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News : Irish Economy Last Updated: Jul 28, 2014 - 8:48 AM


Corporation Tax Reform: Irish Government should reject pleadings of short-termists
By Michael Hennigan, Finfacts founder and editor
Jul 25, 2014 - 7:29 AM

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Corporation Tax Reform: On Tuesday the public consultation period on the Irish response to expected international corporate tax rule changes, which was launched by the Government in May, came to an end and the same business lobby groups who a decade ago were among the cheerleaders of an out-of-control economy because of the short term benefits, are reported now to oppose unilateral moves to change the tax status quo.

As in other sectors of the economy, when it comes to FDI (foreign direct investment) those who support the status quo including ministers often rely on fairy-tales rather than facts.

Tax avoidance can fool many and when so-called "trapped cash," may well be in the US as deposits or invested in Treasuries, while changes become an annual FDI inflow - - last year the American Chamber of Commerce in Ireland made this striking but misleading statement: "Over the five-year period starting in 2008 and ending in 2012, US firms invested more capital in Ireland ($129.5bn) than in the previous 58 years combined."

Have a look at the chart above and see what the impact on jobs has been since 2000 despite a 22% increase in the size of the workforce.

Can it really be true that Irish companies in the US had a payroll of 141,000 in 2012?

Yesterday Richard Bruton, enterprise minister, launched a report on FDI Ireland that has a mix of selective facts and fictions, with echoes of the "talking down the economy" jibe of bubble times that was used to undermine critics who would dare question fairy-tale scenarios.

Also on Thursday, Google filed its Irish and UK 2013 accounts - - 2,368 people in Dublin from a payroll of 43,862 (ex-Motorola) were responsible for 39% of global revenues of $55.5bn.

Just Google, Microsoft and Facebook alone, accounted for €35.5bn or 39% of Ireland's services exports in 2013.

Yet unit labour costs calculated from this type of tax-related/ fake output are quoted as fact.

In our submission [pdf] to the Department of Finance on the Organisation for Economic Co-operation and Development's (OECD) Base Erosion and Profit Shifting Project (BEPS), we recommend that: tax residency rules be changed; the distortions to the national accounts be identified, and a credible enterprise strategy be developed based on evidence and a spin-free assessment of the challenges facing the Irish economy.

It's time to put all the aspirational brochures on a bonfire and a useful template for a report that could be the basis of the development an actual strategy would be Dr TK Whitaker's 'Economic Development' report of 1958 [pdf].

Progress on international personal tax evasion

There has been remarkable progress against international tax evasion and avoidance in recent years while in recent months there has been a realisation in Dublin that official statements claiming that the Irish tax system is "rules-based," "ethical," "transparent," and "Ireland is countering aggressive tax planning," have not been convincing in offsetting a regular news flow which suggested the contrary.

This week the OECD announced that €37bn in taxes has been collected since 2009 by governments, from personal tax evaders who had funds hidden in tax havens.

This year Switzerland, home to an estimated 27 to 30% of international  personal wealth in tax havens, signed an international agreement on the automatic exchange of banking information.

By this month the Organisation for Economic Co-operation and Development (OECD) sponsored agreement had been signed by all the 34 mainly developed country members of the think-tank, together with more than 30 other states and 14 territories including Bermuda, British Virgin Islands and Cayman Islands.

The agreement provides for automatic exchange of information once a year on bank balances, interest income, dividends and the proceeds of sales, that can be used to assess capital-gains tax.

The Economist magazine/ newspaper commented in May: "This is momentous: for the Swiss, agreeing to swap client data systematically is the cultural equivalent of Americans giving up guns. Singapore, which has earned a reputation as the Switzerland of the East, is also a party to the deal."

While Switzerland is trying to limit the information it would provide to countries such as India, it has moved far from 2009 when the United States began aggressive action against Swiss banks for actively encouraging American citizens to evade tax and break their laws.

In that year a leading Swiss banker acknowledged that the "majority of foreign investors with money placed in Switzerland evade taxes." He added that the OECD was a "tax cartel" and that tax evasion was no crime – William Shakespeare anticipated such people in The Merchant of Venice when he wrote: “The devil can cite Scripture for his purpose.”

Ireland's battle against personal tax evasion took a generation and the Financial Times reported this month that so-called UK accelerated payment notices – which cannot be appealed and demand payment in 90 days – will be sent out from August, following royal assent of the finance bill this month.

HMRC, the UK revenue and customs authority "estimates that accelerated payment notices relating to avoidance schemes currently under dispute will be issued to about 33,000 individuals and 10,000 businesses, totalling £7.1bn of tax."

Corporate tax reform

Angel Gurría, OECD secretary general, said this month that "global value chains, or GVCs, are today a dominant feature of the global economy and over 70% of global trade is in intermediate goods and services and in capital goods and the income created within GVCs has doubled, on average, over the last 15 years.

Related international tax rules that developed from the 1920s, have ensured that businesses don’t pay taxes in two countries. However, aided by the rise of digital services and aggressive tax planning the rules are now being abused to permit what Gurría has called double non-taxation.

In the mid 1990s an unintended loophole provided by the Clinton Administration that the US Congress later refused to close, coupled with an exemption in the Finance Act 1999, which enabled US companies in Ireland to have offshore letter-box companies that had no physical presence but were technically tax resident in island tax havens with no corporate tax payable, gave birth to the so-called Double Irish Dutch Sandwich scheme.

Google Inc. said this month that 10% of its global revenues in the second quarter came from the UK  – but most of that is booked in Dublin.

About 40% of the search engine giant's global revenues are usually diverted to Dublin with charges from a letter-box company in Bermuda used to transfer most of the profits tax-free.

The Irish authorities do not know the number of offshore companies and the Financial Times reported in in 2013 that the Dutch have about 23,000 resident letter-box companies that have no substance in the Netherlands – these virtual entities managed by 176 licensed trust firms, attract huge flows of money, making €8tn worth of transactions in 2011 – 13 times the country’s gross domestic product.

They range from multinational giants such as Google to rock groups such as U2, the Irish group, and the Rolling Stones.

While the OECD says none of its member countries are tax havens, the biggest facilitators of corporate tax avoidance in Europe are the Netherlands, Switzerland, Ireland and Luxembourg.

In June Switzerland agreed under pressure from the European Union to end special tax deals for foreign-owned companies while the European Commission opened three in-depth investigations to examine whether decisions by tax authorities in Ireland, the Netherlands and Luxembourg with regard to the corporate income tax to be paid by Apple, Starbucks and Fiat Finance and Trade, respectively, comply with the EU rules on state aid.  

On May 27th the Department of Finance announced that in response to the OECD's Base Erosion and Profit Shifting (BEPS) project, which began last year at the request of the G20 leading developed and emerging countries, "the Minister for Finance now wishes to consider options for Ireland’s tax system to respond to a changing international tax environment."

The Department launched a consultation to run from 27th May 2014 until 22nd July 2014 to get views on "how Ireland’s domestic tax system might best respond to international tax changes."

Last year the option used by Apple Inc. in treating its Irish offshore companies from 2006/2007 as not having a tax residency anywhere, was closed in the Finance (No. 2) Act 2013.

The Dutch introduced provisions to ensure that letter-box companies have some substance but the requirements are cosmetic while it has committed to renegotiating tax treaties with developing countries that allow resource companies to exploit them.    

Irrational fear of FDI exodus

While the FDI (foreign direct investment) exporting sector at end 2013 provided 172,000 direct jobs in Ireland, that number is below the 2000 level despite a 22% rise in the workforce in the interval.

The indigenous exporting sector accounting for only 9% of total exports provided 177,000 jobs.

With the lowest corporation tax in Western Europe at 12.5% coupled with a half century of experience as a host of FDI, Ireland retains significant advantages.

The big service companies with most of their staff from overseas will still need to centralise their European sales and administration operations.

Irish ministers have usually met the lobbying demands of US companies but the June visit by Enda Kenny, taoiseach, to Silicon Valley showed that the traditional welcome in America for Irish leaders drumming up jobs should not be taken for granted.

Most of the chief executives Kenny met refused to be photographed with him as they apparently didn't wish to draw attention to their tax strategies, and Jerry Brown, governor of California, made a barbed comment on Apple's Irish tax arrangements to an audience in San Francisco that included the taoiseach.

The Irish Times has reported in recent weeks that the business lobby groups oppose any unilateral moves on the Double Irish Dutch Sandwich scheme, the most egregious of the tax avoidance measures.

However, even if there is no agreement between the country members of the Group of Twenty next year on the recommendations from the OECD's BEPS project, Germany, UK and France have made clear that they are no longer willing to have huge corporate revenues diverted to the Netherlands, Ireland and Luxembourg.

As during the bubble, the short-term interests of the lobby groups do not coincide with the national interest and just a few years ago there was a welcome with glee for big foreign companies with little if any substance in Ireland becoming "Irish" by moving their headquarters to Ireland. Now with their global employment to exceed 600,000 by the year end the Government has signalled that Ireland gains little, the national accounts are messed-up and payments to the EU are artificially raised.

As for the price of long-term reputation, Ireland's International Financial Services Centre (IFSC) last March slipped to 66 of 83 cities worldwide in the biannual global survey of global financial services professionals. The Irish capital is ranked at 19 of the top 20 European centres and just ahead of Malta and Manila in its 66th global ranking, which compares with 15 in March 2007, 13 in September 2008, and 23 in September 2009.

Finally, there should also be a belated  wake-up call to the need for a more inspired enterprise policy.

We have estimated that 40 American companies accounted for about 75% of Ireland's headline exports in 2013, while the real potential of the indigenous sector has been dormant for decades.

In 2013 Ireland's agri-food exports were valued at €8.7bn compared with €16bn in Denmark (population 5.5 million ) and €79bn in the Netherlands (population 17 million).

The trade surplus as a ratio of exports in the sector was lowest in Ireland at 19%, 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.

Michael Hennigan is editor of Finfacts. A Finfacts submission on tax reform to the Department of Finance can be accessed here: www.finfacts.ie/biz10/Ireland_corporate_tax_reform_2014.pdf

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