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News : Irish Economy Last Updated: Aug 27, 2014 - 10:38 PM

Irish corporate tax policy like property bubble driven by short-term interests
By Michael Hennigan, Finfacts founder and editor
Jul 28, 2014 - 1:27 PM

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Enda Kenny, taoiseach/ prime minister, meets Tim Cook, Apple's CEO, in Cork, January 31, 2014

Irish corporate tax policy like the property bubble has been driven by short-term interests with until recent times, the support of the mainstream media.

After almost two years of floundering in response to surprise global moves to reform international business tax rules, it took remarks by President Obama last  Thursday for the Government to make an explicit statement on so-called tax inversions where US companies change their tax residency to low-tax countries such as Ireland, the UK, the Netherlands and Switzerland.

In an interview on CNBC, the president said businesses who relocate their headquarters to countries with lower tax rates, such as Ireland, are "gaming the system".

"Keep in mind that what we're trying to do is to say that if you simply acquire a small company in Ireland or some other country to take advantage of the low tax rate, you start saying we're now magically an Irish company, despite the fact that you may only have 100 employees there," Obama said. "And you've got 10,000 employees in the United States. You're just gaming the system."

Richard Bruton, enterprise minister, said on Friday: "The Government, my Department or our enterprise agencies do not promote or encourage companies to engage in any practices which bring little or no substance, in terms of jobs or economic activity, to Ireland. The ‘tax inversion’ practices referred to in recent days and weeks are not the product of any features of our tax system, we are not in favour of them and do not promote or encourage them. Ireland features in only a small minority of these cases worldwide, which also relate to a range of other developed countries."

In a broadcast interview with RTÉ, Barry O'Leary, IDA Ireland chief executive, made a distinction between companies that have operations of substance in Ireland already and ones that haven't, suggesting that he still welcomes inversions.

The inward investment agency chief said some companies that have "inverted" into Ireland have well over 1,000 people in Ireland that take care of the whole European market from Ireland.

However, he added that the ones that have "very little substance" are causing the reputational problem, when they come to Ireland to avail of the tax rate without putting a significant presence on the ground. 

While it is up to the US Congress to reform its corporate tax laws, having a company like Medtronic, the medical device manufacturer, with a 77,000 payroll as an Irish company following the completion of its acquisition of Covidien, a US company that moved its domicile to Ireland in 2007, messes up the Irish national accounts and several other metrics.

Finfacts: US-Ireland Tax Inversions 600,000+ staff: Kenny, Noonan met with top US corporate lawyers

We are helpless is the usual refrain but tax inversions had been welcome until they became an issue of controversy in the US. 

In early May 2008 Brian Cowen, then finance minister and days before he became taoiseach, according to The Daily Telegraph stressed that the country would not encourage "brass plate" operations, and wanted to see "real substance in investment in Ireland" by those seeking to take advantage of its benign fiscal environment.

The newspaper also reported that IDA Ireland was actively pitching deals to UK companies to switch their tax domiciles to Ireland

Unrelated to tax inversions, last March, King Digital Entertainment Plc, the maker of the popular Candy Crush Saga smartphone video game, had an IPO (initial public offering) on the New York Exchange.

The Irish holding company is a brass plate operation based at the Dublin offices of William Fry, a law firm, and in its US regulatory filing its phone contact was a London number.

This virtual company with a market cap of $5.8bn last Friday is one of Ireland's biggest companies by value.

“The Irish tax rate on corporate business is very clear - - it’s 12.5% - - we don’t have any brass plate companies like others do have. The tax rate in Ireland is what it says on the tin,” Brendan Howlin, public expenditure minister, said a month before the King IPO.

This is the surreal world of Irish policy making.

Government  and misleading data

Ministers brag about rising services exports as reflecting success of the economy when it's fake output/exports of €45bn or almost half annual services exports, resulting from Double Irish Dutch Sandwich schemes.

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

As damning is the 2012 "EU Industrial R&D Scoreboard" which noted:

Three companies based in Ireland contributed 68% of that country's R&D investment: Seagate Technology (15.0%), Covidien (23.9%) and Accenture (31.2%)."

These 3 companies are only Irish because they have located their head offices in Ireland. Seagate spent $1bn on R&D in 2011 but not in Ireland. The figures in brackets are in respect of annual growth.

The Department of Jobs, Enterprise and Innovation was apparently glad to have the opportunity to mislead the public by publishing a report that suggested policy success when the reality was the opposite -- 'Ireland ranks in top 10 EU countries for R&D investment - EU Commission.' - - this was republished on the Department's website but was deleted after we highlighted the issue in August 2013.

We need to also get our jobs data straight when CSO data can mean to different parts of the Government either 47,000 or 70,000 jobs were added in an 18-month period:

Finfacts: Irish Economy: Bruton and politics of jobs numbers; How to add 50%

Property bubble redux

It was almost a taboo to question the corporate tax policy until the issue of avoidance resulted in international moves for reform in the past 2 years.

Conor O'Brien, head of tax at KPMG Ireland, the Big 4 accounting firm, told an Oireachtas committee this year:

We shot ourselves in the foot. A great deal of the international press coverage arose as a result of international news agencies picking up on reports or articles by Irish persons,"

The Consultative Committee of Accountancy Bodies – Ireland(the representative committee for the main accountancy bodies in Ireland) after their disastrous support of the status quo during the property bubble, when "lending as a fraction of GNP increased from 60% in 1997, to over 200% in 2008, twice the level of other industrialized economies" commented in a submission to the Department of Finance's tax reform consultation:

Certain of our academics and other members of the commentariat, widely reported by certain of our news agencies, make inaccurate and damaging claims with regard to the way Ireland conducts its tax affairs. These claims must be discounted. Published explanations, for example those published by your Department concerning Ireland’s effective Corporation tax rates, dispense with such claims, which in any event have little traction with the fair-minded in the business community [ ] Harmful tax practices are simply not a feature of the Irish tax landscape."

What's all the fuss about is the cri de coeur from the parallel universe!

I wrote in June 2007:

It's becoming common to lambaste referred to 'commentators' for 'talking-down' the Irish economy even though the legitimate issues that are being highlighted are seldom contested."

Self-interest and short-term interest ruled when the economy was on fire and it does now.

The Government doesn't know how many offshore Irish letter-box companies exist and in the surreal status quo world in Ireland they are not Ireland's responsibility anyway!

We are helpless!

Apple Inc. decided that its main Irish company should stop paying taxes from 2006 and its Irish companies should become stateless.

We are helpless!

The knee-jerk reaction is to drown out dissenters and possibly still wonder why they don't commit suicide.  

In the print media in particular, the so-called "people of standing" - - from lobby groups and big name firms - -  still hold sway and last Thursday a flawed report from an accountancy firm on FDI (foreign direct investment) in Ireland that was launched by the enterprise minister but lacked credible data to support bold claims, won a headline in The Irish Examiner: 'Ireland still tops for foreign investment' - - with no data to support the claim. This is 2014!

What does 'tops' mean?

Google books its UK revenues in Ireland but it is in the UK not Ireland where significant research is being done and in Ireland where the majority of the staff, mostly from the European mainland, are in sales and administration roles.

Less than 30% of FDI firms do even minimal research in Ireland.

Why isn't there debate on Ireland's dumb enterprise policy?

We need a credible long-term strategy not fatuous aspirations where  real world challenges are ignored. 

Read the Finfacts submission to the Department of Finance on corporate tax policy:

Corporation Tax Reform: Irish Government should reject pleadings of short-termists - - with link to 17-page pdf submission

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