Irish Economy
Kenny's bogus Irish effective tax rate claim
By Michael Hennigan, editor and founder of Finfacts
Jun 13, 2013 - 6:27 AM

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A draft law allowing Swiss banks to pass data to the United States justice authorities won approval by the Swiss Senate on Wed, June 12, 2013. The lower chamber, the House of Representatives, is set to discuss the controversial issue next week. At least 14 Swiss financial institutions have been under investigation, suspected of helping US citizens evade taxes. Two financial firms have closed down over the past six months. Switzerland’s oldest private bank, Wegelin, was forced to shut its doors following a US indictment in January. It admitted to wrongdoing and paid $58m (CHF54m) in fines. In 2009, the country’s biggest bank UBS was forced to pay a fine of $780m and deliver the names of more than 4,500 clients to avoid indictment, handing information that allowed the US authorities to then pursue other Swiss banks. Image source: swissinfo.ch

Taoiseach Enda Kenny on Wednesday again repeated a bogus Irish effective tax corporate rate claim in defending the regime available for US multinationals. Also on Wednesday, the European Commission issued proposals on reducing the potential for tax evasion and today, a House of Commons committee published a report on tax avoidance by Google in the UK.

Google generated US$18bn revenue from the UK between 2006 and 2011. Information on the UK profits derived from this revenue is not available but the company paid the equivalent of just $16m of UK corporation taxes in the same period.

At an American Chamber of Commerce in Ireland event in Dublin Wednesday,  where a new Europe-wide report ‘The Case for Investing in Europe' [pdf] was launched, the Taoiseach again denied that Ireland is a tax haven and said the country "did not operate a brass plate" system [the Chamber's report says gross output of American affiliates in Ireland represented roughly one-quarter of the nation’s gross domestic product in 2011 but note that this data has been massively distorted by tax avoidance].

He also said the Government had written to US senators stating the country had a 12.5% Corporation Tax rate and an effective rate of 11.9% according to a World Bank report.

In this debate semantics has a big role and provides wide latitude for economy with the truth.

Switzerland isn't a tax haven because it's a member of the OECD, a rich country club, that effectively defines a tax haven as an entity that relies on tax avoidance and evasion services for most of its income.

United States senators said Ireland meets the "common sense" definition of a tax haven.

SEE: Irish Government's foolish tax letter to US senators

As for brass plate companies, laws were tightened in the late 1990s but in practice, non-tax resident Irish companies are mainly used for tax avoidance, as the revelations on Apple to a US Senate panel confirms.

The effective corporate tax rate is the actual tax paid as a ratio of reported net earnings.

It is usually less than the headline rate because of various tax allowances /credits on for example equipment purchases, R&D spending and maybe losses forward.

In respect of big multinationals in Ireland, it is a meaningless metric as the reported net income can be reduced to a very low level or a loss through intercompany charges.

In 2011, Google Ireland paid €3m tax on trading profit resulting from €12.4bn in revenues; Apple's rate ranged from a fraction of 1% to a ceiling of 2% and Microsoft reported an effective 2011 tax rate of 5.69% in Ireland.

Kenny's cited 11.9% rate is from a report produced for the World Bank, by PricewaterhouseCoopers (PwC), the Big 4 accounting firm. Minister Richard Bruton has also quoted the rate. He at least should know that it is not generally applicable in the multinational sector.

The template firm is a pottery maker with 60 staff that sells all of its output domestically via a retail unit. It is in its second year of business and has losses brought forward from its first year of operation.

SEE: Irish claims on French corporate tax are false

European Commission

The European Commission proposed on Wednesday to extend its previous plans to restrict the opportunities for tax evasion. It said additional revenues should be covered in an envisaged automatic information sharing scheme.

EU member countries are already moving towards automatically sharing details on employment revenues, company directors' fees, pensions, life insurance and real estate income, with the corresponding information system currently scheduled to be up and running by 2015.

Wednesday's proposal by the Commission extended the system to information on dividends, capital gains and all other forms of financial income and account balances.

Algirdas Šemeta, EU commissioner for Taxation, Customs, Statistics, Audit and Anti-Fraud, said: " With today's proposal, member states will be better equipped to assess and collect the taxes they are due, while the EU will be well positioned to push for higher standards of tax good governance globally. It will be another powerful weapon in our arsenal to lead a strong attack against tax evasion."

The measures first need to be approved by the national governments and the European Parliament.

Google UK

The Public Accounts Committee of the House of Commons has published a report [pdf] which charges Google with massive tax avoidance in the UK.

It says:

"To avoid UK corporation tax, Google relies on the deeply unconvincing argument that its sales to UK clients take place in Ireland, despite clear evidence that the vast majority of sales activity takes place in the UK. The big accountancy firms sell tax advice which promotes artificial tax structures, such as that used by Google and other multinationals, which serve to avoid UK taxes rather than to reflect the substance of the way business is actually conducted. HM Revenue & Customs (HMRC) is hampered by the complexity of existing laws, which leave so much scope for aggressive exploitation of loopholes, but it has not been sufficiently challenging of the manifestly artificial tax arrangements of multinationals. HM Treasury needs to take a leading role in driving international action to update tax laws and combat tax avoidance."

Margaret Hodge MP, chair of the committee, today said:

“Google generates enormous profits in the UK. But despite an $18bn turnover between 2006 and 2011 it paid the equivalent of just $16m in taxes to the UK government.

“Google brazenly argued before this committee that its tax arrangements in the UK are defensible and lawful. It claimed that its advertising sales take place in Ireland, not in the UK.

“This argument is deeply unconvincing and has been undermined by information from whistleblowers, including ex-employees of Google, who told us that UK based staff are engaged in selling. The staff in Ireland simply process the bills. Google also conceded at this second hearing that its engineers in the UK are contributing to product development.

“The company’s highly contrived tax arrangement has no purpose other than to enable the company to avoid UK corporation tax.

“Google’s reputation has been damaged by these revelations of aggressive tax avoidance. That damage will not be repaired until the company arranges to pay its fair share of tax in the country where it earns the profits from the business it conducts.

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