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News : Irish Economy Last Updated: Feb 18, 2014 - 6:41 AM


Corporate Tax 2014: Feargal O'Rourke's Irish tax fairytales and "meaningless" US data
By Michael Hennigan, Finfacts founder and editor
Feb 11, 2014 - 3:57 PM

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PwC launches ‘Why Ireland?’ guide simultaneously in New York, Boston and San José, Silicon Valley, March 2012

Corporate Tax 2014:  Feargal O'Rourke, head of tax at PricewaterhouseCoopers (PwC) in Ireland, in a radio interview this morning dismissed US Bureau of Economic Analysis (BEA) data collected from US companies in respect of Irish affiliates as "meaningless." He said there was a “hole the size of the grand canyon” in the data but that claim was not supported with any evidence and what he appeared to want was more Irish tax fairytales.

O'Rourke was appearing with Jim Stewart of Trinity College who had calculated that the effective rate of tax for American companies in Ireland in 2011 was 2.2%.

Finfacts last year estimated the effective rate at 2.5% in 2010.

O'Rourke said: “It (the research data) is counting companies that have no operations in Ireland whatsoever. They were born here but have no assets, no income, no activity whatsoever. These companies do not operate in Ireland. No wonder you’d get 2.2%” -- they're Irish offshore companies that are used as part of tax avoidance schemes and if not, what would be their purpose? Arms or illicit drug deals? 

Feargal O'Rourke is credited by Jesse Drucker of Bloomberg News as the leading Irish tax expert behind such schemes as the "Double Irish Dutch Sandwich" scheme - - the non-tax resident mailbox companies on sunny islands are the end route for shaving billions off tax bills.

See the infographic here from the Bloomberg piece, with BEA data for Ireland in respect of the period 1990-2010, where earnings and employment are tracked.
 
Look how the earnings diverge from the mid -1990s as companies took advantage of the ‘check the box’ loophole [pdf], which had unintended consequences. However, with companies able to effectively buy votes on Capitol Hill, once the loophole was available, efforts to close it, including by the Obama administration, have failed.
 
Between 1999-2002, reported profits in low tax countries such as Ireland doubled and from then agressive tax avoidance has been the norm while the spolismen in Washington DC are bought off.

It would be a sham to ignore these companies.

Finfacts 2013: IMF explains “Double Irish Dutch Sandwich” tax avoidance

We assume that US companies do not supply false data to the BEA and when income and tax is allocated to Irish affiliates in their submissions, that is what they also report to the Internal Revenue Service (IRS). Wherever profits come from, these are Irish companies that receive them.

O'Rourke said that  branch operations are not included in BEA data but that is doubtful as legally Pfizer Ireland, the unit of the drugs giant, is a branch of a Dutch partnership but why would significant data on an Irish affiliate that is 100% owned not be allocated to Ireland. Besides, it's geographical data that the IRS could request.

Microsoft told the US Senate Permanent Subcommittee on Investigations in 2012 that its business structure is designed to take advantage of low tax jurisdictions in Ireland, Puerto Rico and Singapore.

Apple's global foreign tax rate was 2% in 2012 and 3.6% in 2013; Google's provision of €17m in corporate tax in 2012 to Ireland on the foreign net income of $8.1bn it booked in Ireland, gave an effective tax rate of 0.21%. Google's global foreign-paid tax rate in 2012 was 4.4%.

What is curious about O'Rourke's argument is that he implies that Ireland should not have any responsibility for its mailbox holding companies in places like Bermuda and Cayman Islands.

Recently, a foreign government has requested Bermuda to investigate three of Microsoft's subsidiaries in the island nation that are in effect Irish offshore shell companies linked to the software giant's companies in Ireland, and are used for corporate tax avoidance and maybe evasion.

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. Microsoft's global profit before tax in 2012 was $22bn; in Ireland profit was reported at $1.3bn.

Microsoft Operations Ireland reported a 37% rise in revenues in the year ended June 30, 2012 to €13.7bn without any significant change in its payroll of less than 700.

Google Ireland 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.

Google Ireland reported a net income as a ratio of sales of 0.8% compared with Google Inc's net income ratio of 30%. Taxes paid or provided for in Ireland amounted to €17m.

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.

 

While profits per employee at US-owned companies in Ireland were at $970,000 in 2010, 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.

Finfacts 2014: Foreign government requests Bermuda to investigate Microsoft's Irish-linked subsidiaries

Investment income from so-called 'trapped cash' is included in Irish earnings in BEA data.

The "Grand Canyon" metaphor is not merited.

Data supplied to the Irish Central Statistics office would be from the local affiliate and in this digital age, head office can easily arrange the figures that suit.

Whatever goes through Irish companies wherever they are based is an Irish responsibility.

Ireland facilitates the holding companies in the island tax havens with unlimited status. So it cannot be ascertained what other flows beyond direct ones from Ireland are routed through them - - but again, the US companies report what is claimed in respect of Ireland.

The non tax-resident Irish companies are made available for tax avoidance as existing multinationals in 1999 had sought an exemption from a reform in company law that was introduced at the request of the European Commission.

Besides, Apple, Google and Microsoft, Facebook diverts almost half its global revenues to Ireland before it moves to the Cayman Islands- - however this results in fake exports and output in Ireland. In 2012, absent these fake transactions GDP (gross domestic product) would have been reported to have contracted

SEE: Irish Medium-Term Economic Strategy 2014-2020: Exports to plunge by €50bn - Part 1

Arthur Cox, Ireland's biggest corporate law firm, 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. The Irish IP regime is broad and applies to all types of IP. A generous scheme of capital allowances as well as a tax credit for money invested in research and development in Ireland offer significant incentives to companies who locate their activities in Ireland.

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

Also in 2009, Cooper Industries with a payroll of 25,000 moved its headquarters from Bermuda to Maynooth, Ireland, to give the location more legitimacy in the eyes of US politicians. In 2012 it was acquired by Eaton, another US electric systems  company, with a payroll of 75,000 and the bigger Eaton decided to move the headquarters of the expanded group to Ireland and save an annual $160m on its tax bill.

Officially, Ireland isn't a tax haven and neither is any of the 34 member countries of the Organisation for Economic Co-operation and Development (OECD), which includes all developed nations.

A tax haven has to have arching palms shading sandy beaches.

While big US companies overseas are synonymous with tax avoidance, at home, companies also win as cities and states compete with handouts to attract jobs.

Meanwhile, in 2012, inflation-adjusted US household income was lower than it was in 1989:

Finfacts 2014: American Plutonomy: Richest 5% account for almost 40% of consumer spending

Finfacts 2013:   Wall Street Journal on Silicon Valley dreams of techno-utopias and arrogance

Selection of Finfacts tax reports 2013/14:

Corporate Tax 2014: Obama running with the hare and hunting with the hounds

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

Corporate Tax 2014: Yahoo! joins “Double Irish Dutch Sandwich” club; IDA Ireland wants more members 

Corporate Tax: Kenny reassures Facebook but Ireland's rate is too high

Foreign government requests Bermuda to investigate Microsoft's Irish-linked subsidiaries

G-20 Australian presidency focuses on tax "leaking bucket"; Ireland still in denial?

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

Corporate Tax 2014: UK's revenues plunge; France considers reform

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