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News : Irish Economy Last Updated: May 28, 2013 - 8:06 AM

Finfacts v Irish Status Quo: Corporate tax and property bubble taboos
By Michael Hennigan, Finfacts founder and editor
May 25, 2013 - 8:52 AM

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Michel Barnier (l), member of the European Commission and Michael Noonan, Irish finance minister, at a press briefing following the Ecofin meeting of EU finance ministers, May 14, 2013. The Frenchman who is responsible for financial services and the internal market, announced this week that he will draft legislation to force big companies operating in the European Union, beginning with banks, to provide breakdowns of tax paid country-by-country.

Finfacts v Irish Status Quo: The escalation of corporate tax avoidance in Ireland in the past decade coincided with the growth of the property bubble. Each operated in Ireland's parallel economies but they were underpinned by an establishment and its claques that successfully protected the status quo by treating dissenting views as taboos.

In the aftermath of this week's US Senate report on Apple's extensive use of Ireland as a tax haven, Michael Noonan, finance minister, has been reported as telling the Oireachtas finance committee: “We would want to be very careful that we don’t join in to this claque of criticism when in actual fact the Irish taxation system is totally transparent.”

The extensive ministerial parroting of the term 'transparent' this week, doesn't make a fiction a fact (see related links below), and Noonan also warned TDs not to jeopardise jobs in their constituencies by joining in unwarranted criticism of Ireland’s tax regime.

This warning has echoes of the stifling of dissent during the bubble years, which is vividly illustrated in the comment in 2007 by Bertie Ahern, then taoiseach, when he wondered why "cribbers" about the economy didn't commit suicide.

The property crash had to happen for the delusionists to return from their slumber in Rip Van Winkle's Land and now after ministers taking credit for surging services exports in recent years, that are the result of massive international tax avoidance schemes, the Government finds itself protesting that Ireland isn't a tax haven when it's too late.

Noonan himself has claimed that the services exports surge reflected increased competitiveness - - it is another example of ministerial fiction.

The services surge should be distinguished from traditional profit shifting in manufacturing.

In Ireland, there are a lot fewer jobs in multinational services compared with manufacturing while the phenomenon of giant US companies as market leaders in big European countries, paying little or no corporate taxes, is new. There is an exception in manufacturing, in respect of Dell, which on paper is Ireland's biggest manufacturer with a turnover of €10bn in the latest Irish Times Top 1,000 Companies. It books the output of its Polish plant in Ireland.

The Obama administration had proposed measures to curb corporate tax avoidance in early 2009 and the Irish Government authorised IDA Ireland, the public inward investment agency, to hire US tax lobbyists.

President Obama in his State of the Union message in early 2012, proposed creating an international minimum tax that companies with overseas profits would have to pay.

The good news for a time was that Republican gridlock in Washington DC killed the prospect of reform.

However, the extent of the use of Ireland as a tax haven - - Google diverting almost half its global revenues to Ireland; Facebook in a pre-IPO (initial public offering) filing last year saying the "material jurisdictions" in respect of its taxes are the United States and Ireland - - even before this week's revelations about Apple, was bound to become an international issue of controversy.

On Wednesday, Joe Nocera, New York Times columnist wrote:

Question for the government of Ireland: Do you really want your country to be known as an offshore tax haven? Indeed, at a time when your citizens are dealing with the pain of an austerity program, how can you justify allowing Apple to pay virtually no taxes on a subsidiary established solely to avoid taxes in the United States? Just wondering.

Stifling dissent in Ireland

While there have been advances on the social side in recent decades, Ireland remains a conservative society that is resistant to change.

The people who run Ireland are older men from the same generation that was shocked when the economy collapsed.

We wrote last week about the small mainstream media and in particular about the timidity of Irish Times editors in this time of crisis.

Coupled to that, the network of vested interests remains intact and business lobby groups such as IBEC and the Irish Exporters Association have been part of the fiction that the surge in services exports reflects real economic activity.

Crucially also, the national parliament is mainly populated by Lilliputians and since the crash, it's hard to think who could be termed a Gulliver who has been prepared to challenge conventional wisdom and look beyond the crisis fire-fighting to present a credible vision of a future sustainable economy.

From our own experience during the bubble and in recent times, despite the rise of the Internet, those who prosper from conventional wisdom, continue to hold the trump cards.

Invoking patriotism has also been a regular ploy, used by defenders of the status quo.

There is also a hypocrisy that is likely common among Irish people: expect solidarity from Europe but Microsoft for example booking a sale made in Athens, in Dublin, depriving Greece of tax on corporate profits - - that's surely an inconvenient truth to be ignored?

Emergence of Ireland as a tax haven

Aggressive tax avoidance became a common feature of US multinationals from the late 1990s.

We reported in 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.

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."

In 2005, The Wall Street Journal brought attention to Microsoft's efforts to route for example profits on sales in Germany to Dublin on which they paid Ireland at the low headline tax rate of 12.5%. The Journal said a subsidiary, Round Island One Ltd., operated from the offices of a Dublin law firm and was one of the country's biggest companies, with gross profits of nearly $9bn in 2004 but it had no direct staff. Now Google and Facebook are following on Microsoft's trail.   

The Journal said much of Round Island's income is licensing fees came from copyrighted software code that originated in the US. Some of the rights to these lucrative assets end up in Ireland via complex accounting rules on intellectual property

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 $17m in taxes to about 20 other governments that represent more than 300m people and $300 million in taxes to a country of just over 4m.

Microsoft's effective world-wide tax rate plunged to 26% in its 2005 fiscal year from 33% the year before. Nearly half of the drop was due to "foreign earnings taxed at lower rates,"

The Wall Street Journal said Microsoft's Irish venture is part of a historic emigration of US intellectual capital, a cornerstone of the modern American economy, to an island that once sent millions of famine-wracked migrants to America. Companies built on knowledge and innovations are an ever-larger portion of the US corporate tax base, displacing the old industrial concerns. But the newer firms' principal assets -- ideas, codes and formulas -- are intangible, and thus easily exported to places where the huge royalties they produce can be shielded from American taxation.

Accountants and lawyers now avidly market such relocations. Round Island's legal address is in the headquarters of a Dublin law firm, Matheson Ormsby Prentice, that advertises its expertise in helping multinational companies use Ireland to shelter income from taxes. It represents other US technology companies including Google.

Round Island was founded in 2001 and was converted to an unlimited Irish company in 2006 after The Wall Street Journal's reporting. The move closed off access to the financial data.

Microsoft told the SEC in 2011 that lower taxes in its fiscal fourth quarter to June 30, 2011, were “primarily due to a higher mix of earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland, Singapore and Puerto Rico, which are subject to lower income tax rates.”

Microsoft’s pre-tax profits booked overseas nearly tripled over the past five years, to $19.2bn in the fiscal year to June 30, 2011, from $6.8bn in the year ended in June 2006, according to company filings. By contrast, its US earnings have dropped, to $8.9bn from $11.4bn in the same period. Foreign earnings now make up 68% of overall income.

WSJ report [pdf; free]

The value added as percentage of GDP of US firms overseas was highest in Ireland in 2005 according to the US Bureau of Economic Analysis (BEA).


Apple, taxes, Irish economy and creating 200,000 net jobs

Reuters says Apple had Irish tax holiday from the start in 1980

EU to force country-by-country tax transparency on big companies

Irish claims on French corporate tax are false

Noonan not transparent on Apple taxes and US Senate report

Apple shifted "golden goose" and 64% of 2011 income to Irish "shell corporation"

Apple has special Irish tax rates; 'Stateless' companies based in Ireland

Irish Economy: No growth in 2012; 6,500 direct jobs account for 52% of services exports

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