|Source: Forfás |
In one recent year, the profits per employee at US-owned companies in Ireland were at $970,000 while the corporate tax paid in Ireland was about $25,000 (€19,000). However, as the Irish Government and its agencies remain on the back foot as they respond to the surprise international support for tackling corporate tax avoidance, it appears to have got its official talking points scrambled. More importantly, it's overdue time for policy makers to embrace the reality that the foreign-owned sector peaked as a jobs engine, thirteen years ago.
Preliminary data [pdf] from the US Bureau of Economic Analysis (BEA) on majority-owned foreign affiliates of US firms show that in 2010 (latest available), Irish-based firms reported net income of $95.6bn and a payroll count of 98,500 [pdf], which gives profits per employee of $970,000.
Meanwhile, Barry O'Leary, chief executive of IDA Ireland, the Irish inward investment agency, this month told the Public Accounts Committee of the Dáil that the agency's clients had paid Ireland about €2.7bn in corporation tax in 2012 - - while total corporation tax receipts (both foreign-owned and indigenous firms) amounted to €3.9bn [pdf] in 2010 and €4.2bn [pdf] in 2012. So there wasn't a material difference between the two years.
Barry O'Leary said the overall tax paid figure equated to €19,000 per employee, which in his view was a “high burden.”
The BEA data shows that 'taxes other than income and payroll taxes' payable in Ireland in 2010 amounted to $2.4bn, giving an effective rate of tax of 2.5%. Using Mr O'Leary's 2012 per capita data shows an effective rate of 2.6% while he told the Committee that the Irish effective corporate tax rate was very close to the headline rate of 12.5%, unlike in other jurisdictions.
Enda Kenny, taoiseach, made the same point about the effective rate when he participated in a panel discussion at the World Economic Forum in Davos, Switzerland last January and both he and other ministers have repeated it in the intervening months. However, it's a misleading claim.
Mr Kenny's cited 11.9% rate is from a report produced for the World Bank, by PricewaterhouseCoopers (PwC), the Big 4 accounting firm.
The template firm is not comparable with the typical foreign multinational company operating in Ireland. It 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.
What we can say is that based on both Barry O'Leary's testimony on tax paid coupled with prominent company examples in Ireland (as detailed below) and BEA data, that in recent years, the effective rate of tax has been in low single digits for multinationals not 11.9% as officially claimed.
It should also be kept in mind that a high effective Irish rate such as our Google and Microsoft examples where intercompany charges are used to minimise reported income, cannot be taken at face value.
An Irish Times survey, which showed that the top 1,000 companies operating in Ireland, paid an effective rate of 15.5%, has no relevance to the current debate.
For example, CRH, the world's second biggest building materials supplier, had an effective tax rate of 17.8% but that reflects a blend of the tax rates in the 35 countries where it has operations.
The Wall Street Journal reported last year that with the benefit of new tax breaks to spur job creation, total US corporate federal taxes paid fell to 12.1% of profits earned from activities within the US in fiscal 2011, which ended September 30 of that year, according to the Congressional Budget Office. That was the lowest level since at least 1972. And well below the 25.6% companies paid on average from 1987 to 2008.
US BEA data shows that in 2010, 98,500 Irish workers accounted for more sales than 598,000 in Germany ($324bn compared with $317bn) and German majority affiliates of US firms could only manage a net income/revenue ratio of 3% compared with 30% in Ireland.
The UK's 1.2m workers in US affiliates produced revenues of $682bn and net income of $87bn. Profitability per Irish worker of $970,000 compares with $72,500 in the UK.
Revenue per Irish employee in 2010 was $3.2m.
According to The Wall Street Journal, a sample of 468 firms in the S&P 500 stockmarket index in 2007, generated an average of $378,000 in revenue for every employee on their payrolls. In 2011, that figure rose to $420,000.
Bloomberg reports that InterDigital, a provider of technologies for mobile devices with a staff of over 300, had the highest US publicly listed company profit per employee in 2012, at $937,255. Apple was in 9th place at $573,255, among 20 companies.
Durability of a leprechaun's gold?
The Central Statistics Office reported on a dramatic rise in services exports in 2012:
Total service exports increased by €8.8bn from €81.5bn in 2011 to €90.3bn in 2012. An increase of €3.9bn in service imports from €83.2bn in 2011 to €87.1bn in 2012 was not as significant as the rise in service exports. As a result, the service balance moved from a deficit of €1.7bn in 2011 to a surplus of €3.2bn in 2012 - - the highest service balance since records began.
Computer services at €35.7bn was the largest export category and accounted for 40% of total service exports in 2012."
This manna from the heavens is officially a result of increased competitiveness and a related plunge in unit labour costs. It is neither and from an Irish viewpoint it is wealth that is as durable as a leprechaun's gold.
The three US electronics giants that route significant amounts of their foreign revenues through Ireland are Apple (it uses non-tax resident Irish companies for routing most of its foreign revenues and income from overseas markets), Microsoft and Google.
In 2011/2012, Apple's foreign tax rate was 1.9%, Microsoft's was 4% in its 3 regional sales centres: Ireland, Puerto Rico and Singapore, and Google's rate was 4.4%.
Google said last January: "Substantially all of the income from foreign operations was earned by an Irish subsidiary" - - Google Ireland Holdings (Bermuda), the Irish-registered non-tax resident company, which owns the intellectual property that Google Ireland Ltd is licensed to sell. It is a letter box with no Google employees.
Google Ireland has reported a 25% rise in 2012 revenues to €15.5bn (41% of Google Inc.'s global revenues ex Motorola) while increasing its workforce in Dublin by 100 to 2,200. Microsoft Operations Ireland reported a 37% rise in revenues in the year ended June 30, 2012 to €13.7bn (24% of Microsoft Inc's global revenues) without any significant change in its payroll of less than 700.
The combined revenues of the two companies accounted for almost one-third of headline services exports in 2012 and Ireland would have reported an annual shrinkage in GDP (gross domestic product) not growth but for the magic data. However, apart from payroll, small amounts of corporate tax paid and other local spending, data reflecting tax-related accounting transactions in multinational companies are not real world rises in Irish output or exports.
Google paid £11.6m (€14m) in corporation tax in the UK in 2012, on revenues of £506m (€625m), not booked in Ireland. Google's sales in the UK in 2012 were at about $5bn (£3.3bn).
The tax paid by Google and Microsoft, on net income after multi-billion royalty charges results in effective rates of 11% (€17m on €154m) and 13.2% (€132m on €1bn) respectively, appearing to confirm the official line that Ireland's effective rate of corporate tax (actual tax paid as a ratio of net income) is close to the headline rate of 12.5%. However, the net income in Ireland is minimised through huge intercompany charges.
Google Ireland reported a net income as a ratio of sales of 0.8% compared with Google Inc's net income ratio of 30%.
The official line from the Department of Finance and the Central Bank is that rising exports and falling unit labour costs reflect improved competitiveness. An international recovery would trigger "rocket" growth and beyond crisis fire-fighting, is it any wonder that the long-term challenges get so little attention?
Wonder why despite an apparent export boom in the past decade, full-time jobs in the internationally tradeable goods and services sectors (both in foreign-owned and indigenous firms) in 2012 were 25,000 below the 2000 level while the overall workforce grew by 20%?
Apple paid $713m in overseas corporation tax on foreign profits of $36.87bn in its 2012 fiscal year ending last September. That's a tax rate of 1.9%.
Apple's details were disclosed in its 10K filing with the US Securities and Exchange Commission (SEC). Apple confirmed last May that two Irish subsidiaries - - Apple Operations Europe and Apple Sales International - - paid approximately 2% in Irish tax in fiscal 2012 (this is a separate issue to claims in respect of a special agreement with the Irish Government on tax rates); Microsoft Inc. reported an effective 2011 tax rate of 5.69% in Ireland to a US Senate panel last year.
Google reported in its 10K filing last January: "Income from continuing operations before income taxes included income from domestic operations of $4.95bn $4,69bn, and $5.31bn for 2010, 2011, and 2012, and income from foreign operations of $5.84bn, $7.63bn, and $8.1bn for 2010, 2011, and 2012."
It had a foreign tax rate of 4.4% in 2012 and it provided for foreign tax of $358m in 2012 compared with $2.5bn in the US.
The massive tax avoidance has had an impact on Ireland's national accounts including both main metrics -- GDP (gross domestic product) and GNP (gross national product).
In 2012, total services exports at €92bn overtook merchandise exports for the first time, which were valued at €86bn.
In current price terms, total services exports quintupled compared with 2000. A miracle, surely?
It was an ostensible triumph for the many Irish economists who over a decade saw rising services exports as reflecting a move "up the value chain."
"Support for overall activity is coming from the exporting sectors, with services exports becoming an increasingly important engine of growth in recent quarters. This, in no small part, reflects the improvements in price and cost competitiveness that have been evident since the onset of the crisis " - - the Department of Finance said in the November 2012 Mid-Term Fiscal Statement [pdf]. Not true!
Last February, Michael Noonan, finance minister, at a Bloomberg event in London, attributed the jump in services exports to “the significant price and cost adjustments that have taken place in recent years.” Not true!
Last April in a speech in Amsterdam, Mario Draghi, ECB president, said on the reduction in unit labour costs: "Ireland has seen an 18 percentage point improvement relative to the euro area average." Not true!
In July this year, Microsoft was declared Ireland's top exporter after a 37% jump in exports value in its 2011/2012 fiscal year. Google was the runner up in the Irish Exporters' Association rankings and Dell was in fourth place for virtually "exporting" from Ireland, €10bn worth of PCs produced in Poland.
Besides the headline jump in computer services exports by 15%, business services, which includes companies such as Apple, rose 13%.
Unfortunately, there was no services miracle and the official line was as reliable as in bubble times.
Forfás, the policy advisory agency, said this year: "Overall, in 2011, foreign-owned firms accounted for 89% of exports in the Manufacturing Category, 95% of exports in the Internationally-Traded Services."
Forfás employment data shows that full-time FDI (foreign direct investment) jobs in computer services and communications (most of Google Ireland's 2,200 jobs are in sales and general administration not high tech) grew by only 10,000 in the period 2000-2012 while exports at current prices jumped nine-fold to €36.5bn.
Microsoft, Google, Oracle and Facebook account for the lion's share of computer services exports (about 90%) and Microsoft's operations company in Dublin, which employs less than 700 people, can achieve a revenue per employee of over $20m through intercompany accounting transactions involving some digital keystrokes that do not reflect economic activities in Ireland.
The US Senate Permanent Subcommittee on Investigations said in 2012 that Microsoft's 1,914 employees in Ireland, Singapore and Puerto Rico from the software giant’s total head count of 90,000, were responsible for 55% of 2011 profit before tax through shifting customer revenues from other economies.
Ireland gains little from what the US Senate panel called Microsoft's 'tax gimmickry.'
In 2011/2012, while Microsoft shifted 24% of global revenues to Dublin, Microsoft Inc.'s net income ratio was 30% and 7.5% in Ireland. Global profit before tax in 2012 was $22bn; in Ireland profit was reported at $1.3bn and a provision for tax was $170m compared with $5.3bn at Microsoft Inc.
There is an extensive eco-system that supports the fantasy of magical exports, both in the public and private sectors but is it any wonder that beyond the crisis fire-fighting, some believe that rocket growth will arrive like manna from the heavens?
There would have been no growth in GDP reported in 2012 but for the net growth in computer services exports. The same applied in the second quarter 2013 results published this month. Digital keystrokes again gave an illusion of growth.
We estimate that at least 40% of the value of Irish services exports is effectively fake - - this conclusion is of course as welcome in Ireland as dissent was during the property bubble. The difference here is that our conclusion is based on hard facts.
The virtual exports raise national output data and distort the ECB's productivity/ unit labour costs indicators; it results in a false endorsement from the European Commission of Ireland's innovation policy
The virtual exports also provide ministers with spin material on improving competitiveness, which can provide a mask for ignoring real world issues; ministers are also helped when most overseas economists and commentators are misled by headline data.
The crucial issue here is that there is no credible jobs strategy and there will not be one without an unvarnished assessment of the challenges.
It's more than a half century since Ireland undertook significant economic reforms in response to opportunities presented by the reduction of trade tariffs and the founding of the European Economic Community (EEC). The Irish backdrop in the 1950s was grim while the rest of Western Europe was rising from the ashes of a devastating war, but in the period since, two economic disasters in a generation have failed to overcome Ireland's conservative mindset and glacial change, if it does happen at all, remains an enduring characteristic.
The Pozzo character in Samuel Beckett's 'Waiting for Godot' says: "Let us not then speak ill of our generation, it is not any unhappier than its predecessors. (Pause.) Let us not speak well of it either. (Pause.) Let us not speak of it at all. (Pause. Judiciously.) It is true the population has increased."
However, let us praise a past Irish generation and wonder why was the young Thomas Kenneth Whitaker (b. 1916), who was appointed head of the Irish civil service at the age of 39 in 1955, able to make a reality of mould-breaking reform aspirations while working with ministers of different parties?
Prof Frank Barry of Trinity College in a recent paper [pdf], says that as far back as 1987, T.K. Whitaker said that he would like to see “a restoration of the old (civil service) principle that you were independent of ministers. You gave your views on any new proposals fearlessly, critically, honestly. You did not care whether your views were likely to commend themselves to the minister, whether for their own sake or politically. Once a decision was taken by minister or government, however, you carried it out as loyally and efficiently as you could. That was my understanding of the function of senior civil servants but I’m afraid it has been undermined."
When was the last time that a public enterprise chief said anything of consequence in public that was a departure from the official spin line?
Before examining in more detail the international tax challenge, we look at Ireland's dependence on FDI (foreign direct investment) and deal with some more bitter truths.
Ireland endorses two sets of FDI data, which is confusing but then the government department of Richard Bruton, enterprise minister, says there are two values for total exports in 2012 with neither of them meriting the tag 'official' - - this is the product of a system that is addicted to spin.
Reuters reported last May that at a conference in Dublin the head of Ireland's largest bank gave small business leaders the "15-second elevator pitch" he gives to US executives when he is in New York or Boston.
"I've mentioned to US investors that US companies have more capital invested in Ireland than they do in Brazil, Russia, India and China put together," said Richie Boucher, chief executive of Bank of Ireland.
"We have had a record year of FDI (foreign direct investment) in 2012" - - in a count of projects, fDi Intelligence, a unit of The Financial Times, says not so.
Mr Boucher was using data from a US Chamber of Commerce in Ireland report, which has a much higher inflow figure for 2011 than the Central Statistics Office (CSO) and the UNCTAD, the UN trade and development agency. The chamber counts 'reinvested earnings' as an inflow when much of it is holding company cash related to unrepatriated earnings.
CSO data shows outward investment is higher than inward investment - - this again highlights the common gulf between headline data and the real world. More here.
A key metric is employment.
Irish full-time employment in the internationally tradeable goods and services sectors (foreign and indigenous) at the end of 2012 was at about 295,000 compared with 320,000 in 2000. The drop of 25,000 in the 13-year period coincided with a 20% growth of the workforce (including the unemployed).
Data from Forfás shows that in 2000, 166,434 and 153,270 were employed in the sectors compared with 149,821 and 144,964 in 2012.
For those who expect rocket growth in Ireland from a European recovery, the performance in the 2001-2007 bubble period is not reassuring - - 10,000 job losses in the FDI sector and 10,000 job gains in the indigenous sector despite a big jump in domestic demand.
While job numbers fell, headline exports grew at current prices by 71% in the period 2000-2012 and at constant prices by 59% .
|Source: Forfás |
While the existing FDI base is significant, new projects tend to be small and it would be embarrassing for IDA Ireland to reveal the breakdown between local and foreign hires in recent years. When Finfacts sought data, it snapped: "We're not a statistics agency."
A big company such as Google may have up to 75% of its Irish payroll from outside Ireland.
Chinese investors tend to buy existing companies in Europe rather than develop from greenfield sites.
This month, National Pen, a US firm, announced it was planning to add 200 new jobs to its existing 259 person workforce, which comes from over 30 different countries with 16 working languages. It is an illustration of the impact poor language skills has for local workers.
Less than one-third of IDA Ireland client companies do minimum research and the main focus in software and web development, is on localisation. Coupled with pan-European sales administration and customer support - - all these areas require multilingual skills.
|'Export Performance and Competitiveness of the Irish Economy,' Central Bank of Ireland Quarterly Bulletin 3 2005 - - According to the 2004 official report 'Ahead of the Curve', produced by the Enterprise Strategy Group: "Over the period 1990-2002, exports by agency-assisted indigenous enterprise grew in nominal terms at 5.5% per annum (versus 15.9% for foreign-owned companies). When inflation is taken into account, the real growth in both sales and exports was negligible."|
European export performance is mainly dependent on firm size and business sectors rather than macro policy in a country. Research by Bruegel [pdf], the Brussels-based think-tank, compares other European countries to Germany as a benchmark. While local issues such as taxes and costs do have an impact, the main factors in success in exporting are firm size and sectors of operation. If the industrial structure (in terms of firm size and sectors) of countries like Italy and Spain were equal to that of Germany, the value of the total exports of Italian and Spanish firms would rise considerably - - by 37% and 24% respectively.
Central Bank research [pdf] shows that despite Ireland’s reputation as one of the world’s most globalised economies, 64% of private sector workers are employed by indigenous non-exporting firms, with 56% working for indigenous, non-exporting SMEs. The economists say that these numbers highlight the importance of domestic demand for sustaining and generating employment, and suggest that an export orientated growth policy may not have as large an impact on number of people employed as might be expected.
The indigenous sector has been operating below par for decades:
- If the excess transfer pricing and services were cut from the total value of annual exports, to leave a value of €100bn, total indigenous exports would only amount to a ratio of 22%;
- About 50,000 direct workers are responsible for almost 52% of headline exports;
- Irish corporate and employer social security rates are among the lowest in Europe and there is no requirement to provide employees with an occupational pension;
- There are a large number of public supports, and current hourly manufacturing wage costs are at 78% of Denmark's level;
- About 7% of local SMEs (small and medium size enterprises with employee numbers up to 249) export and the European Commission says there are approximately 20 SMEs per 1000 inhabitants in Ireland, which corresponds to only half of the EU average. In Denmark there are approximately 37 SMEs per 1000 inhabitants and they have a high level of internationalisation.
- Only 3% of Irish SMEs are active in manufacturing, whereas the equivalent figure for the EU is 10%, according to the European Commission.
- In the indigenous sector, Elan, the most valuable Irish public company in 2001, once the world's 20th-largest drug company with worldwide employment of over 1,700 in 2006, in 2013 is in the process of being acquired by a white label supplier of flu remedies to Wal Mart.
- Language skills are also important for indigenous exports and according to Eurostat [pdf], the EU's statistics agency, the highest shares of pupils in primary education studying a foreign language in 2008 were found in Luxembourg and Sweden (both 100%), Italy (99%) and Spain (98%), and the lowest in Ireland (3%), the Netherlands (32%) and Hungary (33%). The proportion of pupils in primary education studying a second foreign language was highest in Luxembourg (83%) and Greece (24%);
- A government-supported report published last July said that the proportion of people in Ireland who are early stage entrepreneurs has fallen (6.1% in 2012 from 7.3% in 2011) and Ireland’s ranking against other countries has declined. Ireland is now ranked 18th among the 34 mainly developed OECD countries, 14th of the EU-27 countries (of 22 countries included) and 6th of the pre-2004 EU-15 countries.
More on FDI in Ireland
Ireland's answer to changing tax times
The Irish Government expected that the veto available to member countries of the European Union to prevent tax harmonisation coupled with gridlock in the US political system, would protect its low corporate tax regime while turning a blind eye to extensive tax avoidance. However, the development of the software industry and then the Internet, gave flexibility to companies to shift services revenues from one country to another through computer accounting transactions, compared with the limitations in manufacturing of adding a markup to the intercompany sales price of goods that have to be produced.
We at Finfacts have tracked this issue for a decade and by early 2012 when we did extensive research on the evolution over the period, the huge amounts involved without an obvious gain for Ireland, suggested that IDA Ireland hiring lobbyists in Washington DC, to protect what were seen as Irish interests, could only be a short-term palliative, at best.
Today the Government is on the defensive with a focus on framing a public debate to avoid dealing with the issue directly.
So the issue of whether Ireland is a tax haven rather than engaged in tax haven activities, is the main official talking point as is protecting the 12.5% rate, even though that is not under threat. Various lobby groups and tax accountants support the official line.
As for local external advisers to the Government, most people with experience in this area, would likely face a conflict of interest.
Arthur Cox, Ireland's biggest corporate law firm, has been the main external adviser to the Department of Finance during the financial crisis. It is also active in selling Ireland's low tax advantages.
It said in a January 2011 tax briefing, 'Uses of Ireland for German Companies' [pdf]: "There are numerous advantages for multi-national companies with large Intellectual Property (IP) portfolios who locate and manage these portfolios in Ireland. The effective corporation tax rate can be reduced to as low as 2.5% for Irish companies whose trade involves the exploitation of intellectual property...A well-known global company recently moved the ownership and exploitation of an IP portfolio worth approximately $7bn to Ireland."
It is believed that the global company referred to is Accenture, the US management consultancy, which moved its headquarters from Bermuda to Ireland in 2009
Ruairí Quinn, finance minister, in 1996/97 had negotiated with the European Commission on cutting the standard rate of corporation tax to 12.5%, to provide for the official end of the zero rate on export profits, that had been introduced in 1956 by Gerard Sweetnam, Fine Gael finance minister, in the first budget which was prepared with T.K. Whitaker as secretary of the Department of Finance. The additional expiry date of a tax rate of 10% that applied to the manufacturing sector, which had been in force since the early 1980's, was the end of year 2010.
The standard rate of corporation tax was reduced on a gradual basis for indigenous companies and others that did not avail of the exports and manufacturing tax, from 38% in 1997 to a rate of 12.5% on trading profits from January 01, 2003. Passive income and income from certain ‘excepted’ trades (e.g. mining and trading in development land) are taxed at a higher rate of 25% as are company capital gains.
In 2009, Barack Obama, the new US president, proposed anti-tax avoidance measures. However, in the gridlocked US capital, the president's measures got nowhere.
Then in late 2010 following big public spending cuts in the UK, protesters against tax avoidance, mainly women, from a group called UK Uncut, began occupying the high profile retail stores of the Arcadia group such as Topshop, BHS, Burton, Miss Selfridge and Dorothy Perkins, controlled by Sir Philip Green, one of Britain's richest men.
David Cameron, British prime minister, had selected Green to review efficiency in Whiteheall and according to the Guardian, his report published in October 2010 reported "shocking" wastage in the government's procurement strategy. However, his suitability as a government adviser was questioned because of his alleged tax avoidance. The newspaper said the businessman banked the biggest pay cheque in corporate history in 2005 when his Arcadia fashion business, paid a £1.2bn dividend. The record-breaking payment went to his wife, Tina, who lived in Monaco and was the direct owner of Arcadia. Because of this arrangement no UK income tax was due on the gain.
Stories of big US consumer giants such as Apple, Amazon and Google paying no or very low taxes in the UK prompted a commitment from the UK government together with France and Germany to tackle tax avoidance which culminated in the commitments in recent months by the Group of 8 leading developed countries and Russia, and the Group of 20 leading developed and emerging economies, to work with the Organisation for Economic Co-operation and Development (OECD) to produce new rules on disclosure and base erosion by 2015.
Last May, the US Senate Permanent Subcommittee on Investigations issued a report, which said Apple Inc. used Irish companies, which it regarded as 'stateless,' to avoid paying corporate taxes to any national government on tens of billions of dollars in overseas income over a period of four years.
The Irish Government denied Apple's statement to the Senate panel that it had a special arrangement to pay no more than a 2% rate of tax - - in practical terms, a company such as Apple always had flexibility, without fear of an Irish revenue audit, to keep its net income low through intercompany charges from for example an island tax haven.
Aggressive tax avoidance became a common feature of US multinationals from the late 1990s.
Finfacts had reported in 2004 that Ireland was 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 $13.4bn to $26.8bn, 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.
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 the software firm 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 was licensing fees came from copyrighted software code that originated in the US. Some of the rights to these lucrative assets ended up in Ireland via complex accounting rules on intellectual property
Through a key holding, dubbed Flat Island Co., Round Island licensed rights to Microsoft software throughout Europe, the Middle East and Africa. Thus, Microsoft routed the license sales through Ireland and Round Island paid a total of just under $17m in taxes to about 20 other governments that represented more than 300m people and $300m in taxes to a country of just over 4m.
WSJ report [pdf; free]
Joe Nocera, New York Times columnist wrote last May:
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."
In June 2013, the head of tax for the OECD told Ireland it must charge 12.5% tax and not 2% if it wants to retain its tax regime.
Pascal Saint-Amans told a conference in Dublin that Ireland's tax regime was "low and attractive."
This month, Michael West, business columnist of the Sydney Morning Herald wrote:
Why does Macquarie (the Australian investment bank) control 49 entities registered in the Cayman Islands, 18 in Bermuda, nine in Mauritius, six in the Isle of Jersey, four in the British Virgin Islands, two in Aruba and one apiece in the Dominican Republic, Isle of Man, Curacao and the Netherland Antilles?
Is it that the bank has diversified its island operations between the Caribbean Sea, the Indian Ocean and the English Channel in case there is a tsunami?
No, this significant island presence is complemented by 14 entities in Luxembourg, 58 in Ireland and four in landlocked Switzerland."
1. We have outlined above that the effective Irish corporate tax rate is not typically close to the headline rate of 12.5%, for multinationals, as officially claimed.
2. Ireland isn't a tax haven comparable with islands where there is no requirement of operational economic activity locally.
All the developed countries are members of the OECD and among them, neither Ireland, Netherlands, Luxembourg, Switzerland, the UK (with responsibility for 10 island tax havens, known as Crown Dependencies and Overseas Territories) and the US (in Delaware it’s easy to set up shell companies with no questions asked) meet their definition of tax haven -- and for good reason.
All view it as a pejorative term and in 2009 when President Obama termed the Netherlands a tax haven, the Dutch government protested and the Treasury Department adjusted documentation to please them - - the Dutch host 23,000 letter box companies including one for U2, the Irish rock group.
Bloomberg reported last January that multinational companies routed €10.2tn in 2010 through 14,300 Dutch “special financial units,” according to the Dutch Central Bank. Such units often only exist on paper, as is allowed by law.
The OECD in 1998 defined the following features of tax havens: no or low taxes, lack of effective exchange of information, lack of transparency, and no requirement of substantial activity ('Harmful Tax Competition: An Emerging Global Issue').
However, In Ireland, the US Eaton Corporation with over 100,000 staff, can avail of the tax advantages of having a small number of staff working at an Irish headquarters of a holding company.
3. The principal use of non-tax resident Irish companies is tax avoidance and there was an exemption made in 1999 specifically for this purpose. It's ridiculous to suggest that we have no responsibility for what a tax expert told the House Ways and Means Committee of the US Congress, were "Irish shell companies."
4. The Irish corporate tax system is not transparent and the Revenue turns a blind eye to billion in overseas charges to minimise reported income. It's a different standard for local companies.
Some of Microsoft's Irish companies are unlimited; Apple's Irish companies have unlimited status and it does not have to file accounts in Ireland.
In an unlimited company there is no upper limit on the personal liability of shareholders for the company’s debts upon the company’s insolvency. William Fry, a law firm, says: "Although one might expect this type of company to be rare, 2% of all Irish companies are unlimited, and Ireland has more than twice as many unlimited companies as it has PLCs." However, LK Shields, another Dublin law firm, says it is possible to use a structure, using non-EU companies as holding companies, where an unlimited company can avail of the non-filing exemption while also providing the original shareholders with limited liability.
SEE: Apple, Anglo Irish Bank and Irish company law
5. The national accounts and services exports data are distorted by tax strategies. Over 40% of reported Irish services exports are fake.
Prof John Kay said in the Financial Times last June:
In the main, however, tax authorities have preferred to cut deals with big corporations rather than pursue costly legal action. They will not do the same for you and me.
A serious reform agenda would involve a principled reappraisal of the basis for taxing corporations both nationally and globally, and a strategy for effective enforcement of existing rules. Such a strategy would make clear that executives of companies which present accounts to tax authorities that are essentially false, and the accountants who support them, will in future run serious risks. The door they hear closing behind them might be the door of a prison cell rather than the door of 10 Downing Street."
Freedom of Information Act disclosures on budget demands coupled with both anecdotal and actual evidence, suggests that the FDI sector has an inside track in dealing with Irish ministers and authorities.
It took 10 years for even one audit of the R&D tax credit scheme.
In 2009, Craig Barrett, a former CEO of Intel, the computer chip giant, was reported to have told an Irish diaspora forum on the economy, that there were about 14 reasons why Intel came to Ireland in 1989 but that only one remained: our tax rate.
Ireland's low corporate tax rate will remain and we have advantages with the existing large base of FDI but there are also challenges.
In future some activities in Dublin's International Financial Services Centre are likely to be curtailed; companies will not have the flexibility to achieve low effective tax rates but for servicing markets in Europe, many advantages remain.
However, FDI firms will not do significant research in Ireland - - Israel, China and India are the favourite overseas locations for US R&D centres - - and while FDI has peaked, emerging economies will not take up the slack.
It's time for policy makers in Dublin to wake up to the challenges.
The focus of public policy on exports has produced poor returns while the domestic market remains in a parlous state; the participation in Irish apprenticeship schemes is the worst in Western Europe.
It’s striking that Tesco and Dunnes Stores together employ about 30,000 people.
In Famine times, people in West Cork who lived a few miles from inland shores that were well stocked with shoals of herring and mackerel, died of starvation. Today, farmers in West Cork are more likely to shop at the local Tesco unit than grow produce themselves.
It’s also striking how important the agriculture and horticulture sectors are for the Netherlands, the size of the Irish province of Munster - - the world’s second largest exporter of agri-food products, after the USA. The total value of Dutch agricultural exports was €75.4bn in 2012 compared with €9.02bn (Bord Bia) in Ireland, including drink.
Ireland’s output of potatoes is 5% of the Dutch level and turnover of the Dutch machinery for food processing sector is €2.3bn, of which 80% is exported.
They have had a tradition in the sectors but what tradition had poverty-stricken South Korea in world class manufacturing in the 1960s?
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