John Bruton

Opinions & Ideas

Category: tax

THE APPLE DECISION……….GOOD FOR INVESTMENT IN EUROPE?

apple-euThe EU Commission decision that Ireland must collect 13 billion euros in back taxes from Apple has created quite a sensation. Most people agree that multinational companies can, and should, pay more tax. That general goal of the European Commission is widely supported.

The key question is whether Apple was given selective aid, and , if so, if this breached EU  competition rules.

It is therefore important to say that the Irish government never “selected” Apple for subsidy.

Apple, of its own accord, simply applied for, and was given, an interpretation of Irish tax law as it stood at the time (in 1991 and again in 2007). Any other company, in a comparable legal and factual situation, could have applied for, and got, a similar ruling.

It is important to stress that, in its interpretation of the meaning of Irish tax laws, the Irish Revenue Commissioners act independently of the government. Their relations with individual taxpayers, large and small, are confidential. They hold themselves to a high standard of objectivity and integrity.

The Commission ruling, going back and revising ten years of tax liability on grounds of competition policy, rather than of tax law, creates uncertainty for many other companies about their present liabilities.

At a time when too many companies are failing to invest and are, instead, paying down debt or accumulating piles of cash, this added uncertainty is not good for the revival of the European economy.

It may even encourage some companies to incorporate or invest outside the EU, where the Competition directorate of the European Commission will not have the same power to issue retrospective directives to national tax authorities.

The Commission decision in the Apple case attempts to change the way in which profits can be attributed, for taxation purposes, as between different parts of a multinational company’s structure.

Previously, companies could get authoritative guidance on what was permissible in this respect from the relevant national tax authorities. This was possible because taxation was understood by companies to be primarily a member state, rather than an EU, competence.

Now companies will no longer be able to rely in the same way on these rulings, but will have to seek clarity from the European Commission on whether a ruling could be construed as offering a “selective” advantage to the company. In light of the Irish experience, revenue authorities of member states will be very cautious. All doubtful cases will tend to be referred to Brussels. This will add greatly to the burden of work of the Commission, and will entail an extension of the Commission’s field of activity. Commissioner Verstager herself has said that companies should double check the compatibility with EU Competition and State aid rules of the rulings they have been given by their national tax authorities.  

As the corporate structures of multinationals vary considerably, the national tax ruling on each of them will have to be individually examined and adjudicated upon as to whether “selectivity” of some kind is involved.

The test of whether a ruling is illegal, in the Commission’s eyes, is whether it is “selective”. “Selective” is defined as giving a company an advantage over other companies in “comparable legal and financial situation”. As the factual situation of every company is different, this leaves a lot of room for subjectivity and argument.

The Commission will have hundreds of thousands of tax ruling of the 28 member states to review, and so far it has only looked at a thousand.

The Apple ruling also raises  new questions about which country is responsibility for collecting the taxes on particular profits, depending. Up to now, it was understood that a country was expected to collect taxes on profits on activities within that country. Now, Ireland is being told it must to collect the 13 billion euros from Apple even though, in Commissioner Verstager’s own words, “other countries” may actually be owed the money, not Ireland.

Much of the profit may actually be derived from activity undertaken by Apple in the United States, and any tax to be collected it may belong to the US. But Ireland now is told it must collect the money anyway. This is new form of universal jurisdiction!

This precedent will increase uncertainty, jurisdictional disputes, and compliance costs. Yet the Commission is promoting TTIP, precisely in order to reduce uncertainty and compliance costs. The form of the Apple decision sends a directly contradictory signal.

I believe it would have been wiser for the Commission to concentrate its attention, in a forward looking way, on ensuring the uniform and rigorous implementation of the EU Anti Tax  Avoidance Directive which has already been approved by all member states, including Ireland.

The determination of the amount, and the collection, of back taxes should be left to national tax authorities, who, after all, have plenty of incentive already to go after the money!

WHO ARE THE REAL WINNERS FROM COMPLEX FINANCIAL REGULATIONS?

WHY ARE MODERN BUSINESS REGULATIONS SO COMPLEX?

I believe that, across the western world, we may be reaching some sort of limit in the complexity of rules governing business. The response to the financial crisis has been ever more complex rules, that only a tiny number of professional advisors could ever hope to remember, or understand properly.
In the United States, the Glass Steagall Act, introduced to regulate banking after the Depression of the  1930’s ran to  37 pages .In contrast,  the Dodd Frank Act, introduced in the wake of the recent crisis, runs to  848 pages of basic text, plus 30000 pages of implementing rules.
In the UK, the 1979 banking act ran to 75 pages. The 2012 Financial Services act runs to 534pages.
It is the same with taxation. In 1997,Tolley’s  guide to the UK tax system had around 5000 pages. The latest edition has 17,795 pages.  I have no doubt the pattern in similar in other countries and in other areas of regulation.
Why is this happening?
I think the explanation is ethical, political, and legal.
Ethics may have declined in many organisations to a point that something  is  deemed acceptable so long as it is legal, even if it may be very unfair to customers, creditors or the taxpayer. This may be accompanied by other excuses like, “everyone else is doing it” or “we must do this to keep market share”.
In politics, the” gotcha” principle may be at work. No politician or administrator wants the buck to stop with them if something goes wrong. As a result, they make ever more complex rules to pass the responsibility on to some other body, preferably to an anonymous quango. 
Also businesses themselves lobby for “certainty” in legislation, which often involves more and more complex exceptions and qualifications.  
The ingenuity of lawyers in devising complex ways of getting around rules also drives rule makers to introduce new complexities to close loopholes.

Some of these new laws are so long that parts of them are never properly debated, or even understood, in parliaments.

A REGRESSIVE TAX

Complex rules are a sort of regressive tax.

They give an artificial advantage to those  who can hire  “ the most sophisticated risk modeller, the slickest tax accountant” as Andrew Haldane of the Bank of England pointed out in a speech earlier this month.
These complex rules carry huge economic costs. They divert talent, time and money away from productive activity, to activity that adds nothing to the competitiveness of our economies in international markets.
Andrew Haldane asked the question
“If complex frameworks come with economic and social costs-why has society not done more to tackle them? Resistance is strong, particularly among those who gain most from squeezing through the loopholes. There is also an inbuilt professional inertia among regulators, lawyers and tax accountants with large amounts of human capital invested in complexity”
Simplifying regulations must be part of any serious effort to make the European economy more competitive.

A RETURN TO BASIC ETHICAL QUESTIONS IS NEEDED

Rather than ever more complex rules, covering every conceivable thing that could go wrong, we may need to return to simpler, more general rules and rely on the courts to decide whether people acted in accordance with the spirit and intent of those rules.

For example, instead of prescribing in ever greater detail what companies must put in their annual reports, we may need to simply lay down a rule like
”the company must disclose all material facts that shareholders, customers, and creditors would need to know in their own interests.” 
Then leave it to the courts to decide if the company has disclosed all those material facts, and provide harsh penalties if the courts decide they have not.

That may mean businesses living with more uncertainty. Rather than know for sure whether some short cut they are proposing to take is legal or illegal, and if it legal feel free to go ahead with it, businesses in future may have to ask themselves the question ,

 “is this action right, fair to my customers, fair to my shareholders, and fair to the general public?”

And the answer is “no” to any part of that question, they should decide, of their own accord without consulting any regulator or professional advisor, that they will not do it.

IRELAND’S BUDGET……A BETTER WAY TO PLAN THE NATIONS’ FINANCES

Work is now intensifying on the preparation of the budget for 2013.

It is part of a process of reducing the gap between revenue and spending (including spending on interest payments) to   3% of GDP, in accordance with EU rules and the Maastricht Treaty which the Irish people approved in 1992. This reducing of the gap is called ”fiscal consolidation”.

In 2009, the fiscal consolidation was 7.6 billion euros, 
in 2010, 6.4 billion,
in 2011, 6.1 billion, and
in 2012, 3.8 billion.

 
In the budget now under preparation, a consolidation of a further 3.5 billion has to be made for 2013.
For 2014, a consolidation of an extra 3.1 billion euros must be made.
And , finally, to  get on target, yet another consolidation of 2 billion  must be made for 2015.
While these figures show that a consolidation of 22 billion has already been made, and the remaining consolidation is “only” 6.6 billion, the truth is that the further one goes along a road like this, the harder it gets.
The “easy” tax increases or spending reductions are made in the earlier rounds, and the much harder ones tend to get postponed to the later stages. We are now getting to the hard part.

I think there is a strong argument for announcing, upfront next month, a full programme of all the  cuts and tax increases  for all three remaining  years- 2013,2014 and 2015. We should have a three year budget, rather than a one year one.
Doing the job one year at a time adds to the uncertainty, and does not reduce the pain. It also prevents people seeing what the real alternatives are.
The last time Ireland faced a similar crisis , in 1981, I was the Minister for Finance. Within 4 weeks of taking office I introduced and passed an emergency budget in July 1981.
I then prepared a White Paper on how the country could avoid getting into the same sort of mess again.
It  was entitled “A Better Way to Plan the Nation’s Finances”. Unfortunately, because the Government had no Dail majority, and fell on the proposed budget for 1982, I did not get a chance to implement the reforms I had proposed in the White Paper.
But the reforms proposed in that paper are just as relevant to today’s problem, as they were to those of the early 1980’s.

In “A Better Way to Plan the Nations Finances,  I suggested a new timetable for budget preparation for the following year which would see the proposed tax and spending measures published  in the previous October, allowing 2-3 months for debate, and even changes, before the measures took effect.
The 1981 White paper suggested that the budget be  accompanied by estimates of the tax changes and spending  changes that would be needed to stay on track for the subsequent  two years….a sort of three year budget. That would have taken a lot of the secrecy out of budget preparation, and given everybody a greater sense of involvement with the choices that had to be made, and a sense of   how difficult they were.
By having the debates ahead of time, the possibility would be opened up of making amendments in a non dramatic way.  It would not be so much a question of dramatic “climb downs” and “U turns”, but rather of listening and learning from rational debate.
And the  1981 White Paper suggested a  change to Dail procedure to allow opposition parties to make detailed  proposals for amendments to spending plans, so long as they put forward equally detailed alternative ways of bridging the gap.
It also proposed an independent Public Expenditure Commissioner who would analyse the choices for the Dail.

It seems to me that it would be very helpful today if information was published, on a regular basis, by someone like a Public Expenditure Commissioner, comparing different types of public spending  and tax breaks here, with those applying in other  jurisdictions, like Northern Ireland, Germany or Spain.
For example, we could usefully know how things like

 medical consultant’s salaries,
 teacher’s salaries,
 public service pensions, and
 jobseekers allowances,
 here compared with the other places.
It would also be useful to be regularly informed what particular medical procedures cost in different hospitals in Ireland, and in hospitals in other countries.
One could also compare the unit costs of the courts and legal proceedings, and of prison services here with other countries.
 
Publishing this sort of information routinely, and setting out the budget over three years ahead, would make the Government’s political task easier. And  it would help people to see where their money was going and why.

COPYRIGHT JOHN BRUTON & CONTENT

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