On Wednesday, the OECD published its proposal to re-balance the taxation of increasingly digital multinationals between the countries where they do business. This set of rules focused on e-business is the first pillar of two, with a further proposal to ensure a minimum corporate tax on multinationals’ profits due next month. And all have massive implications for Ireland.

The man overseeing the drafting of these documents is Pascal Saint-Amans, an unlikely revolutionary. Suave and softly spoken, he sports designer stubble, wears fitted suits, and his greying hair is foppishly fashionable. A graduate of the fabled National School of Administration in Paris, he spent more than a decade as a bureaucrat in the French Treasury, specialising in negotiating and implementing tax treaties.

Saint-Amans might have the tone and manner of a banker, corporate suit or even diplomat, but the Frenchman is leading his own particular revolution – one that could have profound and significant consequences for Ireland. 

As the tax director at the Organisation for Economic Co-operation and Development (OECD), Saint-Amans is leading the global effort to radically reshape the manner in which, and crucially where, the world’s largest companies are taxed.

It is a process that is highly political, and involves cajoling more than 130 countries to agree, and then implement, new rules around international taxing rights and the digital economy.

“Can we do it? Yes. Can we fail? Yes. Absolutely.”

Pascal Saint-Amans

This week’s OECD proposal merged three competing options submitted by member countries. It would see the creation of a new “nexus” for companies exceeding a revenue threshold in a given jurisdiction, regardless of their physical presence there. The country where consumers buy products and services through digital channels would have a “new taxing right” on profits from this business, and new rules must be agreed to calculate this and avoid double taxation while avoiding a red-tape nightmare.

Saint-Amans wants to achieve political consensus by 2020. But with unilateralism starting to outflank multilateralism and globalism in the current fractured geo-political environment, can the French official pull off such a ground-breaking deal?

 Saint-Amans is confident, yet realistic. “Can we do it? Yes. Can we fail? Yes. Absolutely,” he tells me. “I am not saying we will deliver. I am saying we could deliver.”

Failing that, the OECD proposal warns of unilateral moves that “would undermine the relevance and sustainability of the international tax framework, and would damage global investment and growth”. This would appear a dig at Saint-Amans’s home country after France imposed a 3 per cent tax on gross sales made in the country by digital multinationals in July.

Can he do it by next year? “It is 2020 or never,” he says.

*****

We met in the Westin Hotel in Dublin, a-five star hotel equidistant from both Trinity College and the River Liffey. The interview had been scheduled for weeks, but events had given it a fresh impetus.

In the weeks building up to our interview, the IMF had published a paper arguing that 40 per cent of the world’s foreign direct investment (FDI) was effectively a “phantom”, passing  through empty corporate shells with “no real business activities” to minimise tax.

Gabriel Zucman, the noted economics professor at UC Berkley, had just reiterated his claim that Ireland was the tax haven of choice for US multinationals on the back of new data showing that US firms booked $83 billion in profits in Ireland in 2017. This figure was more than Germany, France, Italy, China, Mexico & India combined.

Meanwhile, the EU General Court was in the midst of hearing the case over Apple’s alleged €13 billion Irish sweetheart tax deals. This Apple debacle, however, was the one area Saint-Amans flagged in advance he would be unable to speak on.

Despite curbing the notorious Double Irish tax structure and introducing a number of reforms, the avalanche of bad press proves how hard it is to shift a bad reputation.

“That is the price to pay for the success you had,” Saint-Amans argues. “Now, I think there is a change of paradigm. I think it was time to change this and it is my understanding that you are doing it. And you have to because the US is changing.”

“You cannot get tax certainty without your partners believing that the system is fair.”

Pascal Saint-Amans

Much of the changes that Saint-Amans is referring to stem from a shift of mood within the Department of Finance. In a significant speech to the Irish Taxation Institute last year, Paschal Donohoe set the tone, arguing that the price of legitimacy was certainty, and he could only offer such certainty to a system he could stand over. 

Effectively, Donohoe put the industry on notice that the days of aggressive tax structures was at an end. The finance minister followed it in May in a speech delivered to the Harvard Kennedy School, where he acknowledged that change was coming, and that it was in Ireland’s interest to build a global consensus on that change.

“Paschal Donohoe is absolutely right, but you cannot get tax certainty without your partners believing that the system is fair,” Saint-Amans says.

Ireland’s hand for the current round of the OECD tax negotiations is starting to become clear. The first phase of Base Erosion and Profit Shifting (Beps) focused on curbing abuse tactics. The process sought to end sandy beach havens, countries with little economic activity and even less tax. Ireland was a winner from this process, with many companies opting to relocate assets here.

The current round will be more fraught, and potentially more disruptive for Ireland. The two key elements of the plan – a minimum corporate tax rate and an agreement on the digital economy – could potentially impact on Ireland’s attractiveness for FDI.

Indeed, days before we met, Donohoe had delivered a speech where he said that he remained “to be convinced that the issue of addressing the tax challenges of digitalisation requires action in this area,” adding the existing transfer pricing rules must remain at the heart of the global tax framework.

Pointedly, he said that the “the final outcome must not unfairly benefit larger countries at the expense of smaller ones,” a reference to the fear among smaller nations that the current round of negotiations is simply a grab by large economies for tax revenues.

I ask Saint-Amans for his interpretation of Donohoe’s comments. “It is not untrue that large economies, particularly market economies, have the feeling that they don’t get enough. And clearly when they see investment hubs where something is happening, but not the most, and they still have the big return in tax. Then, there are frustrations,” he says.

“And countries are sovereign. Ireland is a sovereign country. It can decide on its rate, and it does. It can decide on its base, and it does, but large market economies are also sovereign. And if they are so frustrated with the system, they can take unilateral measures. That is what we want to avoid.”

We begin our interview on the current round of negotiations, and the potential impact on Ireland.

Ireland and the new world order

IK: Ireland has concerns about what is coming down the line, particularly in relation to the minimum corporation tax. If everyone is at 12.5 per cent, this puts Ireland in a particular difficulty because it erodes a pillar of the economy – tax competitiveness. Does the OECD understand this?

PSA: That is a very good question. Do I understand this? Yes and no. I understand the nervousness about countries now being bound by common rules as regards minimum levels of taxes and that is so contrary to what has occurred over the last 30 years. That I understand. What partners of Ireland will struggle to understand is that you have actually set the tone. If there is a minimum tax, it will be around the Irish rate. So, why would you be against something that you have set up yourself? People will wonder what is behind the mindset, what is in the back of the mind. I understand that. I also understand that an agreement at the OECD at some point could lead to EU to act and Ireland would say they don’t want to be bound to the EU outcome.

IK: The other area is around the idea of taxing digital companies. Are you confident you will be able to reach some sort of agreement in relation to a digital tax?

PSA: We are not talking about a digital tax. It is radically different because digital tax is a tax on digital services. It is a tax on something. That is not what we are talking about. What we are talking about is renovating international rules so that you could face the challenges of digitalisation of the economy. What we have been struggling with for the past couple of years has been the scope of the measure. European countries say it should be limited to digital like a digital tax. The OECD and the Americans and the Chinese say sorry, but no. We have challenges coming from digitalisation, like profit allocation but that is not limited to digital. So, it is not a digital tax.

IK: But that is what people talk about. That is the fear – a digital tax.

PSA: I know. And the political economy of the reform is very important. Because people have in mind that it is a digital tax, it is only digital. And then you explain it is broader than digital – you have different companies from different sectors waking up and saying they thought it was just digital. It was in early 2018 when people said it should be broader than digital. The report we delivered in March 18 clearly says that. But some countries like the UK and some others thought it was across the spectrum of industries.

IK: There is a weight of opinion that Ireland’s current stance is about self-interest and that it may just be lip service, an effort to make sure we are part of the process so that it suits us. Do you think that is fair?

PSA: It is a good question. I think it is more than lip service to the extent that if it were just lip service and Ireland does not support anything, then things may happen without you. So there may have been a time when there were doubts about whether anything would happen at the OECD. In that case, what you described could have happened. But it is pretty clear now that something may happen at the OECD.

As a result, it would not be smart just to pay lip service because things will be happening with or without you. Ireland would not be in a position to block everything. The political cost would be very high, especially because the US is now engaged. The engagement of the US in the project, which is the big news for the past two years, has probably driven the Irish government to think that engagement is a must anyway.

IK: I spoke with Brad Setser, the US economist who has studied this area. He argues that Ireland has actually emerged as one of the winners from the original Beps process. Were you surprised when that happened?

PSA: No.

IK: Why?

PSA: Because that was the logic. The first thing I did when I launched Beps was to visit Michael Noonan. I told him that Ireland would be a winner out of the Beps project. You may benefit from onshoring, you may have more economic activities in Ireland, that is real activity. Today, companies have the choice of zero per cent in Bermuda, 12.5 per cent in Ireland with some activities there, or 35 per cent in the US. So, what do they chose? Zero per cent? They don’t get much but a bad reputation. If you change that, you may kill the location in zero tax, but Ireland will benefit from it. So that was no surprise.

IK: Where do you think Ireland will emerge from the process, given how well we did in the first phase?

PSA: It is a good question. First, the time for aggressive tax competition without limitations, without many tools offered, has come to an end. We are at the end of the cycle. It is over. So you need to appreciate my response with that in mind. I also think it would be fair to appreciate the response with the idea that the counterfactual of more reform is unilateral measures everywhere. What would Ireland gain from an agreement is avoiding the nightmare of unilateral measures everywhere and countries taking trade sanctions against jurisdictions they believe are facilitating profit shifting.

The stability is good for Ireland because you will keep a competitive advantage. You have a cluster of companies, the critical mass, you have economic activity, if you have a reasonable approach and don’t try and block changes that are overdue, you will be okay. But it does not mean that that your corporate income tax will increase so much every year. And that is good because that is not sustainable.

Tax havens, corporation tax and phantom profits

IK: Does Ireland classify as a tax haven? It is a big debate.

PSA: It’s not a debate.

IK: Well, Gabriel Zucman says we are.

PSA: I am a diplomat. I need to be careful of what I say so I won’t get in the naming, shaming labelling. Ireland is an investment hub and you had a tax offer to attract investment, the question is how do you do it in a way that does not get you labelled as a tax haven because then your reputation is at risk.

IK: And how do we do that?

PSA: By being constructive, by not overplaying the small countries against big countries, by not saying that the rules of the game cannot change. You are doing pretty well but not obstructing any change. On the contrary, you are participating.

IK: We have seen a massive surge in corporation tax in Ireland. Do you think it is sustainable?

PSA: No. it is not.

IK: Why?

PSA: First, it is a logical consequence of the Beps process, which was about eliminating the schemes using zero per cent tax. So onshoring in Ireland is the logical next step. However, if you want this to be sustainable, you need other countries to be comfortable that the existing rules are sustainable and don’t raise tensions. And there are tensions. There is a big strain in the system, which makes me think it is not sustainable. Hence the interest in Ireland to engage in the process to determine how we can best determine the allocation of taxing rights so that we are not too much of a winner.

IK: You don’t want to be the guying winning all the money at the casino table?

PSA: No, especially because you are not a large market.

IK: Are we attracting too much IP from multinationals?

PSA: You can attract however much IP you want as long as it is linked to real economic activity and as long as it is not tax-driven.

IK: But the fear is that a lot of it is tax driven?

PSA: Yes, but you have many other competitive advantages. And you have to keep a tax advantage. But keeping a tax advantage does not mean that the winner takes it all.

IK: Are you happy with the pace of reforms coming from Ireland and also the Netherlands?

PSA: It is slow but we are talking about fundamental shifts. So, I think internationally we have been faster, which is a big surprise. Because the international mammoth of the OECD used to move very slowly, almost in slow motion. We have been very fast. Countries have been slightly slower. But the change took place ten years ago. 

IK: That is at an international level. But there are issues at the national level. Ireland put an end to the Double Irish but still held onto it for a while.

PSA: You have another year to go. I think it was not necessarily a smart idea. But after the US tax reform I am not sure what is left to it. Sometimes, you need to be a bit faster. It is the trade-off between impact on real business you have today and the impact on business you could have the day after tomorrow based on the reputational risks. The slower you are, the more difficult it is to fight back your reputational risks.

IK: You mentioned the US tax moves. That has led to a huge repatriation of profits back to the US. Is that the sort of unilateral action you are trying to stymie?

PSA: No. this was absolutely necessary. It is not a unilateral measure. They had a broken system. They fixed the system. You have the question of past profits and they fixed it. I don’t see it as an aggressive unilateral move that would harm other countries. Not at all. It is them repairing their own system.

IK: I am sure you saw the IMF report on phantom FDI.  Apparently, 40 per cent of FDI is non-existent but for tax. What did you make of that report?

PSA: Some scepticism on the method that has been followed. There are a number of assumptions which I think can be seriously disputed – the fact that everything could be tax driven, for example. There are a number of simplifications so we have a lot of caution when looking at this. No more comment on that one. Not convinced fully.

Building consensus in a fractured world

IK: What is coming next on the international tax landscape? What does your agenda over the next year look like?

PSA: We did transparency. We did Beps. Beps was about anti-abuse measures. Now we are talking about the allocation of international taxing rights. If you do it well, we will have achieved quite a great deal. Tax certainty will have to be part of the solution because it is such a big thing. I strongly believe in the swing of the pendulum so you need to fight tax avoidance and you also need to protect confidentiality and taxpayer rights. That is why we are pushing for tax certainty and protection of taxpayer’s rights.

IK: We are talking about the most fundamental re-shifting of international tax in centuries. How can you manage to bring everything together – in terms of the policies and also the politics of making it happen?

PSA: You need to segment the work. The first step is about reaching a political agreement on the architecture of the new environment and that is what we are trying to secure first. Once you have that, you can then do a top-down approach and tell the technicians that they must implement. If the guidelines and the roadmap are clear enough then you can move relatively quickly on the implementation. The real challenge is can we reach a political deal. That is where you need to have different elements so that countries would reach the deal, and would all be reasonably happy enough to conclude the deal. That is the game.

IK: We also live in an era where some of the large corporates are bigger than nation states. They have phenomenal power and lobbying resources. How do manage this?

PSA: You need to engage with companies because they are the clients of this work. We are not in the co-decision mode because this is public policy, but you can’t ignore the main practitioners, the ones who will use your product if you want to design it properly.

IK: What are the main blockages to the deal?

PSA: What we are talking about is big, meaning that it has fiscal consequences for a number of countries, which may not be fully mastered because the data may not be here to fully appreciate the impact assessment of the measure. So, fear is one of them. Secondly, the ability of countries to trust each other – when you redistribute taxing rights, you can only move if you trust that all the players will play by the rules.

You can have doubts that the US might not be favourable to multilateralism – I think they are in the area of tax. But that requires confidence to be built. You have countries which are doubtful that the OECD can come up with solutions that are favourable to them – the BIC countries, India, the emerging economies. You need to make them comfortable. You need to navigate in very choppy waters. You have political frustrations because it is technically challenging. You have to deal with several layers of the state – from government to administrators to technical levels. That is what makes it so challenging.

IK: You spoke of impact assessment. The key part of that will be getting company-specific data. Surely that will be an issue?

PSA: We are working on the impact assessment. We have databases that we are working on so you don’t necessarily need to have access to all company data. But we are also working with a number of companies, both American and European, and they have been very helpful. So I think we are getting a good sense of what the impact will be.

IK: And if you get agreement next year, it will be implemented by 2022, 2023?

PSA: Something like that. What matters is to send a strong message that there is a real secure political deal on detailed architecture in 2020. Then you will re-establish the trust and will be relaxed that they don’t have to take unilateral action.

IK: You speak of trust. But there is a body of opinion that the programme is merely a way for larger economies to get a greater portion of the tax pie? After this, they will go back again in a few years and ask for more?

PSA: It is not untrue that large economies, particularly market economies, have the feeling that they don’t get enough. And clearly when they see investment hubs where something is happening, but not the most, and they still have the big return in tax. Then, there are frustrations. And countries are sovereign. Ireland is a sovereign country. It can decide on its rate, and it does. It can decide on its base, and it does but large market economies are also sovereign.

And if they are so frustrated with the system, they can take unilateral measures. That is what we want to avoid. We need to create a balance. you have also to recognise that things have changed. We are no longer pre-crisis where nobody was really paying attention, where people were not concerned. The people around the world are now concerned that multinational companies around the world pay their fair share. 

It is hard to define what fair share is, because it is a matter of policy. But the feeling of the people as well as the analysis of the technicians is that the current rules may not result in the right sustainable allocation of taxation rights because it deprives larger economies of revenue that they should get. And that is why they may be tempted by unilateral measures which are not good because they will be on turnover, on gross income, and that is really bad.

IK: Do you think you will get buy in from the 134? What happens if someone decided to stay out of the final agreement?

PSA: It’s a good question. We are pragmatic. If you have the US, the G20, the constituency of investment hubs, the constituency of developing countries saying “yes, we like it”, and against that you have three or four countries who won’t do it over their dead bodies, but they are not key – well, so be it. They don’t participate, but they won’t block the process. But if you had the US or China or a group of companies saying no way, then it would not be credible to say we have a solution. But can we achieve this kind of consensus? Yes, we can.