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News : Irish Economy Last Updated: Jan 21, 2014 - 9:31 AM

G-20 Australian presidency focuses on tax "leaking bucket"; Ireland still in denial?
By Michael Hennigan, Finfacts founder and editor
Jan 19, 2014 - 4:27 PM

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Tony Abbott, prime minister, and Campbell Newman, Queensland's premier, at the launch of the Australian presidency of the G-20 (group of twenty) in Brisbane, Dec 01, 2013.

At the launch in Brisbane last month of the Australian presidency of the G-20, Tony Abbott, prime minister, said action on addressing the "leaking bucket" of international tax base erosion and profit shifting will remain a priority and will also get attention from the leaders of the nineteen biggest developed and emerging economies at the G-20 summit in the city next November. The Irish government made a small change in response to last year's disclosure of Apple's treatment of Irish non-resident companies as stateless but it appears to be still in denial about the implications of the forthcoming changes or unsure how to prepare for them (Australia's priorities for G-20 in 2014 - pdf).

Last September at the St Petersburg G-20 summit, the leaders of the countries responsible for 85% of the world’s GDP (gross domestic product), 75% of the world’s trade, 65% of the world’s population, “fully endorsed” the OECD (Organisation for Economic Cooperation and Development) Base Erosion and Profit Shifting (BEPS) project.

The public backing of the new conservative Australian leader for changes in international tax rules illustrates the momentum behind reform, and Joe Hockey, the treasurer (finance minister), plans to introduce a targeted anti-avoidance rule to address abuse of  interest charges related to debt loading of affiliates by multinationals that will raise about A$900m.

Last week The Irish Times published a report on an internal Department of Finance report, "Principal Risks to Ireland’s Corporation Tax Strategy," that was released following a Freedom of Information request (the newspaper hasn't  published the report and the official  Information Commissioner does not publish releases of information).

The report says the main concern relates to an OECD action plan on erosion of the tax base and proposed “anti-abuse” rules aimed at firms using tax havens abroad.

“If the issue of minimum tax rates was to get traction in discussions around anti-abuse rules more generally, it could present difficulties for Ireland...The concern is that if other countries introduce anti-abuse/CFC [controlled foreign corporation] rules which stipulate minimum tax rates, multinational company subsidiaries located in Ireland could suffer additional foreign tax rates,” the report says.

It also sees US plans to reform its tax system as another risk, given American firms account for about one-third of all our corporation tax payments.

“The corporate tax changes being considered focus on applying additional US tax to the foreign income of US companies, which is taxed at a ‘low’ effective rate,” it states.

However, the report says Ireland’s long-standing engagement with international tax rules means it is “aligned with best international practice with most areas” and should have little to fear.

Bloomberg reported on Wednesday that David Pyott, Allergan Inc. (AGN) CEO, said he probably won’t follow other drugmakers in making an acquisition in Ireland as a way to lower the company’s corporate taxes.

Allergan employs 900 workers in Westport Co. Mayo, where Botox, the anti-wrinkle treatment, is made.

Bloomberg said investors have been pressuring Pyott to seek an deal where it would move its headquarters to Ireland, according to David Maris, senior research analyst at BMO Capital Markets Corp. It follows acquisitions last year of Irish drugmaker Elan by Perrigo Co. (PRGO), the largest US maker of generic over-the-counter medicines, and Dublin-based Warner Chilcott Plc last year by Actavis Plc, which relocated to Ireland through the deal.

“This is the latest fashion in financial engineering, until the roof comes off and someone changes the rules,” Pyott said in an interview at the JPMorgan Chase & Co health-care conference in San Francisco. “I am not swayed by that.”

'What Makes a Country a Tax Haven?' [pdf; from page 57] -  An assessment of international standards shows why Ireland is not a tax haven - by Gary Tobin and Keith Walsh, head of tax at the Department of Finance and senior economist at the Office of the Revenue Commissioners, respectively, is a paper that was published in the Economic and Social Review journal in September 2013. It broadly reflects the official line of their political masters.

There is a review of the literature and no mention of the "Dutch Irish Dutch Sandwich" which the IMF explains here.

Prominence is given to calculations of effective corporate tax rates [pdf] that was done by Christoph Spengel and colleagues at the ZEW (Centre for European Economic Research), a German economics institute. The work was commissioned by the European Commission and the economists calculated that the Irish effective rate was 14.4% based on a range of assets with financial assets at a rate of 24.4% compared with the headline rate of 12.5%.

The US has an overall average effective rate of 36.5%.

US corporations paid an average effective federal tax rate of 12.6% in 2010, the Government Accountability Office said last year - - that reflected some crisis breaks

The Financial Times reported last year that Apple would have paid a tax rate of about 15% in 2012, far below the 25.2% it reported, had it not used a form of reserve accounting that sets it apart from other big US technology companies.

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%.

Finfacts has calculated that the effective rate for US companies operating in Ireland in 2010 was 2.5% based on data published by the US Bureau of Economic Analysis (BEA).

Tobin and Walsh write that Spengel et al's data "casts further doubt on the reliability of the data used in many studies suggesting very low effective corporation tax rates in Ireland. As Walsh (2012) shows, the BEA data inflate the profit levels of US companies in Ireland due to the inclusion of data on companies tax resident elsewhere and this distorts the effective rate calculations."

Image credit Bloomberg; Finfacts, Sept 2013: US company profits per Irish employee at $970,000; Tax paid in Ireland at $25,000. We use the same 2010 US Bureau of economic Analysis (BEA) data in our article as is used in the Bloomberg image above. Gary Tobin and Keith Walsh, Irish civil servants, argue that the profits data used is "notoriously volatile from year to year." This can be seen to be an unreliable claim as the only dip in the trend was in 2009, the year after the collapse of Lehman Brothers, the US investment bank. In the chart, note the divergence of the profit line from the jobs line from the late 1990s.

Ireland was the world's most profitable country for US corporations, according to analysis by US tax journal Tax Notes in 2004. 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.

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. 

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.

Tobin and Walsh's "companies tax resident elsewhere" are Irish companies used to receive patent royalties transfers in non-tax jurisdictions to avoid tax in Ireland. They object to these transfers being included by the BEA in holding companies profits.

Why does the Irish Revenue accept these transfers while similar big charges at a relative level in a SME would trigger a tax audit?

Google disclosed to the US Securities and Exchange Commission that all its foreign income was routed through Ireland and a key official in the Department of Finance argues that this has no relevance!

Its Irish-Dutch sandwich grew to €8.8bn in 2012, with that amount transferred from Ireland via the Netherlands to an Irish company in Bermuda with a physical presence on the island that amounts to a letter box in the offices of an offshore services company.

Tobin and Walsh do not appear to have a problem with the related revenues from other jurisdictions such as the UK being diverted to Ireland where they are booked as services exports.

In February 2013, Michael Noonan, finance minister, at a Bloomberg event in London, attributed a jump in 2012 services exports to “the significant price and cost adjustments that have taken place in recent years” - -  it was a lie as the facts were that the jump in services exports resulted from tax avoidance. 

Coupled with the multinational tax income streams for Big 4 accounting firms and law firms, with tax partners availing of platforms in the media to argue for what suits their interests, at least the advice from civil servants should not be tailored to please ministers.

SEE also:

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

Corporate tax reform and the biggest tech tax havens

Ireland's new International Tax Charter: More political kabuki

Ireland's tax man for Silicon Valley

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