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
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
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.
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
'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
other states and 14 territories including Bermuda, British Virgin Islands and
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
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 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
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: