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Ireland top
location for US Multinational Profits
In low-tax Ireland, for instance, profits of subsidiaries of US
multinationals have doubled in four years, from $13.4 billion to $26.8
billion. Profits from operations of U.S. multinationals in no-tax
Bermuda have tripled, from $8.5 billion to $25.2 billion. Not
surprisingly, those two tax havens rank as the number one and number
two locations in terms of profitability for U.S. corporations
operating abroad- surpassing long-time leading investment partners
like the United Kingdom and Canada. But Ireland and Bermuda are only
part of the story.
October 2004: Ireland is the world's most profitable country for US
corporations, according to analysis by US tax journal Tax Notes. In a
study by the journal's Martin Sullivan, it was found that profits made
by US companies in Ireland doubled between 1999 and 2002 from $13.4
billion to $26.8 billion, while profits in most of the rest of Europe
fell. In his analysis Sullivan termed Ireland a 'semi-tax haven' for
US firms, because firms are involved in real productivity in contrast
with locations such as Bermuda.
Between 1999 to 2002, US multinational corporations increased
profits in countries with no taxes or low rates by 68% while sharply
reducing profits recorded in countries where they engage in
substantial business activity, a study published in the journal Tax
Notes shows.
Source: Tax Notes
In 2002, US companies reported $149 billion of profits in
18 tax-haven countries, up 68% from $88 billion in 1999, according to
Tax Notes, which analyzed the most recently available Commerce
Department data. This compares with a 23% increase in total offshore
profits earned by US multinationals during the same period-total
profits of US multinationals’ foreign subsidiaries around the world
stood at $255 billion in 2002.
According to the New York Times, Commerce Department data not
referred to in the study suggest that US companies took 17 cents of
each dollar of worldwide profits in tax havens in 2002, up from 10
cents in 1999.
Tax Notes shows that for each dollar of profit taken in Luxembourg
in 1999, US corporations took $4.56 of profit in 2002. The result for
Bermuda was $2.96; for Ireland $2.01; and for Singapore $1.72. These
countries are viewed as tax havens or partial tax havens. For UK, each
dollar of profit taken in 1999 was equal to 67 cents in 2002; for
Germany, it was 46 cents.
Martin Sullivan, a former US Treasury Department economist who
specialised in international taxation, say in his Tax Notes report
that the big rise in profits recorded in tax havens like Bermuda had
no relationship to economic activity there. US companies booked $25.2
billion in profits in Bermuda in 2002, although total revenues there
were only $34.3 billion, according to Commerce Department data. Many
companies seek to lower their taxes by setting up foreign units and
using internal lending so profits are taken primarily in tax havens
and costs are incurred in high-tax countries.
Source: Tax Notes
Sullivan noted that 58% of offshore profits are now recorded in tax
havens and writes: 'In low-tax Ireland, for instance, profits of
subsidiaries of US multinationals have doubled in four years, from
$13.4 billion to $26.8 billion. Profits from operations of U.S.
multinationals in no-tax Bermuda have tripled, from $8.5 billion to
$25.2 billion. Not surprisingly, those two tax havens rank as the
number one and number two locations in terms of profitability for U.S.
corporations operating abroad- surpassing former leading investment
partners like the United Kingdom and Canada. But Ireland and Bermuda
are only part of the story. Tax havens Luxembourg and Singapore-with
2002 effective tax rates of 1.4 percent and 11.4%, respectively- have
also seen dramatic increases in the profitability of U.S. companies
domiciled there. In tiny Luxembourg, sandwiched between France and
Germany with a population of 437,000, the profits of subsidiaries of
US companies jumped from $4 billion in 1999 to $18.4 billion in 2002.
In Singapore, subsidiaries’ profits increased from $4.4 billion to
$7.5 billion.'
The rise of US profits in low tax countries has been matched by a
decline in profits in the large industrial countries where US
companies conduct most of their business. Sullivan says as a group,
Canada, France, Germany, Italy, and the United Kingdom saw the profits
of U.S. companies operating in their borders fall 25%-from $72 billion
in 1999 to $54 billion in 2002 (a drop from one-third overseas profits
in 1999 to a little more than one-fifth in 2002). While these five
countries accounted for 44% of foreign sales, 44% of foreign plant and
equipment, and 56% of foreign employee compensation in 2002, they
accounted for only 21% of foreign profits. In countries where
effective tax rates have fallen, profits of U.S. companies operating
within their borders have risen significantly.
Source: Tax Notes
In Denmark, where the
tax rate fell from 23.9% to 7.6%, profits rose 200%. In Belgium, where
the tax rate fell from 26.6% to 12.5%, profits rose 84%. In Spain,
where the tax rate fell from 26.1% to 12.7%, profits rose 26%. In
Portugal, where the tax rate fell from 21.5% to 9%, profits rose 65%.
And in New Zealand, where the tax rate fell from 36.7% to 10.3%,
profits rose 200%. How It HappensThe United States generally
taxes corporations on their worldwide profits. However, subject to
some limitations, corporations can offset the tax paid to foreign
governments against their U.S. tax liability. The United States should
be able to collect additional revenue on overseas profits located in
low-tax countries as the U.S. corporate tax rate is 35 percent.
If for
example a foreign tax rate is 5 percent and the overseas business of a
U.S. corporation generates say a $100 of profit, the United States
(with a 35 percent corporate tax rate) would collect $30. However,
U.S. corporations can defer their U.S. tax liability on overseas
profits as the foreign income is only subject to U.S. tax when it is
paid as a dividend or repatriated to the U.S. parent. The facility of
'deferral' can allow a U.S. corporation to permanently defer taxes on
foreign profits generated in low-tax jurisdictions and by taking
advantage of this tax-avoidance measure, a corporation can directly
increase the profits reported to shareholders.
Martin Sullivan writes that there is growing concern about an
erosion of the corporate tax base and-over the long-term- the
viability of the U.S. corporate income tax. Concerns usually revolve
around problems with excessive tax shelters. However, income shifting-
usually completely legal- is another major threat. ' It is not the
case that income shifting from one foreign jurisdiction to another has
a direct effect on US revenue. But by whatever means foreign tax rates
are effectively lowered- foreign legislation, real business moves, or
shifting income between paper entities - the incentive to shift income
out of the United States to foreign jurisdictions continues to
increase. If US corporations can shift profits from high-tax to
low-tax countries, it means (1) profit could just as well be shifting
out of the United States, and (2) there is a larger incentive than
ever to do so,' Sullivan says.From the data cited in his study,
Sullivan says : 'We cannot tell how much of the increased income in
tax havens comes from corporate shifting of profits from high-tax
foreign countries and how much, if any, from the United States. But
given the huge increases in profits in low-tax countries, the greater
incentive for income shifting (because of lower foreign tax rates),
and the widely recognized means for income shifting (such as the
aggressive use of cost-sharing arrangements, it would be foolish to
assume anything other that the US Treasury has many billions of
dollars on the line.'
Second Study
In a second study published in Tax Notes on September 27, Martin
Sullivan estimates that the diversion of profits to tax havens around
the globe may be depriving the United States Treasury of anywhere from
$10 billion to $20 billion in lost tax revenue each year. In 2003,
United States multinational corporations shifted $75 billion in
domestic profits to no-tax and low-tax foreign havens like Bermuda and
Ireland.
An updated study by J. P. Morgan Chase in June 2003, said that $650
billion held offshore by American corporations like Exxon Mobil and
General Electric was waiting in accounts to be repatriated to the
United States if proposed legislation enacting a highly reduced rate
is enacted. Sullivan's new study does not mention any companies by
name but he has previously cited the pharmaceutical industry as a
leading shifter of domestic profits to overseas havens. According to
the J. P. Morgan Chase study, the United States manufacturing sector
accounted for 41% of unrepatriated earnings.
A New York Times report notes that, in their public filings,
companies are often unclear about what percentage of their profits
comes from domestic operations as opposed to foreign operations, and
they almost never discuss profit-shifting. For example, Pfizer, the
pharmaceutical giant, said in its 2003 annual report that as of the
end of last year, it had not made a United States tax provision on
what it called $38 billion of unremitted earnings at its international
subsidiaries. It was not clear whether that money was actually earned
by the international subsidiaries or by Pfizer's operations in the
United States and later shifted to those subsidiaries for tax
purposes, and a Pfizer spokesman declined to provide any details or
comments to the Times.
In October, the Financial Times said that from 1994 to 2003,
foreign profits of the six largest US pharmaceuticals companies went
from 38 per cent of their overall income to more than 65 per cent. At
the same time, the taxes paid on those profits fell from a rate of 31
per cent to 17.5 per cent, just half the US corporate tax rate. In the
case of the drug companies, the growing share of profits booked abroad
- most of it in low-tax jurisdictions - does not reflect any
significant shift in where those companies do business. Even as their
overseas share of profits nearly doubled over the past decade, their
overseas sales grew from just 40 to 43 per cent.
Some American corporations argue that United States corporate taxes
are too high and that some profits held overseas are legitimately
channeled into operations there, improving financial strength and
providing value to shareholders.
Sullivan has said that it was not clear what portion of the $75
billion in the latest study was included in the $149 billion cited in
the first study as total profits reported in 18 tax havens in 2002.
New Corporate Tax Bill
In October 2004, the US Congress passed a Corporate Tax Bill, which
was prompted by a US need to comply with a World Trade Organisation
ruling to end a domestic tax subsidy for US exporters.
The Bill offers almost $43bn in new measures over the next decade
aimed at reducing the US tax paid on the overseas earnings of US
companies. The key provisions ensure that companies can make maximum
use of foreign tax credits that allow them to deduct from their US
taxes every dollar in tax paid to a foreign government.
A tax break, worth an estimated $14bn over 10 years, will change
the rules for deducting interest expenses and allow companies to
deduct a greater portion of their global interest expenses from their
US income, thereby increasing foreign income, boosting foreign tax
credits and reducing the company's effective tax rate. Another, break
will all but eliminate legal walls that prevent companies from using
excess foreign tax credits paid on certain types of income to offset
US taxes for other types of profits. General Electric, for instance,
will now be able to shift tax credits from its lucrative financial
services arm to its less profitable manufacturing divisions. Other
provisions would have a similar impact. One, which is estimated to
cost the Treasury some $5.5bn over the next decade, would allow
companies to reclassify some domestic US profits as foreign profits.
Under current law, if a company pays no tax in the US because it has
declared a loss that year, it cannot take a foreign tax credit to
offset taxes paid abroad. The new law, however, would allow some
future US profits to be booked offshore to take advantage of unused
tax credits.
The Bill provides for a tax holiday that allows companies to bring
home those deferred overseas earnings at a tax rate of just 5.25 per
cent, a move that is expected to bring more than $100bn back into the
US. The holiday has been termed as a "temporary stimulus"
and that there is "no intent to...enact it again in the
future".
The Financial Times quotes Martin Sullivan of Tax Notes as saying
that while the tax holiday may keep US companies happy for a while,
"as they build up profits again, it's more than likely that
there'll be another amnesty because they'll start lobbying
again".
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Pfizer was one of the first
US pharmaceutical businesses to locate in Ireland and set up its
first production facility in Ringaskiddy in 1969 to produce food
chemicals, including citric acid and gluconate products. In 1972
a further
production plant, Organic Synthesis Plant 1 (OSP1), was
constructed to produce bulk pharmaceutical products.
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In November 2005, The Wall Street Journal wrote that "a law firm's
office on a quiet downtown street [in Dublin, Ireland ] houses an
obscure subsidiary of Microsoft Corp. that helps the computer giant
shave at least $500 million from its annual tax bill. The four-year-old
subsidiary, Round Island One Ltd., has a thin roster of employees but
controls more than $16 billion in Microsoft assets. Virtually unknown in
Ireland, on paper it has quickly become one of the country's biggest
companies, with gross profits of nearly $9 billion in 2004."
Ireland's low corporate tax
rate of 12.5% on trading profits has been a magnet for multinational
companies who are responsible for 90% of Irish exports and a significant
contributor to the success of the modern Irish economy, commonly known
as the Celtic Tiger.
In addition, an Irish tax
exemption on patent income, has promoted the parking of US multinational
company overseas profits in Ireland, through transfer pricing and other
accounting measures. Ireland is the most profitable location of US
multinationals and in the period 1998-2002, the profits of US companies
with Irish facilities doubled.
Ireland's annual corporate tax revenue is about
€5.3 billion ($6.3 billion). The Wall Street Journal said in its report
that a Microsoft Dublin-based company that is used for routing patent a
royalty income from overseas operations, paid the Irish Revenue $300
million in taxes last year.
Ireland is the location of
top US tech and pharmaceutical firms. Chipmaker Intel has its largest
overseas manufacturing facility in Ireland, computer maker Dell is one
of Ireland's largest employers and the top global drugs firm Pfizer,
employs around 2,200 people at nine operations in Dublin and Cork. One
of the products that it produces in Ireland is Lipitor, the
anti-cholesterol treatment which is the world's biggest-selling drug.
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The Intel Ireland campus, at
Collinstown Industrial Park, Leixlip, County Kildare is
Intel's fourth largest manufacturing site overall, and the
largest outside the United States.
Intel, Dell, Pfizer and HP are among foreign-owned
manufacturing firms in Ireland responsible for 90% of Irish
exports. |
Wyeth employs around 3,000 people in Ireland, between
Wyeth Nutritionals in Limerick, Wyeth Medica in Kildare, Fort Dodge
Laboratories in Sligo and the 90-acre Wyeth bio-pharmaceutical campus in
Grange Castle, Dublin. This $1.5 billion research and development
facility in west Dublin employs around 1,000 people, and is scheduled to
hire another 200 over the next two years.
Pfizer Ireland has been a
litigant in patent cases across the globe, including one as far away as
New Zealand, against its near neighbour in County Cork, Eli Lilly.
On Sunday, The Sunday
Independent reported that top executives at Dell Computer's Irish
operation - including Vice President of Services and Operations in
Ireland, Nicky Hartery - shared nearly $3.8m in tax-free dividends since
2003.
The dividends paid by Dell
were paid through a patent royalty company called Dell Research Ltd.
Recently filed accounts show that it had accumulated $91.7m in retained
profits, none of which is subject to tax under current Irish
legislation.
Pfizer alone had $38
billion of unremitted earnings at its international subsidiaries,
according to its 2003 accounts.
Up to half of Irish
corporate tax receipts may relate to taxes paid on profits transferred
from other overseas units of US corporations, to its Irish subsidiaries.
In effect, the Irish tax
exemption on patent income, could well fund over 5% of the Irish
Government's planned total spending (current and capital) of €48.5
billion, in 2006.
HOW
MICROSOFT REDUCES ITS GLOBAL TAXES
The Wall Street Journal
said in its report two weeks ago : "Ireland's citizens may not have
heard of Round Island One, but they benefit greatly from its presence.
Last year the unit handed the government of this small country of four
million citizens more than $300 million in taxes.
The citizens of other
nations where Microsoft sells its products are less fortunate. Round
Island One provides a structure for Microsoft to radically reduce its
corporate taxes in much of Europe, and similarly shields billions of
dollars from U.S. taxation.
Giant U.S. companies
whose products are heavily based on their innovations, such as
technology and pharmaceutical firms, increasingly are setting up units
in Ireland that route intellectual property and its financial fruits to
the low-tax haven -- at the expense of the U.S. Treasury."
The Journal wrote: "Much
of Round Island's income is licensing fees from copyrighted software
code that originates in the U.S. Some of the rights to these lucrative
assets end up in Ireland via complex accounting rules on intellectual
property that the Treasury is now seeking to overhaul. The Internal
Revenue Service said it is also looking closely at how companies account
for such transactions.
In a statement,
Microsoft said its European units "report and pay significant amounts of
taxes" and that Microsoft "is fully compliant with the tax laws of the
United States and all other countries."
Through a key holding,
dubbed Flat Island Co., Round Island licenses rights to Microsoft
software throughout Europe, the Middle East and Africa. Thus, Microsoft
routes the license sales through Ireland and Round Island pays a total
of just under $17 million in taxes to about 20 other governments that
represent more than 300 million people."
Microsoft's effective
global tax rate fell to 26 percent in its last fiscal year from 33
percent the year before. Nearly half of the drop was attributed to
"foreign earnings taxed at lower rates," Microsoft said in a Securities
and Exchange Commission August filing. Microsoft leaves much of its
profit in Ireland, including $4.1 billion in cash, avoiding U.S.
corporate income taxes. But it still can count this profit in its
earnings.
IRELAND
TOP LOCATION OF US MULTINATIONALS' PROFITS
Ireland is the world's most
profitable country for US corporations, according to analysis by US tax
journal Tax Notes. In a study by the journal's Martin Sullivan that was
published in 2004, it was found that profits made by US companies in
Ireland doubled between 1999 and 2002 from $13.4 billion to $26.8
billion, while profits in most of the rest of Europe fell. In his
analysis Sullivan termed Ireland a 'semi-tax haven' for US firms,
because firms are involved in real productivity in contrast with
locations such as Bermuda.
Between 1999 to 2002, US multinational corporations increased profits in
countries with no taxes or low rates by 68% while sharply reducing
profits recorded in countries where they engage in substantial business
activity, the study published in the journal Tax Notes shows.
In 2002, US companies
reported $149 billion of profits in 18 tax-haven countries, up 68% from
$88 billion in 1999, according to Tax Notes, which analyzed the most
recently available Commerce Department data. This compares with a 23%
increase in total offshore profits earned by US multinationals during
the same period-total profits of US multinationals’ foreign subsidiaries
around the world stood at $255 billion in 2002.
According to the New York
Times, Commerce Department data not referred to in the Tax Notes study,
suggest that US companies took 17 cents of each dollar of worldwide
profits in tax havens in 2002, up from 10 cents in 1999.
Tax Notes shows that for
each dollar of profit taken in Luxembourg in 1999, US corporations took
$4.56 of profit in 2002. The result for Bermuda was $2.96; for Ireland
$2.01; and for Singapore $1.72. These countries are viewed as tax havens
or partial tax havens. For UK, each dollar of profit taken in 1999 was
equal to 67 cents in 2002; for Germany, it was 46 cents.
A New York Times report
last year notes that, in their public filings, companies are often
unclear about what percentage of their profits comes from domestic
operations as opposed to foreign operations, and they almost never
discuss profit-shifting. For example, Pfizer, the pharmaceutical giant,
said in its 2003 annual report that as of the end of last year, it had
not made a United States tax provision on what it called $38 billion of
unremitted earnings at its international subsidiaries. It was not clear
whether that money was actually earned by the international subsidiaries
or by Pfizer's operations in the United States and later shifted to
those subsidiaries for tax purposes, and a Pfizer spokesman declined to
provide any details or comments to the Times.
In October 2004, the
Financial Times said that from 1994 to 2003, foreign profits of the six
largest US pharmaceuticals companies went from 38 per cent of their
overall income to more than 65 per cent. At the same time, the taxes
paid on those profits fell from a rate of 31 per cent to 17.5 per cent,
just half the US corporate tax rate.
In the case of the drug
companies, the growing share of profits booked abroad - most of it in
low-tax jurisdictions - does not reflect any significant shift in where
those companies do business. Even as their overseas share of profits
nearly doubled over the past decade, their overseas sales grew from just
40 to 43 per cent.
IRISH
PATENT EXEMPTION
A & L Goodbody, one of
Ireland's top law firms, says that patented inventions are a large
source of revenue in the pharmaceutical industry.
Ireland's tax exemption in respect of certain
patent royalties, has been one of the driving factors behind investment
by pharmaceutical multinationals, principally from the US, in the Irish
economy.
Irish tax legislation
provides an exemption from tax for income derived from "qualifying
patents" when received by a person resident in Ireland and not resident
in any other country. A "qualifying patent" is defined as a patent in
relation to which the research, planning, processing, experimenting,
testing, devising, designing, developing or similar activity leading to
the invention, the subject of the patent, was carried out in Ireland.
A & L Goodbody says that
the taxation reliefs to be derived from patented inventions goes further
than to exempt the income from patent royalties from tax. Certain
distributions by companies made out of income from certain patents which
has been disregarded for corporation tax purposes, are themselves
disregarded for the purposes of income tax on the part of a shareholder.
This has very wide implications for investors in pharmaceutical
companies considering carrying out any of their research and development
in Ireland.
Maximising Relief for Patent Income
A & L Goodbody says that
individuals or companies interested in knowing how to maximise benefits
available under the patent royalty exemption should consider the
following:
- establishing a
separate company to do research and development work for the
qualifying patent which will apply for, and hold the relevant
patents; and
- this company should so
far as is commercially viable, grant licences to unconnected third
party users.
Patent royalties received
by this company will be exempt from Irish corporation tax, and dividends
paid on the ordinary shares of the patent holding company, or on other
shares but only to the inventor or co-inventor, will be exempt from
Irish income tax in the hands of the shareholders.
Click for more detail from
A & L Goodbody.
Ireland's industrial development agency IDA Ireland, says that Ireland
offers one of the most beneficial corporate tax environments in the
world.
A
corporation tax rate of 12.5% applies to all corporate trading profits.
The tax position of companies carrying out approved activities prior to
31 July 1998 will remain unchanged at 10% up until 2010.
European Corporate Tax Rates for substantial distributed trading profits
|
Ireland |
12.5% |
| Cyprus |
10% |
| Latvia |
15% |
| Lithuania |
15% |
| Hungary |
18% |
| Poland |
19% |
| Luxembourg |
22.88% |
| Portugal |
25% |
| Slovenia |
25% |
| Estonia |
22% |
| Germany |
26.38% |
| Czech Republic |
26% |
| Sweden |
28% |
| Finland |
29% |
| Slovakia |
19% |
| Denmark |
30% |
| UK |
30% |
| Italy |
33% |
| France |
33.33% |
| Belgium |
33.99% |
| Austria |
25% |
| Netherlands |
34.50% |
| Greece |
32% |
| Malta |
35% |
| Spain |
35% |
Source - Deloitte & Touche, 2005
Percentage increase in profit required to achieve the same distributable
income available in Ireland
| Germany |
46% |
| USA |
45% |
| Spain |
35% |
| Netherlands |
34% |
| France |
33% |
| Belgium |
33% |
| UK |
25% |
| Estonia |
18.24% |
| Cyprus |
2.94% |
Source - Deloitte & Touche, 2005
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