The answer was an astounding no as almost all of the dozen or so tax directors in the room shook their heads in unison. Given the current environment, setting up a tax structure centred around prominent tax havens was considered a non-starter. Way too BEPSy!
And that got me thinking about sovereign reputation. We normally think about sovereign reputation in terms of debt and credit ratings, but does sovereign reputation impact multinational firms' investment location decisions?
|Luxembourg. Photo by Wolfgang Staudt / CC|
It is no secret that a tax auditor is likely to take a harder look at your file if your company has a lot of intercompany dealings with tiny Caribbean islands. This isn't to say that having presence on tiny Caribbean islands is by itself problematic-- it is just expected to draw scrutiny. Some countries have taken the extreme step of publishing blacklists of tax haven countries, dealings with which draw extra scrutiny or even taxation of income earned in those tax haven countries. And now with the European Commission publishing its opening decisions in state aid investigations of Ireland and Luxembourg, one can't help but wonder whether these jurisdictions are now, somehow, tainted because of these decisions.
The focus of these state aid investigations has been rulings and agreements between the state and the taxpayers that provided selective advantages or individual concessions to a taxpayer. (You can find more on State aid here; it isn't the point of this post.) These state aid investigations also come at the same time as the OECD proposals on greater transparency and recommendations for disclosure requirements on such rulings and agreements as a part of the transfer pricing documentation master file. I expect that a tax auditor looking at your transfer pricing documentation in a couple of years would know whether you had special rulings and agreements in certain "tainted" jurisdictions, resulting in prolonged, more painful audits. And my hypothesis is that all else being equal, a tax director is likely to avoid these jurisdictions due to this risk of prolonged, more painful audits.
It is therefore no surprise that Ireland has so quickly taken steps to remove the provisions that allowed for Double Irish structures. It isn't just the EU investigations and possible sanctions that motivated Ireland in my view; it is the fear that if Ireland as a jurisdiction becomes tainted, that on its own will drive away foreign investment. That doesn't mean that Ireland will cease to provide incentives for multinationals to locate there, because its economy is dependent on that kind of foreign investment. So Ireland has now focused its attention on patent box regimes, which are likely considered a less risky proposition because larger and more reputable islands like the UK have also introduced such regimes.
Others will follow Ireland's example. The economies of Ireland and Luxembourg are so dependent on activities of the multinational firms that they can't afford to lose them completely. Hence they will find new and creative (and sometimes not so creative) ways to retain their advantage, and their reputation.
In the mean time, if you have operations in jurisdictions with tainted reputations, you should have a plan B in mind.