OECD BEPS Project: If new international corporate tax rules take effect from 2016, at least €50bn or half the annual value of services exports will be vapourised. Nevertheless, Ireland should support reform to a) protect the 12.5% corporation tax rate that will continue to give the country an advantage in competing for mobile investment b) remove the taint of sleaze that is associated with being a facilitator of massive corporate tax avoidance and c) enable the production of national accounts that are free of huge distortions which mask the enduring underperformance of the indigenous exporting sector over the past fifty years.
The Government like its predecessors had banked on the status quo being preserved through the EU veto on tax harmonisation and political gridlock in Washington DC. However, the unexpected international support for tax reform over the last eighteen months has left it floundering and the responses to various revelations about Irish involvement in tax avoidance have not been convincing.
“I want to reemphasise that all companies operating in Ireland -- domestic businesses and multinationals -- are chargeable to corporation tax at the 12.5% rate on the profits that are generated from their trading activities here," Michael Noonan, finance minister, said in answer to a Dáil question last February.
What is missing from this narrative is that when Google booked 41% of its 2012 global revenues in Ireland; Facebook booked 48% and in 2011/12, Microsoft diverted 24% of its global revenues, the tax due in Ireland was calculated after the booking of big charges to shift most of the profits tax-free to Irish offshore mailbox companies in Bermuda and the Cayman Islands.
The offshore companies are protected from public scrutiny through unlimited status under Irish company law.
Apple Inc. for decades has been able to present its offshore non-tax resident companies that contain the ‘Apple’ name as normal Irish tax-resident companies with addresses at its Cork headquarters. It even filed an Irish tax return in respect of some transactions in one of the companies according to a 2013 report from the US Senate Permanent Subcommittee on Investigations.
Apple’s Irish company in the British Virgin Islands is named Baldwin Holdings Unlimited - - Baldwin is a breed of apple.
The tech giant’s ex-US revenues in recent years have amounted to about 60% of the global total and with the help of the Irish companies, the foreign profits tax rate has been 1.8% in fiscal 2011, 1.9% in 2012% and 3.6% in 2013.
Both Microsoft's main Irish companies, Microsoft Operations Ireland Limited (MIOL) and Microsoft Ireland Research Unlimited (MIR) are subsidiaries of Round Island One Unlimited, Microsoft's Irish shell company in Bermuda.
MIR handles licensing of Microsoft's intellectual capital (IP) and also employs about 400 in Dublin. It's a conduit for billions of dollars in royalties and it may well be both tax resident and non-tax resident in Ireland.
Microsoft's effective corporate tax rate in Ireland in 2011 (including the Irish companies in Bermuda) was 5.69% according to the US Senate's Permanent Subcommitte on Investigations.
The Government is publicly supportive of the Organisation of Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) project that the think-tank for mainly developed country governments, was asked to undertake by the G-20 group of leading developed and emerging nations.
Behind the scenes, the Government is likely the target of intense lobbying from groups such as the Irish unit of the powerful United States Chamber of Commerce. It should resist it because the biggest threat to the Irish corporation tax rate is not from the OECD but a US minimum foreign profits tax to deter profit shifting to countries such as Ireland and island tax havens.
The Obama Administration has proposed such a measure without specifying a rate and last February in The Wall Street Journal, Robert Pozen, a former senior executive of Fidelity, the giant mutual fund manager, proposed a 17% minimum foreign rate to fund a cut in the headline US corporate tax rate of 35%.
A US foreign profits tax above the Irish 12.5% rate, would kill the latter as an incentive and while US tax reform may seem a distant prospect today, history shows that like the progressive era a century ago in response to robber-baron capitalism, when the Standard Oil Trust was broken up and a corporate tax became law, growing inequality will not always be accepted as inevitable.
Ireland’s offshore companies are tax avoidance entities and they should be closed down over time.
The Irish authorities haven’t a clue about the operation of these mailbox companies -- which don't have any real-world existence - - and the multi-billion charges that come from them to transfer profits from Ireland tax-free. Some of the accounting is inevitably suspect.
A different standard applies to the directors of a local firm who engage in questionable accounting and they risk imprisonment.
Jobless exports surge
In the early years of the last decade Irish subsidiaries of US companies became the most profitable in the world in terms of sales revenues and as profit shifting to low corporate tax and no-tax jurisdictions accelerated, Irish exports rose but job numbers remained static.
In the period end 2000 to end 2013, the value of inflation-adjusted exports rose 59% while according to Forfás , the public research unit, direct jobs in foreign-owned exporting firms fell from 184,000 to 172,000 despite a 22% overall rise in the size of the workforce.
Even though only accounting for 10% of total headline tradeable exports, indigenous firms added a net 5,000 jobs in thirteen years to 177,000 at end 2013.
In 2013 the total value of exports was €177bn and if excess transfer pricing and virtual services exports were eliminated from the total, to result in a discounted €100bn, indigenous exports (including tourism and transport) would only amount to 24% of that discounted total.
So while jobs in the indigenous sector may have lower pay and typically no pension coverage compared with those in foreign-owned firms, the job creation ratio for a given level of output is 4:1.
Consequences of reform
Enda Kenny, taoiseach/ prime minister, said in a speech on April 3rd that the US is “Ireland’s largest trading partner in services.”
In 2012 services exports overtook goods exports for the first time and the development was hailed by the Government as reflecting competitiveness - - which it wasn’t.
The rise in recent times reflects tax avoidance rather than trade and we estimate that in 2013 €45bn of the value of computer and business services was tax related - - this amounted to 48% of total services exports.
As the big services multinationals have been posting double-digit revenue growth in recent years, the tax-avoidance component in services exports from Ireland will soon rise to over €50bn.
In the real world, the elimination of fake services exports will not have a big impact as royalty and other charges offset the values, and companies such as Apple, Google, Microsoft, and Facebook, employing about 10,000 mainly European nationals because of the demand for multilingual skills, will still have incentives to stay in Ireland, with lower employment levels.
Ireland also has low non-wage labour costs and with the exception of the UK, hourly pay compares favourably with most of Europe’s developed economies.
The investment of over $5bn by Intel, the US computer chip giant, in Ireland in recent years is a signall of confidence in the country as a location for high tech manufacturing.
However, the reality behind the Government’s permanent jobs publicity campaign is that the FDI (foreign direct investment) sector ceased being a jobs engine in 2000.
Less than one-third of IDA Ireland supported firms do even basic R&D (research and development) in Ireland and Craig Barrett, the former Intel CEO, suggested in a newspaper interview earlier this year said that this situation is unlikely to change.
Tax avoidance has distorted the national accounts and in recent years companies moving their headquarters to Ireland with no physical presence or limited ones, have artificially boosted gross national product (GNP) while exporting is made look easy when ministers conflate for impact, data on exports by Irish-based foreign firms to particular markets such as China, with data on indigenous exports.
Since the introduction of export profits tax relief in 1956, indigenous exporting firms have been provided with similar incentives to those available to FDI firms but the performance has been poor with limited activity outside the English-speaking world.
In food, our area of strength, we could do better but reforms in agriculture are overdue while to politicians, ready-made FDI jobs involve no hard choices.
In 2013 Ireland's agri-food exports were valued at €8.7bn, compared with €16bn in Denmark (population 5.5m) and €79bn in the Netherlands (population 17m).
The trade surplus as a ratio of exports in the sector was lowest in Ireland at 31%, and down from 52% in 2000; it was 37% in Denmark and 32% in the Netherlands.
The foreign sector will continue to be important for the Irish economy but the biggest potential for job creation is in the indigenous exporting sectors.
A submission on the OECD’s 'Tax Challenges of the Digital Economy' report can be accessed here [pdf].
OECD April 2014: Comments received on discussion draft on 'Tax Challenges of the Digital Economy' published
Finfacts April 2014: Irish Economy: Data confirms jobs in foreign-owned exporting firms in 2013 below 2000 level
Michael Hennigan is founder and editor of the Finfacts financial website (www.finfacts.ie)
The genesis of the G20-OECD BEPS Project
|The genesis of the current OECD reform project dates from late 2010 in the UK when following public spending cuts, 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. According to The Guardian, Green 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 tax was due on the gain.
Margaret Hodge MP then took up the issue and House of Commons hearings revealed the cosy relationship between Revenue (HMRC) officials and Big 4 accounting firms working on behalf of MNCs (multinationals).
A Google executive recently said that it’s up to governments to set the rules on traffic speed and the firm obeys whatever rules are set.
Of course every issue cannot be specifically codified and revenue authorities do usually have a lot of discretion on abuse of the system. However, a different standard usually applies to MNCs compared with domestic firms and when a prime minister or taoiseach hosts a leader of an MNC, staff of course get the message on who matters.
What of course is also missing from the Google argument is that the MNCs have the money to influence the rules and as recently as Jan 2013 their tax lobby group lobbied the OECD to include a clause in a then planned new tax convention to allow companies to continue to finalise deals in a low-tax country, and thereby avoid paying taxes in higher-tax markets even if that’s where most of the business happens.
Until the corporate tax avoidance got the attention of the international media, anyone in Ireland who questioned the status quo was viewed in the same manner as dissidents during the property bubble - - “talking down the economy” - - and it was usually only a left-wing TD who would dare question the gods of existing policy.
The conservative Irish media was in the same boat and my claim a few years ago that a third of Irish services exports were tax related or effectively fake, was of course incendiary. Now, I argue that almost half the annual value is fake.
Read the OECD submission for more detail.
In the past year The Irish Times has given platforms to three of the leading vested interests for the status quo: the American Chamber of Commerce in Ireland and two taxation partners from Big 4 accounting firms.
On Monday April 07, I submitted the piece above to the newspaper and followed up last Friday with an email but got no reply.
It took an economic crash for many to realise that the free lunch hadn't been invented and today when new thinking is required, the insiders are old dogs that cannot learn new tricks.
- Michael Hennigan
Ireland's benign neglect of agriculture
Food exports trade surplus shrinks
|Forty one years after Ireland joined the then European Economic Community which resulted in price supports and other assistance for Irish farmers, agriculture is showing the signs of decades of benign neglect despite food production being crucial for the indigenous sector.
The Irish food trade surplus as a ratio of exports has fallen from 61% in 1990 and 52% in 2000 to 31% in 2013 while today Denmark produces four times the Irish output of potatoes and has a trade surplus ratio of 37%.
Direct employment in agriculture, fisheries and forestry - - mainly in farming is at about 120,00 - - 5.5% of the total workforce - - while in 2013 according to Forfás, a public research unit, 39,000 people were employed in indigenous food firms and 6,000 in foreign-owned food manufacturing firms.
Bord Bia, the public food and drinks promotion agency, estimates that 60% of pigmeat and some 90% of chicken sold at foodservice level is imported while grain for feeding cattle is also imported.
The typical Irish farmer is a shopper for imported vegetables, including at the Irish outlets of Tesco, the British supermarket giant.
Many farmers are dependent on European Union welfare and non-farm employment, while the corrupt land rezoning system which makes land for development artificially scarce in a country that is 4% urbanised, remains a taboo issue for Irish governments because farmers see it as a lucrative potential top-up on their incomes, giving them flexibility to sell sites for housing when necessary - - it's Ireland's biggest stealth tax.
During the property bubble, the acquisition of farmland accounted for almost a quarter of the €18bn national roadbuilding budget - - double the average ratio across Europe.
A 2008 survey published by Eurostat, the European Union's statistics office, showed that of 117,900 agricultural holdings in 2007, 39% used less than 20 ha (hectares, 49 acres), while 4% used 100 ha (247 acres) or more; 93% of Irish farms were livestock specialists; family labour force represented 93% of the total agricultural labour force and amongst the sole holders: 50% were aged 55 or more and 5% were younger than 35 years; 43% had another gainful activity in 2007.
According to Macra na Feirme, the Irish farmers' organisation for under 35s, there are more Irish farmers over 80 than under 35 while the amount of land that comes on the market annually is less than 0.5%.
Transactions have fallen in recent decades and EU cash payments unrelated to production; pensions; site sales and short-term lettings or conacre give an incentive to older farmers not to sell while multi-year leasing, which is common in Europe is not in Ireland.
In the early 1990s, over 30,000 hectares was being traded per year, about three times the amount that currently comes to the market and while investors get tax breaks for buying land for speculation, it is very hard for young people who do not inherit farms to get into the sector - - so much for ministerial twitterings on entrepreneurship.
Teagasc, the Irish public agriculture development and research authority, said in its 2012 annual report that "only about one-third of farms are economically viable farm businesses. Almost 26,104 farm households are economically vulnerable, i.e. the business is not viable and neither the farmer nor the spouse works off the farm. The availability of off-farm employment opportunities continued to contract in 2012 and the number of farmers working off the farm fell for the sixth consecutive year. The proportion of farmers also engaged in off-farm employment fell from 30% in 2011 to 27% in 2012....The average direct payment - - mainly via the EU's Common Agricultural Policy - - per farm was €20,534 comprising 81% of farm income.
In France there is a bias towards helping young farmers (under 40) not only in buying land but also in finance support and it has been estimated that 30% of farmers have no prior family connection with agriculture.
SAFER (Les Sociétés d'aménagement foncier et d'établissement rural) was established by the French government in the early 1960s, when 56% of all French farms were smaller than 10 hectares and it comprises 27 not-for-profit bodies that have the objective to help local agriculture and rural trades to thrive while protecting the environment.
It has a particular objective to bring young people into the sector who may not have a prior family connection with farming.
"We are interested in agricultural or other rural properties - - it could be an inn or café and the mairie might ask us to buy it. If it's an inn, we would look for an innkeeper to take it on to maintain the area's economic vitality," a spokeswoman told Connexion, an English language newspaper in France. “Or we might buy a piece of land that needs to be protected to safeguard nature and biodiversity."
A pre-emptive right might be used, for example, where a farmer is planning to sell to a Parisian but a young local farmer, who needs to expand, asks SAFER to intervene.
SAFER will usually buy at the asking price, but it should be a reasonable market price.
"Say a rich Californian wants to buy a vineyard at 10 times the market price, which would push up the prices of agricultural land in the area and make it unaffordable to local farmers, SAFER may pre-empt. Or if a billionnaire decides they want to buy the whole wine production of the Languedoc..."
Where SAFER makes its own, lower, price offer, the seller can refuse and withdraw the sale. SAFER pre-empts only after permission from the state and on advice from its "technical committee", a panel of local experts including representatives of chambers of agriculture, banks, agricultural insurers and unions, local councils and the state.
SAFER says 38% of land it sells is to install or add to holdings of young farmers.
France also has tools to enable the combination of all the production factors into a “farm fund” to facilitate the transfer of the farm. Another measure includes the possibility of increasing the pension of an older owner of a farm if he/she sells the farm to a younger successor. The EU says France's policy for younger farmers "seems to be the most extensive and also includes several measures focused on new entrants in agriculture, such as farmland preservation from urbanisation and other uses, direct support to new entrants in local and regional policies."
The French system did not evolve without protest, however in 2010, SAFER acquired 74,800 ha of land, worth €791m. In 2011, it supported the installation of 1,220 young farmers, including 730 from non-agricultural backgrounds (60% of all installations for 2011).
Why not? What other area of entrepreneurial activity requires that?
According to Savills, the estate agents, in 2007 in France each field changed hands at least once every 70 years, but in Ireland on average a field changed hands every 555 years! Total annual turnover in Ireland was less than 0.2% of the total acreage. Countries with sales restrictions, such as France, had the cheapest land.
Land was about €6,000 a hectare compared with almost €60,000 in Ireland - - the most expensive in Europe in 2007. In the later years of the bubble in Ireland, demand has been boosted by purchases of 'lifestyle farms', especially within 100 km of Dublin, coupled with the increasing trend of 'off-farm' employment leading to commercial farmers in effect becoming 'hobby farmers.'
In France the average price of arable land in 2012 was €6,560 / ha and in Ireland in 2013 the price was €23,200/ ha.
Ireland has 24% of the number of land holdings in France and 41% of French farmers are over 55 compared with 51% in Ireland.
Fergal Anderson who has a vegetable farm in the West of Ireland writes on Ireland in a report, ‘Land concentration, land grabbing and people’s struggles in Europe,’ that "the only historic colony of the British Empire within Europe, Ireland’s modern land and peasant history needs to be understood as a product of both colonial land policy and the land struggles which eventually led to independence. These policies and struggles established, and in many cases entrenched, trends within the agricultural and rural economy which form the basis of the system which exists today."
He says that a minority of farmers and companies involved in the production as well as the processing industry, particularly for beef, dominate the agricultural economy. Ireland is primarily a beef and dairy exporter, with 90% of beef produced being exported, largely to Europe with 50% going to Britain and while the big dairy companies in Ireland are hoping to increase their production with the lifting of the milk quota in 2015 which will certainly lead to an increase in production on larger, more industrialised farms, a further concentration of land ownership is inevitable.
Anderson says that since independence in 1921, larger landholders and richer farmers primarily focused on the export market have, had the ear of political parties and successive governments - - Irish government policy has served to support an export economy as opposed to ensuring fair livelihoods for the majority of farmers.
He writes: "Ireland is well placed to reorientate its farming system - - particularly smaller producers - - towards quality production as opposed to quantity. There is huge scope to improve accessibility to locally produced food for the population, and to help farmers develop local and cooperative based markets for their produce, while ensuring real sustainability without Ireland having to import concentrated feeds or fodder to feed its animals."
It may seem that large industrialised farms may be more competitive than smaller farms.
However, the IMF says that “family-owned farms, rather than large companies run by hired labour, have...been the most competitive all over the world, including in developed countries such as the United States.”