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Irish Accountants Discuss How To Calculate Effective Tax Rates

by Lorys Charalambous,, Cyprus

06 October 2014

The Consultative Committee of Accountancy Bodies – Ireland has responded to the Organization for Economic Cooperation and Development's ongoing work on the best way to calculate countries' effective corporate tax rates.

Its recommendations are set out in a response to a discussion draft issued by the OECD on BEPS Action 11, on the subject of establishing methodologies to analyze data on BEPS and the efficacy of actions to address BEPS.

The CCAB–I pointed out that calculating effective tax rates has become a key issue – particularly for Ireland – as countries have looked into arrangements on offer worldwide that allow businesses, and in particular multinationals, to legitimately reduce the rate of corporate income tax they pay.

While acknowledging the importance of work in this area, the Committee said that the OECD and BEPS stakeholders should consider whether data that is already available can be used to calculate effective rates before proposing additional information reporting requirements on businesses.

The CCAB–I said: "At least some of the impetus for the BEPS project as a whole has been generated by disquiet at the apportionment of tax revenues between countries in which multinational organizations operate. It seems to us that some of that disquiet has stemmed from a lack of agreement as to the best method of computing the apportionment of taxes between territories. At the root of this lack of agreement are disputes over effective tax rates."

The CCAB–I continued: "On the face of it, the computation of the effective tax rate for a company should be a matter of dividing the company profit by the amount of tax paid for the same period. There is legitimate discussion as to which amounts should constitute the numerator and the denominator in this formula. The analysis may also be carried out either at the macroeconomic level, or at the level of the individual companies concerned."

The Committee noted the publication of a recent paper by the Department of Finance in Ireland, which examined different approaches to compute effective tax rates using model companies, official national statistics, and financial reports. The paper concluded that an approach based on national aggregate statistics is the most suitable. Within that approach, it advanced the thesis that measurements based on Net Operating Surplus and Taxable Income best represent the effective Corporation Tax rate in Ireland.

Commenting on the relevance of this research, the CCAB–I admitted that "it does not of course follow that these findings necessarily constitute the best approach to effective tax rate measurement in every country," but it said this approach "does ringfence apparent distortions in the effective rate computation which arise because of foreign activity by individual companies. It seems to us that such a ringfencing would be essential in tracking the effect of BEPS project initiatives on individual countries."

Companies operating in Ireland are chargeable to corporation tax at 12.5 percent of profits. Although the matter of corporate tax rates is specifically off the BEPS agenda, Ireland's Finance Minister Michael Noonan recently said that there is "no doubt" that the Government is under increasing "international focus" with regards to its tax policies. He stressed that the Government would continue to defend its right to choose and maintain its corporate tax rate.

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