Exclusive Interview: Feargal O'Rourke, Managing Partner (PwC Ireland)
BUDGET 2021
“a Budget the likes of which we really haven’t seen before”
On Tuesday, Minister for Finance Paschal Donohoe and Minister for Public Expenditure Michael McGrath will present Budget 2021 amid a backdrop of unprecedented uncertainty. It will be a Budget “the likes of which we really haven’t seen before,” says PwC Managing Partner, Feargal O’Rourke. “A lot of this budget will be about giving confidence to people about spending money and about trying to stimulate the economy. At a big picture level, we can’t borrow indefinitely: so his [Paschal Donohoe] opening salvo has to be about staying in the pack of European countries so that Ireland is not an outlier on borrowing. That is something which happened to us a decade ago. O’Rourke feels Donohoe will be focused on borrowing enough such that Ireland is not an outlier but then it is also about spending that money “in a way that generates as much economic activity as possible.”
“I think Michael McGrath’s role on Budget Day is going to be a bigger role than Paschal Donohoe’s”
Citing classic Keynesian theory O’Rourke expects that Donohoe will not feel the need to take cash out of the economy. As such O’Rourke feels that it is McGrath who will have a bigger role come Budget Day. “I think it’s fair to say he [Donohoe] won’t be increasing taxes. Corporation tax is not going to increase, he’s said publicly he’s not going to touch income tax, increasing VAT would be a bad move. So, I actually think Michael McGrath’s role on Budget Day is going to be a bigger role than Paschal Donohoe’s,” O’Rourke affirms. O’Rourke expects that McGrath will be “looking to stimulate capital expenditure: things like school building programmes- something which has an impact not just in Dublin but right around the country. So, I think you’re talking about local government spend, school spend, I think there’ll be a large capital works programme which is geographically spread. ”He continues: “Donohoe will talk about the income side of the house and tax receipts are holding up OK, but he’s basically going to be saying- and I would endorse this approach- I won’t be increasing any taxes. Now, once he’s said that all he has left to consider then is are there any tax incentives he can bring in,” he says.
VAT
VAT reduction for hospitality
sector not the best way to help them
A particularly hard hit segment is the hospitality sector. However, O’Rourke feels that the VAT reduction which the sector has been lobbying for would not prove as effective as one might think: “The loss of hundreds of thousands of jobs in hospitality, tourism, retail, requires creative responses to help restore and maintain these vital sectors of the Irish economy. A strong case is being made to reduce the VAT rate again to 9% which, worked the last time, but we have to be mindful of whether this will stimulate the necessary demand this time around. I just think there is a bigger issue there about trying to align the Irish scientific approach with Europe, which I think would be a much bigger benefit to the hospitality industry. The Government response may need to be direct sectoral support,” says O’Rourke.
INCOME TAX
“It should be about widening the
tax bands, not about reducing the rates”
With changes to income tax off the table this time around, I
raise the subject with O’Rourke about whether this is something which could be
looked into in years to come. After all, Ireland’s income tax is rather
punitive on middle-income earners by international standards. For example, a
single worker will start paying the higher rate of income tax (40%) on any
income above €35,300, which is 10% below the average industrial wage. O’Rourke
says there are two issues at play here: 1) the rate of tax and 2) when you start
paying that rate. “If I look at myself, I have no problem paying the rate of
tax I do. It’s right that somebody at my income level pays at the rate I do.
It’s absolutely wrong that somebody on, say, €50,000/€60,000 is starting to pay
those rates and I think whatever fiscal space there is in tax should be about
widening the tax bands, it shouldn’t be about reducing the rates,” he says.
He continues: “It’s interesting because I love a bit of
political history and if you go back to 1990’s, there was a clear divide
between Fianna Fáil and Fine Gael in the 1997 election. Charlie McCreevy wanted
to cut rates and the rainbow coalition wanted to widen tax bands. And
ultimately, you’d argue McCreevy’s argument won over, and he reduced, for
example the standard rate of income tax from 27% to 20% and the top rate of tax
tumbled from 58% to 48%. They were different times and I suppose the point I’m
making is there is never an absolute truth in any of these things that is
applicable in all circumstances. Right now, the focus should not be on rates;
the focus should be on widening bands. Now there will come a time, maybe in a
few years’ time where maybe it’s out of line, we could look at cutting the rate,
but for now any fiscal space we have should directed at widening bands,” he
says.
CORONAVIRUS
“The Government probably need to
be listening to three voices”
On the themes of Keynesian economics raised earlier, I ask O’Rourke for his views on the UK’s decision to withdraw a large bulk of income supports last week versus the Irish Government’s decision to continue with the Employment Wage Subsidy Scheme until March. “History will tell who’s doing the right thing, “ he says. “My assessment now is that it is the right thing [The Irish Government’s decision]. The Government were bold and brave when the crisis hit. I think there’s a recognition that this is a longer-term issue. I think it would be wrong to have a situation where you’re preventing people from work through the lockdown and at the same time you’re not supporting them- I think that’s philosophically incorrect. I think as long as we’re in a lockdown situation, we’ve got to support people’s livelihoods.
Adds O'Rourke: "Now there will come a
point- and we saw the first evidence of it this week- where the Government
probably need to be listening to three voices: one is NPHET on public health;
one is the rest of the health service, in other words the fact that cancer
diagnosis is way down, the number of interventions from the rest of the health
service is way down. And the third is the impact of Covid on livelihoods and
society generally. This week was the first time when that came home. And I
think it’s going to be the first of a number of occasions because there will
come a point where we’ve got to learn to live with coronavirus. We can’t just
hunker down and hope and wait for it to go away. So, I think the government are right to
continue as they are, but there will come a point where the government will not
be able to sustain continued borrowing and we’re going to have to open up
Ireland a bit more. And more difficult decisions lie ahead,” he says.
GOVERNMENT DEBT
“Low rates have been a function
of the last decade but that’s not going to be the case forever”
With Government borrowing soaring (€250bn expected this
year) and the budget deficit expected to be close to €30bn come year end, I
next ask O’Rourke whether large deficits and debt matter as much as they used
to. With the State borrowing at less than 1% and the NTMA’s recently
oversubscribed bond auctions, we seem to be nowhere near the point where the
markets could be spooked by a heavily indebted nation like Ireland. O’Rourke
thinks there will come a time however where we will need to get our house in
order: “We’re not like the US which has
a Reserve currency which can fund large deficits- almost indefinitely over the
last 20 years. Low rates have been a function of the last decade but that’s not going to be the case forever. I think there will
come a point, maybe in 5 or 10 years, where if we’re refinancing, say, €5
billion which currently we’re paying close to 0% on and suddenly that €5
billion if we were to start paying three or four per cent, for argument’s sake,
that’s going to be a drain on the working citizens and the exchequer. So, I
think we can do it [continue borrowing] in the short term, but in the longer
term the piper is going to have to be paid at some point. I think Paschal
Donohoe’s got the right approach of positioning Ireland in the middle of the
pack in terms of borrowing. So, we can continue borrowing, but let’s not become
outliers,” O’Rourke says.
OECD GLOBAL TAX REFORMS
“In 2014, I came out and said
this would be good for Ireland and I still hold that view”
Covid and Brexit aside, another grave threat to Ireland’s future prosperity is the issue of OECD global tax reforms. With corporation tax accounting for almost 18% of the tax take, changes by way of a new digital tax and the imposition of a global minimum rate of corporation tax threatens to seriously undermine the attractiveness of our FDI model. However, O’Rourke is not as concerned as some other commentators appear to be: “I was contrarian back in 2014. I came out and said this would be good for Ireland and I still hold that view. And I think a lot more people are coming around to that view. Citing US multinationals as a broad example, O’Rourke then likens tax “as falling into three buckets.”
He continues: “outside the US they had their intellectual property in sort of a tax haven and they paid zero tax on that. Ireland then was their principal seller into the rest of the world and they paid 12.5% corporation tax on that. And then the country into which they were selling, they probably paid no tax because they had no taxable presence there- and that’s because you had a 20th century tax system in a 21st century business model. If you take those three buckets, what’s happening is Pascal Saint-Amans basically wanted to make sure that tax havens no longer worked and therefore, companies had to bring those operations onshore. And what we’ve seen through increased corporate tax receipts is that a lot of those companies brought their activities onshore to Ireland. And we’ve seen in the last few years corporate tax receipts have increased significantly,” O’Rourke says.
Overall the net effect is Ireland
will be “winners”
He continues: "What’s happening now is the next phase of that where some of
the tax that used to be paid in Ireland is going to go into the country of
consumption. So, if I just take music for example: back in the day I bought a
CD and looked at the back and it was pressed in Germany, wholesaled in the UK,
retailed in Ireland so all three countries picked up tax. Now today, I download
it and whatever country I’m getting it from- if you look at your receipt it’s
probably Luxembourg- they’re the only ones collecting tax. O’Rourke expects the
second wave of the OECD digital model will result in some of our current tax
take going to other countries- the countries of consumption- but that, overall
the net effect of the two phases together will result in Ireland being “winners”-
something which he thinks “in the five
years so far, has borne out.” Overall
then, O’Rourke is “not that worried about the first wave which is the digital
tax. I think it’s gone into abate at the moment with the US election. So, I
think once that election is over the US will get back on the train and see what
they’re going to do about a digital tax,” he says.
GLOBAL MINIMUM RATE OF CORPORATION TAX
“Ireland’s approach of
constructive engagement is the right way to go”
The other pillar of the OECD reforms, a global minimum rate of corporation tax on multinationals “is probably a bit more worrying for Ireland,” O’Rourke professes. “Ireland for the last 7/8 years has projected itself on a platform of being competitive but fair, i.e. we will sign up to all the OECD developments but we believe in fair tax competition. We’ve fought off for the best part of thirty years this idea of a common consolidated corporate tax base (CCCTB) in Europe. This is kind of another mechanism to try and attack Ireland. It’s got a good few phases to go through yet. Ireland’s approach of constructive engagement which is about making sure we are in every room where tax is being discussed and we will respectfully point out where the flaws are to try and protect our own position- I think it’s the right way to go. So, there’s a few more fights in it left,” O’Rourke adds.
“The European Commission completely
overreached”
A related issue concerns that of Apple and the recent European Court of Justice decision to strike down the European Commission’s ruling which ordered Apple to repay the State taxes amounting to almost €13bn. O’Rourke feels that the Commission were undoubtedly acting beyond their remit in making such a judgement in the first place: “At the time when the ruling came out, I said it was a “landgrab” by the Commission and that basically it had no basis in law. I think the mistake they made was that they completely overreached. I wasn’t really surprised by the judgement on the Commission’s case, which was scathing. It was a very comprehensive win for Apple and Ireland. The real winner in that case was the rule of law. The other big winner was the US treasury because if Apple had to pay that tax they would have then gone to the US and said ‘you’ve taxed us on these profits as well and we’ve paid tax in Europe- we want a credit back from the US Treasury for those taxes.’ The real losers were the Commission. And was Ireland a winner or a loser? You could say well it didn’t get the money, so Ireland was probably in that neutral zone. I was a bit surprised at one level that they [the Commission] had appealed the case because it was such a comprehensive judgement I don’t think it will be reversed, but it will be a political decision and I think it will run for another three or four years,” he says.
AUDIT REFORMS
“I absolutely support anything
which increases the quality of audit”
Another area of EU influence in recent years has been in the
area of auditing and the 2016 EU wide reforms aimed at improving the quality of
audits. Combined with increased oversight from the Irish Accounting and
Auditing Standards Authority (IAASA), there has been a concerted effort in
recent years to enhance quality. O’Rourke welcomes such reforms: “It’s in all
our interests to have an ecosystem which has the trust of the markets and
society, so I absolutely support anything which increases the quality of audit and the perception of audit . I think anytime
a company fails, it may well be a business failure but questions are asked
about whether the audit is fit for purpose, so I think there’s two issues here:
the first is I think auditors will have to maintain high standards and having
an external review point like IAASA or like the PCAOB (US regulatory body), I
think they are welcomed. I think anything which keeps quality high is welcome,”
he says.
THE FUTURE OF AUDIT
“I would expect the audit
landscape to significantly evolve over the next 10/12 years”
O’Rourke also expects the auditing landscape to evolve
significantly over the course of the next decade. “I think what you’re going to
have as technology evolves and as there is a growing evolution of what an audit
should provide, I think both of those dynamics are going to mean that in 10
years time I think that what an audit does and how an audit is done will be
changed significantly. Right now, it’s kind of an historic pass or fail- it’s
basically saying we’re looking at the past and we’re telling you whether you
passed or failed. I think if you were to go forward 10 years there will be a
more real time reporting element to it. I think there will a lot more focus on
the ESG (Environmental, Social and Governance) aspects of annual accounts. I
think there’ll be a lot of things dealt with like climate risk, so I think the
scope of an audit will evolve and grow over the next 10 years. I think in terms
of how an audit is done there will be a lot more technology involved. Judgement
will always be required but I would expect the audit landscape to significantly
evolve over the next 10/12 years,” says O’Rourke.
US ELECTION
“I’m much more worried about
Brexit and the OECD changes”
We finish on the topic of the impending US election. O’Rourke
is a big fan of elections and politics in general, and he admits that he will
be “staying up late the night of the third.” The prospect of another Donald
Trump upset does not spook him as much as most- at least from a tax perspective
anyway. “The tax changes that he [Trump] got through a couple of years ago:
they were touted as really going to cause the US companies to bring back their
activities to the US- and that didn’t happen. I think Ireland is well enough
established on the global stage now as a kind of a 51st State in
Europe in that we are very attractive to US companies selling into the European
market and if anything, if a Trump re-election takes place, judging on the
first four years it could lead to more trade wars. If there are more trade wars,
US companies will say ‘we’ve got to have
operations in Europe’, which I think makes Ireland ideally placed to be the
beneficiary of that. So, I’m not massively concerned, I’m much more worried about Brexit and the OECD changes than I am about the US .
Both Biden and Trump would like to take more US operations back to the US but,
at the end of the day, these are global operations which need to be around the
globe. If I was ranking the problems: I would say the immediacy of Brexit, then
the long-term potential implications of the OECD project and then the US
situation,” O’Rourke concludes.
