US MULTINATIONALS PROFIT FROM TAX HAVENS

Ireland top location for US Multinational Profits

Feb 2014: Selection of Finfacts tax reports 2013/14:

US company profits per Irish employee at $970,000; Tax paid in Ireland at $25,000

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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".

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.
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.

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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