All posts by Vulcan Consulting

The Starting Gun is Fired on Brexit – it’s going to be HARD

Theresa May made no attempt yesterday in her speech to the Conservative party conference to dress up the fact that the United Kingdom is hurtling towards a ‘Hard Brexit’.  This means that the UK is likely to leave the European Single Market, giving up the free access to some 500 million consumers which it currently enjoys, and most likely heading towards a system of trade based on WTO rules, meaning the reintroduction of tariffs and other restrictions on imports and exports to and from the UK.  Her key Brexit Ministers, Liam Fox, David Davis and Boris Johnson have all indicated that the UK will not simply leave the Single Market, but also the customs union.

So what does all this mean?  There are a few issues which require some consideration, not least how we arrived at this extraordinary juncture.

In the aftermath of the UK’s vote on Brexit, I wrote about the stark reality that British voters had voted to leave on foot of three fairly clear premises – a desire for the UK  to ‘take back control of its borders’, a promise from Brexiteers that they would no longer be subject to EU regulations and bureaucracy and a commitment that the UK would no longer pay into the EU Budget.  Then, as now, it was glaringly obvious that in order to achieve these goals and honour the express will of the British people, the UK would have to leave the single market and engage in ‘Hard Brexit’.

Still, those of us concerned about the future of Britain, of Europe and of Anglo-Irish relations, hoped that some negotiation or accommodation on both sides would lead to a better outcome for all, which would involve the UK staying within the tent.  As of yesterday, this looks increasingly unlikely.

While Theresa May’s own instinct may be for a ‘Soft Brexit’- after all she was a committed Remainer until June 23rd – her overriding priority seems to be to maintain unity within her party, and of course to copper fasten her own leadership.   There is a clear Eurosceptic majority in the Conservative party and there is no doubt that she is pandering to it.

A distinct factor in all of this is, of course, the appalling black hole that is the official Opposition in the United Kingdom.  To all intents and purposes there is none.  The lack of a coherent, authoritative and moderate Labour Party, holding the Tories to account and counterbalancing the political discourse in the House of Commons and in British public opinion, actually weakens the Prime Minister and her more middle ground Ministers such as Philip Hammond, the Chancellor of the Exchequer. The absence of a serious voice articulating the enormous risks of a Hard Brexit allows the Tory hardliners dictate the pace.

May’s commitment to trigger Article 50 by March 2017 is an enormous gamble, designed to silence the Tory critics who want to race ahead in case the British public change their minds.  Unfortunately it is a gamble which, while giving the PM the upper hand within her own party, risks putting the UK at an enormous disadvantage in the tumultuous negotiations which lie ahead.  It certainly hands the first advantage to the large, experienced and focused EU negotiating side.

From a practical, logistical point of view the UK will not be ready to negotiate by March.  A third of the positions in the two new government Ministries, Trade and Brexit, have not yet been filled.  The Ministry of Trade only last week advertised for a brand new Permanent Secretary, and its staff were still meeting in Starbucks up to three weeks ago.

These practical problems might be surmountable if there were a clear vision, or clear direction for the UK in these negotiations.  There is is not.  Sound bites like “Brexit Means Brexit” do not make a strategy.  Theresa May may have put to bed the unrest in her ranks about the timeline and about her commitment to British ‘sovereignty’, but she certainly did not set out anything like a negotiating strategy or even a vision for what the UK will look like at the end of the Article 50 process.  During her speech she even made a rallying call about the UK now being empowered to set its own labelling standards, ignoring the reality that even outside of the EU, the UK will be bound by WTO labelling rules under the SPS Agreement.  This really is all about creating illusions rather than demonstrating facts.

Theresa May’s  key Ministers, Davis, Johnson and Fox have all, to varying degrees, set out a vision of a UK which exists in a sort of splendid isolation. They talk wistfully of a UK which is a global player, invoking nostalgic images of the Great Empire, looking to the Commonwealth and former colonies as their future trading partners.  All of this is nice and jingoistic, but it does not clarify how for example, they intend to deal with the stark reality of economic loss to the UK economy when its biggest industry sector, financial services, loses its passporting rights to every other EU member state.   Nor does it provide any plan as to how they will transform the share of UK exports to Australia from 1.6% to something much greater, as will be essential when they turn their backs on the European single market (which accounts for 44%).

One noticeable twist in Theresa May’s approach, evident in her Tory conference speech, was the dramatically hardened stance on the Devolved Assemblies of Scotland, Northern Ireland and Wales.  Just two months ago, after a cordial meeting with Scotland’s First Minister Nicola Sturgeon, Theresa May, spoke of her commitment to ensuring a unified and consensus based approach to Brexit.  On Sunday, instead she referred to opponents in the regions as “divisive nationalists” and explicitly committed to a single centralised negotiation approach, with no reference to involving the devolved governments in the process.

Mrs May and her Government risk utterly underestimating the chaos which is likely to ensue from this attitude.  Scotland, in particular, is likely to revolt against a London ‘like it or lump it’ approach.  The Prime Minister’s speech may well have stirred the independence referendum pot once again.  It is unlikely that Nicola Strugeon or the SNP will stand idly by as their future outside the EU and the Single Market is defined by Tory hardliners.  Expect a vote on Brexit in the Scottish assembly, and expect a rapid cranking up of rhetoric around a referendum. Once that genie is out of the bottle, expect the exact same demands from Northern Irish nationalists.

There is a long way to go in this Brexit saga.  In effect we are still reading the forward, not even having progressed to the introductory chapter.  There will be many twists and turns ahead.  So far all that is clear, is that the hard liners have the ear of the PM and are undoubtedly  setting the pace and the parameters.  This is bad news for all of us.

Leading Fipra’s new global Brexit team

I am looking forward to my new role with Fipra in addition to the exciting work we are doing at Vulcan Consulting.

At Fipra I will be leading the Brexit team’s engagement with client companies on all issues relating to the UK’s exit from the European Union, working internationally with all Fipra Units (in 50 countries on 5 continents) in offering specialised briefings, seminars, and strategic workshops to companies, as well as to industry associations and other client multipliers, including law firms and management consultancies.

Fipra logo

 

 

 

 

www.fipra.com

Politico Morning exchange announcement 

€13 Billion Apple Tax Windfall – What’s Not to Love?

€13 Billion Tax Bill for Apple

The decision of the European Commissioner, Margrethe Vestager, to impose a €13 billion retrospective tax bill on Apple in Ireland seems, on the face of it, to be a great outcome. €13 billion euro can be pumped into roads, hospitals, broadband and multiple other projects which, after 10 years of purse tightening, badly need significant investment. This is a win-win situation and the Irish Government should embrace it, right? Well not quite, as it happens.

This is a far-reaching, arguably over-reaching, decision of the European Commission which undoubtedly threatens the industrial policy that has seen the Irish economy transformed since the 1980s. There are several reasons to be concerned about this Apple tax bill.

Impact on Foreign Direct Investment

The Government, the IDA (Industrial Development Authority) and every multinational foreign company in Ireland denies that our low corporate tax rate of 12.5% and our friendly tax mechanisms (the “Double Irish” etc) that allow corporates significantly reduce their tax bills are the key reason that those companies choose to locate their European headquarters in Ireland. They cite our excellent education system, highly skilled workforce and English language as our spoken language, as significant factors. They may be factors, but let us not delude ourselves. The biggest and most important reason for all of these companies locating in Ireland is tax. The lower the tax rate, and the greater the number of tax reduction schemes that can be availed of, the more attractive Ireland is as a destination for investment.

This may very well be considered immoral, and not too many people would argue that paying 0.005% tax on profits is either fair or moral, but the reality is that so long as the international tax system is disjointed, corporate entities will seek out the most conducive locations to base themselves.

In Ireland 350,000 people are employed directly and indirectly by such multinationals, who have come here specifically to avail of the tax advantages that Ireland offers. They contribute €4 billion to the Exchequer in taxes each year.

Before we demand that the Government lie down and accept the Commission ruling, without any appeal, we should perhaps spare a thought for those 350,000 people and their families. We should consider how the €4 billion in tax generated by those multinationals annually will be replaced if they pull out, and we should consider what economic and industrial policies can be switched on, overnight, to replace the one Ireland has successfully pursued since the 1980s.

There is no doubt that retaining multinationals in Ireland, not to mention attracting new ones, will be a very tall order if they believe that tax arrangements can simply be overturned on a whim by a crusading European Commissioner.

Competition Commissioner Becomes Tax Hawk

The European Commission has a long and strong record of competition law (antitrust) enforcement in the European Union.  It has worked hard to ensure, often controversially, that companies can enjoy a fair and level playing pitch when operating in the Single Market. This is essential to make the single market function properly. It ensures that Member States cannot impose artificial barriers to protect certain vested interests and prevents companies from abusing dominant positions. This has been healthy and positive for business and for consumers.

However, this ruling moves into an entirely unjustified and arguably unauthorised territory, because it will have such a clear impact on domestic taxation policy – a matter for Member States. The notion that rules against ‘state aid’, envisaged as unfair subsidies or a leg-up to companies thus distorting competition across the union, can give a licence to the Commission to decide on tax rules in individual member states, is quite bizarre. It arguably goes far beyond the competence awarded to the Commission by the EU Treaties which form the basis of EU law.

 Misunderstanding of Intellectual Property

This is made all the more worrying by the fact that the European Commission apparently believes that more than 60% of Apple’s global profits ought to be taxed in Europe, or specifically Ireland. It is quite apparent that Apple generates all of its creative capacity and its highly valuable intellectual property in the United States. Most of its products are then physically manufactured in China. Its Cork headquarters in Ireland, and its various subsidiaries across Europe, are primarily retail, customer care and marketing operations.

The bulk of the value of Apple goods is generated on two other continents. The European Commission ignores this reality entirely, and in doing so either misunderstands the value of intellectual property or wilfully ignores it. There is no doubt that the global tax system which sees Apple pay rather insignificant corporate tax on its profits in both China and the United States must change (and in fact is already changing through G8 and OECD measures) but this fact does not legitimise a tax grab from the Commission on products which are created and generated elsewhere.

Invalidation of National Tax Authorities

While Ireland is at the receiving end of this extraordinary decision, every EU Member States that values the principle of tax competition (particularly the Nordic countries, the Baltics, Netherlands, Luxembourg and the United Kingdom) should resist this move vehemently.

All of these countries say they are opposed to tax harmonisation in the EU. They either have a vibrant FDI community or they are generating their own models in their own country. There is no doubt that the Competition Commissioner straying into the realm of tax policy, and overturning several binding decisions of a national tax authority, is a very serious development.

Attracting investment to countries which heavily rely on Foreign Direct Investment will be extremely difficult in future if those companies cannot have faith in the rulings and decisions of tax authorities in individual Member States. The inability of national tax authorities to give authoritative decisions to companies considering major investments or relocations, will have a major effect on inward investment, and thus on economic buoyancy, growth and ultimately on jobs. This is something that Member States must fight against.

Brexit

The other impact of this ruling will be on the debate in the United Kingdom. While the referendum is over, there is still a significant prospect of the UK remaining within the European Union, or at least within the Single Market.

The spectacle of the European Commission dictating tax fines to member states and overturning decisions of national tax authorities is likely to play into the narrative in the UK which favours a quick and full exit from the Union. This is clearly not good for Ireland, which has traditionally relied on the UK to be the voice of reason within the EU Council when it comes to matters concerning tax competition.

Conclusion

In short the apparent tax windfall for Ireland comes with significant risks and enormous cost. It reflects the old adage of “There’s no such thing as a free lunch”. The implications of this ruling are complex and significant. The idea that the Irish State would not be party to an appeal to the European Court of Justice is simply bizarre. Ireland must get deeply involved in this appeal to ensure that our national interest is protected. This will not be an easy task. ­