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News : Irish Economy Last Updated: Jun 3, 2014 - 6:45 AM

Ireland in U-turn on corporate tax avoidance; Accepts reality of reform
By Michael Hennigan, Finfacts founder and editor
May 28, 2014 - 5:51 AM

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Enda Kenny, taoiseach/ prime minister, meets Tim Cook, Apple's CEO, at its Cork, Ireland campus, January 31, 2014

Having spent the past eighteen months claiming that Ireland does not facilitate international corporate tax avoidance despite overwhelming evidence to the contrary, the Irish Government has done a U-turn and has signalled that it is ready to prepare for the reality of reform.

On Tuesday the Department of Finance published a consultation document [pdf] on the OECD (Organisation for Economic Co-operation and Development) Base Erosion and Profit Shifting (BEPS) project and it announced that Michael Noonan, finance minister, "now wishes to consider options for Ireland’s tax system to respond to a changing international tax environment.

Interested parties are now invited to submit their views on how Ireland’s domestic tax system might best respond to international tax changes.

The consultation will run for 8 weeks from 27th May 2014 until 22nd July 2014."

The Department also said in respect of the BEPS project that "Ireland is actively engaged in this process."

Up to this week, this meant "actively engaged" in trying to undermine it with the support of business lobby groups and the professional services vested interests.

Last month Finfacts argued in a submission to the OECD that Ireland has the potential to gain from corporate tax reform including the ending of massive distortions of the national accounts -- for example almost half of Ireland's reported services exports are effectively fake as they result from tax avoidance.

Finfacts 2014: OECD BEPS Project: Ireland should embrace corporate tax reform

The Irish Times reports today that Feargal O’Rourke, chairman of the tax policy committee of the American Chamber of Commerce Ireland, and head of tax with PwC Ireland, a unit of the Big 4 accounting firm, has said that the “realpolitik” of the global debate on corporation tax meant Ireland’s rules needed to change.

For example a change to the rule on tax residency would end a process whereby multinationals based in Ireland reduce their tax bills by making intellectual property payments to Irish subsidiaries that are tax resident offshore. "However, it is likely there would be no corporation tax windfall for the Irish exchequer as the companies would probably locate their IP elsewhere."

Finfacts 2013: Ireland's tax man for Silicon Valley

On Tuesday the Oireachtas (Parliament) Joint sub-Committee on Global Taxation met in Leinster House and heard from Brian Keegan, director of taxation, Chartered Accountants Ireland and Sorley McCaughey, head of policy and advocacy, Christian Aid Ireland.

Testimony has not yet been published but according to The Irish Examiner, Brian Keegan warned that poor transfer pricing and profit shifting proposals could result in Ireland’s €4bn annual tax take from foreign-owned multinationals falling to €3bn.

He added that any negative international focus on Ireland regarding international tax policies has been “unfair and unfounded” and harmful tax practices are “simply not a feature of the Irish tax landscape.”

He also said that base erosion and profit sharing could make an already difficult international tax environment even more complicated.

Christian Aid’s Sorley McCaughey said Ireland has a reputational problem and is already considered a tax conduit country.

His organisation has called for a country-by-country reporting requirement for companies operating in Ireland.

Brian Keegan spoke the official Newspeak that is now set for revision, where "a reality distortion field" exists or in Irish vernacular - - a fairytale.

“Steve has a reality distortion field… In his presence, reality is malleable. He can convince anyone of practically anything,” Dr Guy "Bud" Tribble, a member of the Macintosh Software team said about Steve Jobs, Apple co-founder in 1981. Tribble is still with Apple, having rejoined in 1992.

The Irish defenders of the status quo arguing black is white eventually ran out of road and the Government, floundering after a pasting in the local and European Parliament elections' is likely to be more open to a Reality Check now than continue to founder in a Star Trek reality distortion field.

In May 2013 the US Senate’s Permanent Subcommittee on Investigations revealed how Apple was using Irish offshore companies that it considered as 'stateless' -- not obliged to report to any tax authority in the world -- to route much of its overseas income through tax-free.

In response the Irish Government and its cheerleaders claimed:

  • The Irish tax system is transparent;

  • Ireland's effective corporation tax rate was close to the headline 12.5% rate not the low digit rate for foreign companies availing of the 'Double Irish Dutch Sandwich' dodge via Irish offshore accounts.

  • Ireland could not be responsible for Irish offshore companies because they were "controlled and managed" outside Ireland.

As for Apple, to the world, most of its offshore Irish companies use the Cork, Ireland address and appear to be part of its real world operations there - “AOI is active in just two countries, Ireland and the United States” the May 2013 Senate report says.

Companies like Apple don’t like being publicly associated with small tax havens. That’s why Accenture, the US consultancy firm, moved its hq from Bermuda to Ireland.

The Irish Apple company in the British Virgin Islands tax haven is Baldwin (a breed of apple) Holdings Unlimited.

As for transparency, the 'unlimited' status provision in Irish company law ensures that the accounts of all Apple's Irish units are kept secret.

Ireland closed the 'stateless' loophole but it didn't impact the Irish companies in West Atlantic tax havens that are part of the 'Double Irish Dutch Sandwich' tax-dodging scheme. 

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 5.3% in 2012, rising to 8.6% in 2013 (page 79; pdf) - - this rate is about one-third of international headline rates. Google's total (US and overseas) effective rate was 15.7%, down from 19.4% in 2012.

1. In the Finance Act, 1999, under pressure from the EU, all Irish-incorporated companies were to become resident for tax purposes; however, multinational companies were given an exemption and these companies are mainly used for tax avoidance.

2. In 2011/2012, Microsoft booked 24% of its global revenues in Ireland; in 2012 Google booked over 40% and Facebook booked 48% of global revenues in Ireland -- almost all its ex-US revenues.

A total of about €45bn of virtual exportsor 48% of Ireland services exports in 2013 also boosts Ireland's output and without the benefit of the net exports, Ireland would have reported a GDP contraction in 2012 rather than a small positive. Productivity data is also impacted - - these exports are effectively fake but they are part of the national accounts.

In February 2013,Michael Noonan, finance minister, at a Bloomberg event in London, attributed the jump in services exports to “the significant price and cost adjustments that have taken place in recent years.” It was not true!

In April 2013 in a speech in Amsterdam, Mario Draghi, ECB president, said on the reduction in unit labour costs: "Ireland has seen an 18 percentage point improvement relative to the euro area average." Again it reflected a distortion.

In July 2013, Microsoft was declared Ireland's top exporter after a 37% jump in virtual exports value in its 2011/2012 fiscal year. Google was the runner up in the Irish Exporters' Association rankings and Dell was in fourth place for virtually "exporting" from Ireland, €10bn worth of PCs produced in Poland.  

3. Mailbox Irish holding companies in West Atlantic island tax havens, avail of secrecy courtesy of unlimited status provided by Irish company law.

4. It is US companies who identify Ireland as the location of profits used in BEA data - - for example Google and Facebook says in their Securities and Exchange Commission filings: "Although we file US federal, US state, and foreign tax returns, our two major tax jurisdictions are the US and Ireland."

5. Google Netherlands Holdings BV is owned by Google Ireland Holdings, Bermuda.The Dutch mailbox company, receives funds from Dublin and it booked €10.4bn in sales in 2012 and expenses of €32,750 -- it doesn't even have an employee.

The funds come from Dublin for onward transfer to Bermuda.

Pfizer, Ireland's largest merchandise exporter, is owned by  Dutch partnership and it has a similar arrangement.

5. BEA FDI (foreign direct investment) data gets an official imprimatur from Richard Bruton, enterprise minister, who in 2013 launched the American Chamber of Commerce in Ireland annual FDI report

Last year the chamber made a bold claim: "In the past half decade, US firms have invested more capital in Ireland than in the previous half century."

Finfacts reported last October that despite a claim of new investment of $129.5bn in the period 2008-2012, only 3,300 permanent net jobs were added by US firms in Ireland.

In this case, the data is distorted by tax avoidance as retained earnings reflect tax-related 'trapped cash' that is counted as an inflow.

Finfacts 2013: Ireland's confusing FDI data in age of spin

6. Noonan has said: "Ireland cannot tax profits that are properly attributable to other jurisdictions" but its resident companies book the revenue and what is profit is transferred out without any tax via charges with a small amount reported as net income in Ireland. Besides, the transfers end up in Irish companies in other jurisdictions and if the Irish Revenue did some checking, it may find that the profits are not "properly attributable."

Google has reported UK revenues of $5.6bn in 2013 but it may have booked up to $5.0bn in Dublin with no tax liability on the profit.

Note again that huge revenues are booked in Ireland that are unrelated to activity in Ireland and become part of the national accounts but Noonan argues that even though the related profits are moved from Ireland and end up in Irish companies in tax havens, they should not be classified as Irish. 

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