Tax is a sensitive subject - nobody enjoys paying it, but it's necessary to provide us with essential infrastructure and services.
We all pay tax one way or another, whether it’s taken directly from wages, paid in an annual tax return to Revenue or indirectly added on to the price of goods and services in the form of Value Added Tax (VAT), stamp duties and the like.
Ireland, along with all EU Member States, is free to choose its own tax systems but because we’re part of the Single Market it’s important to have common tax policy in some areas.
The European Commission’s Taxation and Customs Union (TAXUD) Directorate-General is the department tasked with developing and managing policies in taxation and customs.
The Customs Union is a foundation of the European Union and an essential element of the Single Market, but it can only function properly when there are common rules at external borders.
The European Commission believes there is no need for broad harmonisation of Member States' tax systems. Provided EU rules are respected, Member States can choose whatever tax systems they consider most appropriate.
Value Added Tax
Ireland adopted VAT in 1971 in preparation for joining the European Economic Community (EEC) in 1973 and all 27 national governments in the EU broadly align their rules for VAT within an agreed legal framework that sets out minimum and maximum rates.
In principle, everything we buy includes VAT in the price. When selling domestically (not across borders) companies pay VAT on the goods they buy and plan to sell on to another business or to consumers.
Each EU Member State decides exactly what VAT rate to charge within the agreed legal framework, meaning goods and services can have different VAT rates applied to them within the EU.
Ireland’s standard VAT rate is currently 23% but we also have reduced rates of 13.5% and 9% as well as a 4.8% rate on livestock.
VAT is a useful way of funding political objectives such as schools, roads and healthcare but the current rules agreed by Member States in 1992, and which were designed to be temporary, are overcomplicated, out of date and too restrictive.
Smaller companies suffer from disproportionate VAT compliance costs, and as SMEs make up 98% of businesses in the EU it’s a real obstacle to growth.
Wealthy individuals and companies have also been involved in circumventing the EU's VAT rules to avoid paying their fair share of tax.
Another problem is that VAT avoidance schemes can be used to finance criminal organisations, including terrorists.
That’s why the European Commission is proposing to overhaul VAT rules by developing an Action Plan on VAT that includes creating a single EU VAT area. This will dramatically reduce the estimated €150 billion lost to VAT fraud every year in the EU, while supporting business and securing government revenues.
New VAT rules
The key principles of new VAT rules proposed by the European Commission include measures to tackle fraud, such as charging VAT on cross-border trade between businesses so that unscrupulous companies can’t collect VAT and then vanish without remitting the money to the government.
A new system for businesses called the Mini One Stop Shop Method, or VAT MOSS has also been established to help businesses with changes to the EU VAT system.
In simple terms, a business can register for MOSS in one Member State and electronically submit quarterly returns there for VAT on goods or services sold to private customers in other Member States.
There will also be greater consistency under the new rules as the final amount of VAT will always be paid to the Member State of the final consumer and charged at the rate of that Member State.
Another principle of the new rules will see a change in VAT invoicing. Sellers will prepare invoices according to the rules of their own country, even when trading across borders, meaning less red-tape as companies will no longer have to prepare a list of cross-border transactions for their tax authority.
The new proposals only apply to transactions between businesses (B2B), so consumers won’t be directly affected. However, Member States will be able to collect billions in VAT revenues which would otherwise be lost and that can be spent on improving life for citizens.
A competitive corporate tax regime is one of the reasons why Ireland has been so successful in attracting foreign direct investment (FDI) to the country.
Corporate taxes collected in Ireland currently amount to about 15% of all tax revenues the State raises, making it a significant contributor to the national exchequer.
Ireland’s corporate tax rate is amongst the lowest in Europe, and it can only be changed by the Irish Government.
However, changes do need to be made to the way companies are taxed in the Single Market and the European Commission has proposed a single set of rules to calculate companies' taxable profits in the EU.
The Common Consolidated Corporate Tax Base (CCCTB) can make Ireland even more attractive to foreign investors as it will provide a modern, simple, stable corporate tax system that applies across the entire EU.
The European Commission is encouraging Ireland and all Member States to help make the CCCTB a success for all by helping negotiate an agreement on the proposals.
Corporate tax payments need to be more open and transparent as avoidance in Europe is estimated to cost Member States €50-70 billion a year in lost revenues.
Some multinationals engage in aggressive tax planning that puts smaller competitors, particularly SMEs, at a competitive disadvantage.
It’s also difficult for cross-border businesses of all sizes to follow 27 different rulebooks to determine their taxable profits in each country.
The CCCTB is designed to cut costs, reduce red tape and create a level-playing field for multinationals by closing off avenues used for tax avoidance.
The CCCTB will allow companies to offset profits in one Member State against losses in another. This is particularly important for small and start-up companies.
Mandatory for all groups with global consolidated revenues of more than €750 million, the revamped CCCTB is a harmonised system to calculate companies' taxable profits in the EU.
The CCCTB can lift investment in the EU by up to 3.4% and growth by up to 1.2% by offering companies predictable rules, a level-playing field, reduced compliance costs and encouragement to invest in research and innovation.
Everybody needs to pay their fair share of tax, and when some pay less than others it not only creates resentment, it also makes it difficult for smaller companies to compete.
A successful Single Market needs a level playing field and that’s why the European Commission is clamping down on companies that are given an unfair tax advantage.
The Commission has opened and concluded investigations into a number of tax rulings made by Member States that may have given large multinationals an unfair advantage over other companies.
Tax rulings are perfectly legal and every Member State is entitled to determine their own corporate tax systems, but they can’t be used to unfairly provide special treatment for certain companies.
EU rules on state aid and special tax treatment are designed to ensure fair play for everybody but in recent times multinational companies have been pushing the boundaries of aggressive tax planning.
In 2013 the European Commission began an investigation into an Irish tax ruling involving hi-tech firm Apple. It concluded that the ruling granted undue tax benefits of up to €13 billion to Apple.
The Commission has demanded that the money is recovered and while the Irish Government has agreed in principle to do so, Apple and Ireland have appealed the decision to the European Court of Justice.