It was a pleasure to be in Dublin, Ireland recently to speak at a client briefing with Tom Woods, Head of Tax & Legal, KPMG in Ireland, on “Ireland in a changing world,” where the focus of discussion was on the changing tax landscape, the implications for Ireland, and how tax policy can continue to support growth in the economy. I spoke specifically from a global perspective, while also providing my thoughts in relation to Ireland.
I don’t always write down everything I’m going to say, but as I begin to do these types of speeches more regularly, as the world opens up, I thought it worthwhile to share my spoken remarks with this community. I welcome any feedback and will aim to do this on a continual basis.
Speech from David Linke, Global Head of Tax & Legal Services, KPMG International:
Thank you, Tom and Minister.
Reflecting upon this speech this morning, I was struck by the complexity faced by many economies from a tax policy perspective. We are witnessing the biggest shift in global international tax rules in a century. Relatively small, open economies, reliant on foreign capital and the ingenuity of its own people, need a tax policy fit for the challenges of the 21st century. An intriguing balance of how to attract foreign capital with competitive settings, raise sufficient funds to deliver services and do it in such a way to be fair, inclusive and not undermine the social compact underpinning tax collection in western democracies.
If we start with the BEPS project, I do not propose to spend time with an astute crowd such as this to recount the background of the proposals or the journey we have been on. I would, however, make the following remarks:
- The work that has been undertaken thus far has been extraordinary, gaining the agreement of 137 countries on both Pillar 1 and Pillar 2 as it is now known. A level of inconsistency will no doubt emerge as individual countries move to implement, but my view is that that will not be significant.
- The EU has been clear that its digital levy has been put in abeyance on the basis that a share of the residual profits of the largest and most profitable multinational enterprises are reallocated to member states under Pillar 1. The latest EU estimate I have seen is between E2.5bn – 4bn of tax.
- The question therefore is where is the US? US support for Pillar 1 is uncertain and the real question is whether the 60 votes in Congress can be garnered for its passage. Pillar 1 is based on the US preferred approach and having regard to the likely EU response and potential proliferation of DSTs, I remain optimistic. Relevantly OECD estimates, albeit now dated, were for a 1 % reduction in global GDP if DSTs were to proliferate.
- Pillar 2 is of course much more advanced given the OECD release in December 2021, and the specific consultation processes now proceeding in country. Some countries are pushing for this to be delayed until 2024 while France is seeking political agreement in the EU by 15 March.
- While that is said, there has also been a rising sentiment against the GILTI changes from certain Republicans. The GILTI changes could be placed in a Budget Reconciliation Bill, only needing 50 votes in the Senate. They must therefore be linked to a Bill that would be accepted by the Democrats (on the expenditure side) or some Republicans will need to vote with the Democrats. The EU has said that the current GILTI is not an approved income inclusion rule because of its global blending approach and an effective rate of sub 15%.
- The real concern of certain members of Congress is whether congressionally provided tax credits and deductions (R&D tax credit, low income housing credit, new markets tax credit) would be subject to top up tax.
- How are companies preparing for the reform? Proceeding on the basis that both pillars will move forward, many have done modelling to determine what are the tax impacts and where are the “problem children”. Most Heads of Tax I talk to have had discussions with the CFO and Board on what additional tax is estimated and where it will be paid. An issue that has come to the forefront quickly for Heads of Tax is data – principally sourcing it, governing it and then preparing compliance filings. Common challenges include the need to obtain data to carry out tax and accounting adjustments, tax and withholding tax information being kept outside ERP systems and intra group transactions being kept in separate systems.
- In conclusion, what do I anticipate? I am optimistic that Pillar 1 and Pillar 2 will proceed despite these reservations principally because I believe that the alternative of DST’s proliferating and the economic consequences alluded to above and the impact on the US tech companies will likely be consequential.
Which brings me to the next point. How does an open, capital importing economy make every post a winner in the modern economy?
In OECD analysis Ireland’s tax mix is characterized by:
- High revenues from taxes on personal income, profits and gains from corporate taxation
- Equal to the OECD average on tax from payroll, property and VAT
When you dig into these figures you find some interesting conclusions:
- Top 10 companies pay 51% of the corporate tax in 2020
- Foreign owned multi nationals constitute a significant portion of that corporate tax base
- Foreign multi nationals employ a third of all employees raising about half the employee taxes (indicating a significant difference in salary levels)
- A phenomenon that has occurred globally during COVID-19 whereby the profits at the big end of town (large foreign multi nationals and locally owned companies) grew substantially while the profits at the small end of town declined.
With all that, how do you build indigenous businesses? One indicator which is relevant is the Economic Complexity index published by Harvard. The index is based on levels of interaction in the economy, the sophistication of what is made and developed and the lack of dependency on sectors and geopolitical factors. Ireland ranks well at 17th in 2019 although it has slipped eight places from 2000. Singapore in contrast has gone up six places and a country which I know about, Australia is ranked 86th principally because it relies on the export of iron ore and coal to China.
Many of the matters addressed by Tom Woods, Head of Tax & Legal, KPMG in Ireland, and Brian Daley, Partner, KPMG in Ireland, in the submission to Government are relevant here:
- R&D concessions to promote innovation and ingenuity. My experience is that concessions in this space that drive positive spill over effects for the general economy and collaboration with the university sector are critical
- Promotion of complex manufacturing
- Positive attraction of talent
- One stop shop for business establishment and regulation (a matter on which Singapore has invested significant energy)
- High social capital and education
- Strong technological infrastructure
- A burgeoning and carefully cultivated Fintech and bio tech industry.
I should finish with a comment on inequality. Following the GFC and COVID-19, there is increased pressure for wealth type taxes to tax disproportionate gains from capital. The issue with such taxes is the complexity – the complex advisory solutions deployed, which often mean little is raised, and importantly how you protect intergenerational asset transfers for farms and productive businesses. I note the relatively high rate of Irish CGT, and with us moving into a higher inflationary environment, the settings for CGT should be continually reviewed.
Thank you for your time.
As organizations of all sizes are ever more exposed to new trends in regulation, David Linke leads the Global Tax & Legal network of professionals in its efforts to work with multinational businesses to respond to those demands and create value. As a leading network, KPMG Tax & Legal professionals are focused on bringing our professional experience and acumen, our global capabilities and connectivity and technology-powered solutions to the most complex tax and legal challenges and transformation projects that tax leaders face.