotheleft

Jail the Anglo Bankers?

Nat O'Connor: In the wake of the Anglo Tapes, it was not surprising to see a poster on a lamp post today stating "Jail the Anglo Bankers". As well as refering to a PBP/SWP protest planned for tomorrow, it echoes a wider question of why - after so many years - are more people involved in the banking collapse not facing justice for what has happened to this country?

It is debateable whether Ireland has enough laws on the statute books to cover the kinds of subtle (and not so subtle) white collar crime that the Anglo bankers stand accused of. Moreover, I am not sure that our concept of 'fraud' is sufficiently comprehensive to deal with something like the damage that Anglo has done to Ireland.

The Journal.ie reports Minister Joan Burton's reaction to the tapes: "With regards to the events being examined by a Dáil committee, Burton said she feels that it should be resourced with, for example, an experienced lawyer, with experience of civil proceedings and banks, and also by somebody like a forensic accountant with an understanding of banking."

Prof. Bill Black of UMKC is fairly experienced as a former financial regulator, who led the investigation into the Savings & Loans scandal in the US in the 1980s and 90s. He's also a white collar criminologist and author of The Best Way to Rob a Bank is to Own One. (You can listen to David McWilliams interviewing Prof. Black in 2011).

He will be presenting an update on his specialist subject, 'control fraud', at the LSU 2013 Fraud and Forensic Conference on 29 July 2013.

My understanding of 'control fraud' is that it refers to the ability of those at the top of major financial organisations to pull enough different levers that they can enrich themselves (and others) by essentially taking unacceptably high levels of risk and reducing the institution's safeguards against that risk. This is insane/suicidal behaviour for the organisation, but it is rational behaviour for individuals who believe that they can get away with the personal benefits (remember all those big bonuses?) and leave others to pick up the pieces (i.e. the Irish taxpayer in the case of Anglo).

It is not clear to me that we have the necessary law on the books to deal with 'control fraud', although we might be able to address aspects of it. It is a form of fraudulent behaviour that straddles corporate governance, regulation and business ethics, as well as crime. But we still need to ensure we have sufficient legislation to cover criminal aspects of how senior executives use and abuse their positions of power and responsibility.

The Anglo Tapes feature in Prof. Black's substantial 181-slide presentation, which can viewed here. (It is well worth taking time to go over this material to consider what 'regulation' of the power of banks should or could mean). It is likely that the Irish banking collapse will not only enter the history books as one of the world's most expensive bank bailouts, but also will enter the curriculum of 'how not to do it' in terms of financial (non)regulation, banking crisis (non)resolution and (potentially) fraud.

Black's response to the Nyberg Report on the investigation into Ireland's banks is on slide 8. Nyberg (perhaps diplomatically) suggests that banks operating models restricted their ability to provision for likely future loan losses. Black suggests that the Anglo Tapes undermine any belief that the Anglo Irish bankers actually wanted to do this. On slide 9, Prof. Black reminds us that the Irish banks were woefully badly provisioned to deal with likely losses.

And that subtle correction of Nyberg is at the heart of the 'control fraud' argument. If the banks willingly took risks that they knew they could not cover, the potential is that this represented control fraud; i.e. using the institution to take risks and willfully failing to provision for those risks on the basis that someone else will pay.

The S&L crisis cost the US taxpayer $341 billion in 1996 (that's $510 billion in 2013's terms, or €388 billion). Anglo and Irish Nationwide have cost the Irish taxpayer around €35 billion, and AIB and BOI add further billion to that. Plus interest. The Department of Finance estimated a €65 billion cost from the bank bailouts.

Pause for thought.

The USA (pop. 265 million in 1996) had a €388 billion bailout. That's €1,464 per person.

Ireland (pop. 4.6 million) had a €65 billion bailout. That's €14,130 per person, or over nine times more expensive.

In the S&L crisis, Prof. Black's investigation involved 1,000 FBI agents and had a 90% conviction rate.

Of course, before any bankers go to jail, we need due process and for the DPP to bring charges, based on forensic evidence. But are we really serious about tracking down any wrong-doing if we haven't had hundreds of investigators tracking down the evidence over the last five years?

We know that, in 2010, the then new Financial Regulator Matthew Elderfield sought to recruit an extra 360 staff to bring his office up to international standards. I very much hope that most of those people have been focused on building up evidence for the DPP since then.

Prostituting Irish Citizenship

Nat O'Connor: Up until 1996, under the so-called "Passports for Investment" scheme, a wealthy investor could gain Irish citizenship as part of a deal involving an investment in Ireland of over £1 million. Some details of the scheme can be read in the Oireachtas record here.

A new proposal, raised in today's Irish Times, suggests that tax exiles could buy extra time in Ireland, while still remaining non-resident for tax purposes, would represent another bizaare and offensive example of Ireland pandering to wealthy individuals and allow them to live under a different set of laws from everyone else.

The suggestion apparently comes from the Forum on Philanthropy. While they are looking at innovative ways to encourage planned charitable giving, there is a substantial difference between providing tax breaks for charitable donations, and providing other inducements (including different laws about residence) to get people to give to charity.

For transparency: TASC is a not-for-profit charitable body (CHY 14778) that benefits from the current tax break. If anyone donates more than €250 per year, a further 31% can be claimed from Revenue, paid out of income tax paid by that donor. But whoever that donor might be, he or she must pay income tax in Ireland in the normal way.

It is noteworthy (in the above Oireachtas transcript) that the original "Passports for Investment" scheme was similar to schemes in various tax privacy and offshore finance regimes, including: The Bahamas; Belize; Panama; St. Christopher and Nevis; and Uruguay.

As the global debate continues about how to tackle tax avoidance and tax evasion by wealthy individuals and global corporations, the idea of selling time in Ireland for €36,500 a day should be treated with great suspicion if not outright disgust. It would mean that if a super-wealthy person wants to pop over for a game of golf or to do business, they would no longer have to worry about triggering the automatic requirement to pay their full share of tax in Ireland that year. Instead, the price for not having to follow the same tax residency laws as everyone else is suggested at €36,500 a day.

Emerging characteristics of an Enabling State

Nat O'Connor: Carnegie UK Trust have been organising a series of discussions around the UK, and one in Dublin, about their idea of the 'Enabling State'. The lead author, Sir John Elvidge, was the chief architect of a radically new model of the civil service operating under the devolved Scottish Government.

Carnegie are still continuing the conversation, but so far "six common characteristics that define an enabling approach to public services" have emerged.

• Services built around empowered citizens and communities;
• Co-produced public services;
• Nurturing community solutions where the state has failed;
• Services that seek to reduce not exacerbate inequalities;
• A holistic approach to public service delivery;
• Shared responsibilities in improving collective and individual wellbeing.

The report of their Dublin meeting can be accessed here. It is refreshing to see Ireland's problems looked at by a sympathetic NGO that is nonetheless more used to the UK context. For example, "There was no Beveridge Report in Ireland and as such Ireland’s health, welfare and social services provision developed in a piecemeal fashion". It is useful to remember the influence of visionary ideas, like Beveridge's post-war plans for National Insurance and the NHS.

See also Carnegie UK Trust's Enabling State webpage.

There is a risk that in Ireland we will fail to grasp the opportunity to imagine a very different state and a radically reformed politics. The Enabling State is one useful contribution to help us to promote public discussion of real reform.

A New Industrial Strategy for Ireland?

Nat O'Connor: From the global clamp-down on corporate tax avoidance, the failure of the EU to co-ordinate a jobs-rich recovery strategy and the continued recession and high unemployment in Ireland, there is a need for a serious re-think on the economic policies and industrial strategy underpinning Ireland’s future economic development and recovery.

TASC has just published a series of Industrial Policy discussion papers as a contribution to discussion of central themes in Ireland’s industrial strategy.

Professor Seán Ó Riain provides an overview of the challenges facing Ireland in relation to industrial policy; from the short-term need for job creation, to the longer-term goal of sustainable prosperity. He proposes a balance between private and public activity, with a role for the State in ‘making winners’ through the production of new industry capabilities; the creation of networking spaces and the promotion of ‘conceptions of control’ that are favourable to industrial development.

Professor David Jacobson examines the difference between innovation and the narrower concept of R&D. He points to evidence that the national innovation system in Ireland is inefficient and ineffective.

Dr Eoin O’Malley’s paper questions the received wisdom about Ireland’s competitiveness and the undue focus on labour costs. Instead, he argues that Ireland’s rising and falling shares in export markets is more nuanced indicator of real competitive performance.

Professor Jim Stewart examines the vexed issue of Ireland’s 12.5% Corporate Tax rate and overturns the myth that it provides a ‘cornerstone’ of industrial policy. On the contrary, he argues that a tax based industrial policy will not result in an innovative, research led economy.

Chair of TASC’s Economists’ Network, Paul Sweeney, has provided a compelling calculation of the amount of public money used, directly or indirectly, to support the enterprise sector in Ireland. He estimates this at between €4.7 and €6.2 billion per annum, which is far more than is generally imagined. This raises the question of whether we are getting value for money, or whether these supports should be reallocated.

Each of these papers provides a thematic analysis of a core aspect of Ireland’s industrial strategy. They are intended as a contribution to debate, to encourage a much wider and more critical scrutiny of the future pathway to Ireland’s recovery.

The Scale of Youth Unemployment

Nat O'Connor: Ireland's economy is contracting again, unemployment is at 13.6 per cent and over 60,000 people emigrated over the last two years (net of immigration, CSO population report). Unemployment across the EU is at record high levels (12.2%) and Enda Kenny was not wrong when he recently called the high levels of youth unemployment "an abomination" (RTÉ)

Eurofound reports that 14 million young people (aged 15-29) are NEET: Not in Employment, Education or Training.

So what's the strategy for medium-term economic recovery, development and prosperity? And how are we going to generate good jobs, especially for younger people?

The recently announched EU Youth Guarantee will make up to €8 billion available, as part of the next seven-year budget of the EU. "The funds will form the basis of a 'Youth Guarantee' that aims to provide a job, training or apprenticeship to young people within four months of their leaving school, full-time education or becoming unemployed." (Reuters)

However, "Economists have derided the scheme as a public relations exercise, and even the leaders conceded the plan would have little impact unless member states took action themselves."

€8 billion is c.€571 for every young person currently in the NEETs category (to say nothing of those currently aged under 15 whose futures are equally uncertain). That's just over €80 per year, although logically the expenditure should be front-loaded.

While this might pay for an 'intervention' of some description, like advice or a small amount of training, it is not anything like the right scale to provide paid apprenticeships or jobs. In Ireland, you could employ someone for less than two weeks at the minimum wage for €571.

So, the Youth Guarantee is not a strategy. At best, it will provide a trickle of useful money that will facilitate national governments setting up training schemes and assistance to find employment.

But what would a strategy look like? Today, TASC launched a series of papers looking at themes in industrial policy, including innovation, competitiveness, State supports to enterprise and our 12.5% Corporate Tax rate.

Each paper makes a specific contribution to the discussion, and they are meant to provoke thought. For example, Paul Sweeney estimates that between €4.7 and €6.2 billion is spent by Ireland annually to support enterprise here. That's very roughly 10 to 15 per cent of all public spending. And in contrast, Ireland's proportionate share of the Youth Guarantee is likely to be around €11 million per year (assuming 1% of €8 billion divided by 7 years).

This contrast shows that we have a lot more internal capacity that we might imagine to focus resources towards employment, education and training, but it requires a reevaluation of existing policies and activities, guided by a coherent medium-term vision or 'strategy' for how we can make better use of these resources to achieve the sustainable growth of good jobs.