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News : Irish Economy Last Updated: Mar 26, 2014 - 7:16 AM

Corporate Tax Reform: OECD says Ireland/ India top global ICT services exporters
By Michael Hennigan, Finfacts founder and editor
Mar 25, 2014 - 5:22 AM

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Corporate Tax Reform: The OECD (Organisation for Economic Co-operation and Development) on Monday published a draft document for discussion as part of its Base Erosion and Profit Shifting (BEPS Action Plan) project that it has undertaken at the request of the G-20 (the group of twenty that comprises the 19 leading developed and emerging economies in the world) to develop new international tax rules to counter massive corporate tax avoidance. The document shows that Ireland is just behind India as a top global exporter of ICT (information, communications, telecommunications) services.

The chart above from the Paris-based think-tank for 34 mainly developed country governments including Ireland, shows the huge growth in both India and Ireland since 2000. However, the key distinction is that India's ICT exports are home-produced while Ireland's mainly reflect corporate tax avoidance.

The document, BEPS Action 1: Address the tax challenges of the digital economy[pdf] says:

Structures aimed at artificially shifting profits to locations where they are taxed at more favourable rates, or not taxed at all, will be rendered ineffective by ongoing work in the context of the BEPS Project. At the same time, the work on BEPS will increase transparency between taxpayers and tax administrations and among tax administrations themselves. Risk assessment processes at the level of the competent tax administration will be enhanced by measures such as the mandatory disclosure of aggressive tax planning arrangements and uniform transfer pricing documentation requirements, coupled with a template for country-by-country reporting. The comprehensiveness of the BEPS Action Plan will ensure that, once the different measures are implemented in a coordinated manner, taxation is more aligned with where economic activities takes place. This will restore taxing rights at the level of both the market jurisdiction and the jurisdiction of the ultimate parent company, with the aim to put an end to the phenomenon of so-called stateless income."

The focus of the document is on the rise of the digital economy and the opportunities for avoiding tax; the ability of a company to have a significant digital presence in the economy of another country without being liable to taxation due to the lack of nexus under current international rules, the attribution of value created from the generation of marketable location-relevant data through the use of digital products and services; excessive cross-border payments to related parties in low tax jurisdictions that can erode the tax base where the services are sold, and so on. of the countries from which such payments are made.

Avoiding payment of VAT is also an issue besides tax on profits.

The plan is to "restore taxation" to where digital companies make their sales and base their headquarters

The report says "the fact that it is possible to generate a large quantity of sales without a taxable presence should not be understated...and it raises questions about whether the current rules are fit for purpose in the digital economy.  These questions relate in particular to the definition of permanent establishment for treaty purposes, and the related profit attribution rules. It had already been recognised in the past that the concept of permanent establishment referred not only to a substantial physical presence in the country concerned, but also to situations where the non-resident carried on business in the country concerned via a dependent agent (hence the rules contained in paragraphs 5 and 6 of Article 5 of the OECD Model)."

The OECD proposes changing the rules on determining whether a company has a taxable presence including instances where a company had “fully dematerialised digital activities.” It also highlights the role played by intellectual property in digital companies saying under current rules, the legal ownership of intangible assets can easily be separated by the activities that led to their development.

The reports says that over the last decade, a number of OECD and non-OECD countries have introduced intangible regimes which provide for a preferential tax treatment for certain income arising from the exploitation of IP (intellectual property), generally through a 50 to 80% deduction or exemption of qualified IP income.

The OECD says that under existing tax rules, the rights to intangible assets can often be easily assigned and transferred among associated enterprises, with the result that the legal ownership of the assets may be separated from the activities that resulted in the development of those assets.

It says it has consulted on planned changes to rules which will drastically reduce the profits that can be attributed to countries where there were no real activity, other than the legal ownership of intellectual property.

This will spell end the infamous 'Dutch Irish Dutch Sandwich' scheme.

On Monday, Chartered Accountants Ireland(CAI), in common with the Irish Government's failed effort to change the subject (effective tax rate 11.9% for all companies; statute based transparent system; not a tax haven and so on), avoided addressing the focus of the OECD report: the digital economy.

The CAI said multinationals would be subject to corporate tax at the point of sale rather than where products are manufactured, which would favour big economies with large consumer markets to the detriment of smaller countries.

“These proposals, which are a key element of a larger project to revise the way multinational companies are taxed, would fundamentally change the business model for companies based in Ireland,” said Brian Keegan, CAI tax director.

“These proposals would move company profits away from where value is created, in countries like Ireland, to locations where products are sold - - principally the major European countries.”

This would be akin to taxing our agriculture exports where they are sold, rather than where they are grown, he added.

This is quite a stretch from companies like Apple, Google, Microsoft, Facebook booking big chunks of their global revenues either through resident companies in Ireland or offshore Irish companies that are mainly used for tax avoidance.

Finfacts: Right on property bubble & corporate tax avoidance

This is another key moment for the Irish establishment, when reality dawns that facilitating massive corporate tax avoidance while also having a low headline rate of 12.5%, could tarnish the attractive FDI (foreign direct investment) incentive package.

1) Given the extent of the tax abuse through the use of Irish offshore companies, that were usually based in West Atlantic island tax havens where there were no corporate taxes, there was always a risk that the US Congress would apply a minimum foreign tax greater than the Irish headline rate. 

2) The banker of an Irish veto on European Union tax harmonisation lulled  policy makers in Dublin into believing that they could see off EU efforts to curb corporate tax avoidance.

As with the property bubble, the Rip Van Winkles in Dublin have awakened to a new reality.

Finfacts has been covering the accelerating corporate tax avoidance for a decade.

Again, as with the property bubble, dissent is easily drowned out when the political leadership, senior civil servants, enterprise agencies, mainstream media, economists and vested interest groups such as Ibec and Chartered Accounts Ireland, tacitly or otherwise deem departures from the received wisdom as "talking down the economy."

This tune has only changed since corporate tax avoidance became a big international issue.

For many years, rising services exports were acclaimed as reflecting a "move up the value chain" when the increase mainly reflected tax avoidance.

Even today, reports on the Irish economy from the Government, the Central Bank, the ESRI and some economists, suggest that rising services reflect increasing competitiveness not virtual transactions unrelated to activities in Ireland

The Department of Finance in a report last month [pdf; page 12] claimed: "Continued competitiveness boost through reduction in unit labour costs with a 21% relative improvement forecast against the Eurozone average" in 2008-2015.      

This is a fantasy.

Another report from the Irish Government in February said

Ireland is a strong performer in services exports, which grew by 11% in 2012 and account for 50% of  total Irish exports. This reflects the growth in ICT and e-business sectors with a number of Irish services companies and large foreign-owned multinationals operating and exporting from Ireland. Ireland is also home to the service operations of many manufacturing firms as well as financial services, leasing and computer services firms. Some important services sectors within the Irish economy include:

  • Computer Services: accounting for 40% of total services exports in 2012, realising a 49% growth over a five year period."

We noted that this is a classic example of Irish political spin and fantasy in policy making.

The rise in computer services exports is overwhelmingly related to the booking for tax avoidance purposes of big chunks of global revenues in Ireland by companies such as Microsoft, Google and Facebook. Were 2,200 Google employees in Dublin responsible for over 40% of Google's global revenues in 2012? 

Irish Medium-Term Economic Strategy 2014-2020: Exports to plunge by €50bn - Parts 1-8

Irish Corporate Tax 2014: How official spin and distortion works - in short-term

Civil servants are required to produce propaganda material and last year Prof Frank Barry in a paper, 'Politicians, the Bureaucracy and Economic Policymaking over Two Crises: the 1950s and Today' [pdf], compared the disastrous Irish policy making of the Lilliputians of  recent times with the times of giants like TK Whitaker, who was appointed secretary of the Department of Finance in 1956.

-- Michael Hennigan

Selection of Finfacts tax reports 2013/14:

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

Corporate Tax 2014: Apple's massive tax avoidance revealed in Ireland and Australia

Corporate Tax 2014: White House and Congress to publish US reform proposals

Corporate Tax 2014: US proposal of 17% rate for foreign profits

Irish Corporate Tax 2014: How official spin and distortion works - in short-term

Irish Corporate Tax 2014: Noonan signalls publicity offensive on effective rate

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

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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