Irish Economy
Corporate Tax: More confusion on Ireland's effective rate from The Irish Times
By Michael Hennigan, Finfacts founder and editor
Sep 27, 2013 - 6:17 AM

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Pascal Saint-Amans, director of the Centre for Tax Policy at the Organisation for Economic Co-operation and Development (OECD), is responsible for devising new rules on international corporate tax for the G-20 group of leading developed and emerging economies. The G-20 said this month that it would put forward recommendations to set up a system so that profits are taxed "where economic activities deriving the profits are performed and where value is created."

Corporate Tax: With Enda Kenny, other ministers, and the IDA Ireland chief, misleadingly suggesting that the Irish effective rate of tax (actual tax paid, to be paid or accrued for an accounting period as a ratio of net income), for a foreign multinational based in Ireland, is typically close to the headline corporate tax rate of 12.5%, The Irish Times weighs in today with a survey reporting that the top 1,000 companies operating in Ireland, are apparently generously even paying more than the headline rate. However, the findings have no relevance whatsoever to the debate on global corporate tax avoidance and Ireland's involvement in it.

This week we set out why the Irish official line on the effective rate is misleading as the standard company used in an international survey that is cited, is an SME pottery maker that has 60 employees, sells all it output via  retail outlet (no exports) and has losses forward from its first year of operations. It's a bit different from say Google or Microsoft, surely? I'll come back to that term 'surely'!

We also reported that from financial data supplied by US companies to the US government, in respect of majority affiliates in Ireland, coupled with information provided by Barry O'Leary, IDA Ireland chief executive, on tax paid per employee in Ireland, the effective tax rate in 2010 was 2.5%.

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

Fiona Reddan reports today in The Irish Times that in an analysis of the tax practices of Ireland’s largest companies, as determined by the Top 1,000 database, it was found that companies - - both foreign and indigenous - - are paying corporation tax on their profits at an average effective rate of 15.5%.
Combined, Ireland’s Top 1,000 companies paid taxes of some € 2 billion in their most recent financial year, accounting for about 50 per cent of total corporation tax revenues in 2012.

The survey found that Dubai-headquartered international oil and gas exploration group Dragon Oil was the largest taxpayer in Ireland, with a tax contribution of €161m in 2012, followed by Microsoft (€132m) and CRH (€120m), which is termed Ireland’s largest company.

Reddan makes no reference in her piece to a relevant point: there are currently two Corporation Tax rates in Ireland; 12.5% for trading income and 25% for passive (investment) and foreign income. An Irish resident company which does not have a business in Ireland is taxed as if all its income is foreign income and the rate applicable is 25%. Besides apart from the units of foreign multinationals, the rest of the companies on the top 1,000 list, which have foreign operations, pay tax at several different rates in different countries.

As for CRH, it has about 1,500 from a payroll of 75,000 worldwide. So what it reports in its consolidated accounts reflects a cocktail of different rates including the 35% federal rate in the United States, offset by various tax expenditures (allowances/ credits).

CRH says in its Annual Report 2012: "The effective tax rate of 17.8% of pre-tax profit was higher than 2011 (16%), reflecting the mix of Group profits by geographical region."

Has Dragon Oil  exploration operations in Ireland.

As for Microsoft, it reported net income in Ireland in 2011/12 of €1bn, on revenues of €13.7bn, giving an effective rate of 13.2%. However, this is simply a fiction.

Microsoft Inc. reported revenues of $73bn and net income of $17bn in fiscal 2012; it allocated 24% of the global revenues to Ireland, $17.8bn, which resulted in a net income of $1.3bn.

So Microsoft Inc. had a net income/ revenues ratio of 23% and Microsoft Ireland's ratio was 7.3%, thanks to intercompany charges, which were likely used to transfer profits to a jurisdiction with a lower tax rate.

Microsoft's fiscal year (FY) 2012 ended on June 30, 2012 and in September 2012, at risk of serious legal sanction if it gave misleading information, the software giant told US Senate investigators that in FY 2011, the Irish, Singapore and Puerto Rican companies earned approximately $15.4bn in earnings before tax (EBT), or approximately 55% of global EBT. The average effective book foreign tax rate for the Irish, Singapore and Puerto Rican companies was approximately 4% - - 5.69% in Ireland; 2.78% in Singapore and 1.03% in Puerto Rico.

Google reported revenue in Ireland in 2011 at €12.4bn and after a charge of €9bn in 'administrative expenses' it had a net income of €24m; payroll costs for 1,900 people in Ireland amounted to €218m.

The tax charge on trading activities was €3m; total tax charged at €22.2m included foreign withholding tax.

The trading tax gives a perfect effective rate of 12.5%, corresponding with the headline rate of 12.5% but the profit was transferred out within the 'administrative expenses.'

...and back to 'surely.'

The official line is to avoid commenting on avoidance ("we can't discuss the affairs of individual companies") and keep harping on talking points whether they are valid or not.

This Irish Times op-ed in June is an example of a vested interest, in this case Conor O'Brien, the head of tax at KPMG, a Big 4 accounting firm, putting stress on the positive aspects of the tax regime but issues such as Google booking UK, German, French etc. sales in Dublin; Amazon treating the UK as a distribution depot for its office in Luxembourg; Starbucks paying no tax in the UK through the use of intercompany charges, are ignored, despite being the key factors in pushing political leaders to address massive tax avoidance.

One key problem is that few journalists or politicains can forensically challenge these defenders of the status quo.

The Irish Examiner reported last week that Gary Tobin of the Department of Finance told an Oireachtas committe that it was possible to close down the facility of Irish non-resident tax companies "but it would have a marginal impact on global tax avoidance by multinationals."

It had been retained in company legislation in 1999 at the request of US multinationals.

Wonder how would Gary Tobin or any other official know that ending the facility would have a marginal effect?

 Finally, this Irish Times report will inevitably be used by the spinners - - all directly or indirectly dependent on the Irish taxpayer.

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