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This article was first published in the May 2020 Ireland edition of
Accounting and Business magazine.

With Britain finally bowing out of the EU on 31 January, Ireland has lost a major English-speaking Atlantic-oriented member state ally in its battles within the EU Council of Ministers against proposals for greater harmonisation of EU tax rules.

While two other member states, Malta and Cyprus, are anglophone to a significant degree (and also keen to protect their tax prerogatives), and the Netherlands has been a traditional ally along with the UK in opposing tax harmonisation, Ireland will need all its diplomatic smarts if it is to successfully protect its position in the EU in the wake of Brexit.

And significant tax proposals remain outstanding. They include establishing a common consolidated corporate tax base (CCCTB) so that multinationals need file only one EU tax return, and rules to harmonise digital taxation across the member states. While each EU member state has the right of veto over tax proposals, there is clearly scope for Ireland to be pressured by the larger EU countries that support these moves.

Eoin Drea, senior research officer at the Brussels-based Wilfried Martens Centre for European Studies and a research fellow at Trinity College Dublin, says: ‘Ireland should look for new allies on the council, such as the Netherlands and Luxembourg, whose governments also support fair corporate tax systems being distinct and not harmonised across 27 nation states.’

Kevin Doyle, BDO Ireland partner and international tax coordinator, predicts that Ireland will remain a robust champion of retaining the EU national veto over tax legislation, a procedural rule which is itself protected by a veto. And while Brexit has ‘removed a member state with whom Ireland often had a similar approach in terms of key tax policy, there is now an opportunity for Ireland to strengthen other alliances with various EU member states’, he says.

However, a blanket ‘no’ to every proposed European initiative will not work, according to Drea. He argues that Ireland should ‘take a central part in the ongoing discussions, rather than simply standing to the side and reiterating its objection’.

Ironically, the current EU proposal on common digital business rules may relieve pressure for agreement on the CCCTB given it allows Ireland to stress a favoured argument that a global solution for digital and crossborder taxation is required, ideally based on Organisation for Economic Co-operation and Development (OECD) guidance, Doyle says.

Indeed, the ‘CCCTB has been around since the last century and has not yet garnered sufficient support across Europe in order to be brought in’, Drea points out.

Sweden and Denmark both back Ireland’s opposition to the European Commission proposal that a 3% tax rate be applied in the EU to online advertising, digital intermediary activities (including social platforms and e-commerce) and data sales. Ireland wants this law to be limited to profits only, and exclude revenue.

So far, Ireland and its allies have successfully lobbied the Council of Ministers, Doyle says, adding: ‘An EU-only [digital] tax, or even more unilateral taxes on a country-by-country basis, could impact Irish tax revenues [and] reduce future foreign direct investment.’

Drea thinks Ireland should look to continue to punch above its weight in the EU and ‘look to central and eastern Europe to help build up a network of economically open states which favour close relations with the US’. He even urges Ireland to ‘act as the leader of this informal grouping to push the agenda of a leaner, more competitive, less centralised EU’.

If it succeeds, Ireland will retain a relatively free hand to set its own tax policy, even without the UK’s help. So how should it use such authority?

Simon MacAllister, partner and Brexit lead in Ireland at EY in Dublin, argues for the retention of the light touch. ‘We need to be focused on ensuring the country is attractive and competitive on all fronts,’ he says, although perhaps also offering tax incentives for companies registered in Ireland to manufacture and perform more services locally.

A useful reform, he suggests, would be to reform Ireland’s entrepreneurs tax relief to encourage capital release and reinvestment. He also advocates narrowing gaps between employed and self-employed tax rates and offering tax benefits for infrastructure investments in education, housing and transport.

However, the sudden and swift impact of the Covid-19 pandemic across the economy risks tipping Ireland back into the sort of recession that followed on from the 2008 financial crisis. MacAllister points out that the government has limited scope to raise corporation tax, VAT and income taxes. The unpopular universal social charge is also being narrowed, property taxes have been frozen, and politically toxic water charges are off the agenda. Given the country has less headroom for taking on sovereign debt than a decade ago – it is only just wiping out the budget deficit – all these restrictions ‘reduce the scope for meaningful interventions’, if trouble hits.

Barbara Bierach and Keith Nuthall, journalists