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News : Irish Economy Last Updated: Oct 17, 2013 - 10:36 AM


Ireland's new International Tax Charter: More political kabuki
By Michael Hennigan, Finfacts founder and editor
Oct 16, 2013 - 6:08 AM

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The announcement of Ireland's new International Tax Charter by Michael Noonan, finance minister, in his Budget speech on Tuesday is what Americans would call political kabuki, evoking a classical Japanese dance-drama. In the vernacular, it merits being termed a fake while some of the claims made in the accompanying document could be termed economical with the truth for sensitive folk or lies to people who inhabit a world of common-sense.

The only direct legislative measure Noonan promised on Tuesday was to address the issue of  "stateless" non-tax resident Irish companies that had been highlighted in a report on Apple last May by the US Senate panel, the Permanent Subcommittee on Investigations.

The report [pdf] said that Apple Operations International had not filed an income tax return in either Ireland or the US, or any other country, for the past five years. From 2009 to 2012, it reported income totaling $30bn.

A second Irish subsidiary claiming not to be a tax resident anywhere is Apple Sales International which, from 2009 to 2012, had sales revenue totaling $74bn. The company appears to have paid taxes on only a tiny fraction of that income, resulting, for example, in an effective 2011 tax rate of only five hundreds of one percent.

The Senate panel said that in addition to creating non-tax resident affiliates, Apple Inc. had utilised US tax loopholes to avoid US taxes on $44bn in otherwise taxable offshore income over the past four years, or about $10bn in tax avoidance per year.

Senator Carl Levin, Democrat of Michigan, and John McCain, Republican of Arizona, chairman and ranking member, respectively, of the Permanent Subcommittee on Investigations, released the following statement Tuesday on Ireland’s announcement.

Ireland’s promise to reform its tax rules to stop multinationals from using Irish subsidiaries to escape or defer paying taxes anywhere in the world is encouraging. Important questions do remain, however, including whether the new rules will continue to allow Irish subsidiaries to dodge taxes by, for example, excluding substantial income from the 12% Irish tax rate, calculating taxable income in ways that produce a lower effective tax rate, or simply declaring tax residency in a tax haven with no corporate tax.  Hopefully, the answers will demonstrate that Ireland is ready to close the door on these egregious corporate tax abuses enabling multinational tax avoidance.”

While the current work being done by the Organisation for Economic Co-operation and Development (OECD) to develop proposals to update international corporate tax law, at the request of the G-20 leading developed and emerging economies, is more important than national initiatives, the Dutch who facilitate corporate tax haven activities that are much more extensive than Ireland's, announced last month measures to restrict the Netherlands' 23,000 foreign letter-box companies and revise tax treaties with 23 poor countries to allow the incorporation of anti-abuse clauses where necessary.   

In Dublin, the strategy is to play for time and obfuscate because there is a reality that the Government will not officially acknowledge: corporate tax avoidance is entwined in the fabric of the national accounts. 

With merchandise exports under stress because of the expiry of patents on American blockbuster drugs that are manufactured in Ireland, a surge in services exports in recent times has been hailed as reflecting increased competitiveness, while providing GDP (gross domestic product) with the only material boost. The latter, which includes the profits of the dominant foreign-owned sector, is the key metric for European Union targets.

In 2012, just Google and Microsoft accounted for a third of record services exports, because of tax related revenue diversions from other markets - - it's a bit of a stretch to classify Google sales in Australia and Hong Kong as Irish exports but that is what's happening.

So about 45% of the value of services exports or €40bn (25% of GDP) is virtual or effectively fake and to wipe this out overnight would be embarrassing. It would also undermine the argument about competitiveness as national output would have to be downsized with a resultant rise in unit labour costs.

In the debate on tax avoidance, the Government would like to keep the focus on defence of the headline 12.5% corporate tax rate but that is not under attack, despite some confusion overseas.

The Dutch have a 25% corporate tax rate and lots of tax avoidance and evasion.

Ministerial mantras that Ireland's tax system is transparent and the effective corporate tax rate is close to the headline rate, are debunked here:

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

The Department of Finance's 'Ireland's International Tax Strategy' [pdf] document, which was published on Tuesday contains some gems and what would commonly be understood as lies:

Ireland has been active in efforts at European and OECD level to develop a response to aggressive tax planning.

Aggressive tax planning by companies is a major issue for legislators across the world and it needs to be addressed. Ireland is very much involved in the process of addressing the issue

Ireland’s corporate tax system is open, transparent (when did Apple last file company accounts in Ireland? 2005?), and all the rules are clearly set down in our national law.

A General Anti-Avoidance Rule (GAAR) has been in place since 1989 – the  European Commission is now calling for all Member States to introduce such domestic legislation – and Irish transfer pricing rules are based on the OECD arm’s length standard.

Notwithstanding the evidence which shows that Ireland only engages in fair tax competition and complies with all relevant international rules, some company structures have been criticised as examples of legal but aggressive tax-planning by international companies.

A statute-based 25% rate of corporate tax applies to investment / non-trading income to guard against ‘brass-plate’ operations with low substance and to reinforce the role of Ireland’s corporation tax regime in fostering active, substantial, trading operations here."

On the last point, in recent times, the US Eaton Corporation with a payroll of over 100,000 and only a small headquarters staff in Ireland, is availing of the 12.5% rate.

A brass-plate is one thing and a brass-neck is another.

The bromides on helping developing countries must rank with the hypocrisy of Bono, the frontman of the Irish rock group U2, who last month demanded transparency from extractive companies operating in Africa, who were likely using Dutch tax haven facilities just like U2!  

Ireland’s new Policy for International Development commits to ensuring that our Key Partner Countries emerge from their dependence on aid. Lasting solutions to problems of poverty and hunger must be underpinned by developing countries’ own ability to raise domestic revenue. We will therefore undertake efforts to help developing countries increase their domestic revenues in ways that are more efficient, fairer and better promote good governance and equity.

We will do this by working both at an international level to combat illicit financial flows and capital flight and at a national level to strengthen revenue collection and management."

This is classic cant and a wise man named Abraham Lincoln once said: "You cannot escape the responsibility of tomorrow by evading it today."

The good news is that default Irish procrastination will not work this time as the sands are already moving under the comfortable seats of conservative policy makers.

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