One aspect of the recently published Finance Bill that caught the eye was the tweak to the scheme that allows executives of some firms, usually foreign multinationals, to avail of income tax breaks. The idea is the same one that drives our low corporation tax rate; indeed, those same people who avail of that rate are probably the ones who have also successfully lobbied for favourable tax treatment of some of their employees. No doubt they also describe those employees as “key”.
The scheme used to allow a proportion of (capped) income to be tax free. You had to be a high earner to get this break and to fulfil other conditions – essentially, you had to be a foreigner or, at least come here from overseas. The new conditions are less stringent in terms of how you qualify, and the cap on income that qualifies for the tax break is gone. As with our low corporate tax regime, other countries offer similar enticements to the executives of foreign companies that grace them with their presence. It is no surprise that critics describe all of this as a race to the bottom.
Most countries have constitutions that explicitly say all citizens are equal before the law. Somewhere along the way we must have had a referendum that exempted tax law from this imperative.
Tax discrimination
Most legal systems also forbid discrimination on the basis of ethnic origin. Again, something must have happened in the case of tax laws. We tax exactly the same income completely differently depending on whether or not you are self-employed; you can have more favourable tax treatment provided, for the most part, that you are not a citizen of this country. To be fair, discrimination normally works, and is much more prevalent, against non-citizens so they are probably grateful for catching, for once, a break.
As it happens, foreigners who come here to work have for decades been able to avail of tax breaks not available to ordinary citizens. Something called “the remittance basis of taxation” allows slices of income to be sheltered from the Revenue Commissioners. It all turns on whether you are domiciled here – which has little to do with the fact that you might actually be resident here. We could say that the roots of the “Double Irish” can be seen in these arrangements: you can be here to work, but not here for a fair chunk of your tax liabilities. Again, to be fair, the remittance basis of taxation is common to a lot of countries and has more intrinsic logic – as opposed to whiffs of bribery – than some other schemes.
The phrase "race to the bottom" made its first appearance over a hundred years ago when the various states of the US competed with each other to attract inward investment by US companies. It was a very incestuous contest. An astonishing number of US companies are, to this day, all incorporated in Delaware, despite having no business there: it is always instructive to ask why. All of this, of course, is ironic given the ongoing criticism made by various parts of the US Congress of our tax arrangements.
Base erosion
In the UK, they appear to have won the race: the fastest-growing
G7
economy now seems to produce no growth at all in tax revenues. This, presumably, is what the OECD mean by tax base erosion. If the UK authorities can’t figure out how to get more from corporate taxes, Labour’s proposed “mansion tax” will just be a start. If, more generally, the race has found the bottom, hopes are pinned on the ongoing OECD project explicitly designed to stop base erosion. We can wish them luck.
In a prominent editorial, the New York Times last week criticised Ireland for displaying an apparent lack of interest in corporate tax reform. Michael Noonan would no doubt disagree. But we have the classic dilemma: it is in our interests to act but only if everybody else jumps at the same time. There is plenty of moral high ground (as well as tax revenue) to be grabbed by showing leadership – which could potentially pay huge dividends – but little to be gained by acting alone. The New York Times's argument would carry more weight if somebody, anybody, in the US government displayed the slightest interest in reforming their own corporate tax code.
