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News : Irish Economy Last Updated: Jan 9, 2015 - 8:45 AM


Double Irish tax scheme axed; Conventional wisdom wrong again - Part 1
By Michael Hennigan, Finfacts founder and editor
Oct 15, 2014 - 7:24 AM

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Jesse Drucker of Bloomberg News reported in 2010 that Google Ireland Holdings listed as its directors, two attorneys and a manager at Conyers Dill & Pearman, a Bermuda law firm, based at Clarendon House, Church Street, Hamilton. It is also home for Microsoft's Irish subsidiaries in Bermuda.

The notion just two years ago that the Double Irish tax avoidance scheme would be axed in the short-term would have been viewed as risible but just as the economy is at last recovering from a momentous crash, conventional wisdom has been shown to be wrong again.

On Tuesday as part of the Budget 2015 measures, Michael Noonan, finance minister, announced: "I am abolishing the ability of companies to use the 'Double Irish' by changing our residency rules to require all companies registered in Ireland to also be tax resident. This legal change will take effect from the 1st of January 2015 for new companies. For existing companies, there will be provision for a transition period until the end of 2020."

Last February Noonan had said that it was a "flawed premise" to include profits routed through Irish offshore companies in calculating the Irish effective rate of corporate tax of US companies -- the reality was that Apple was only able to achieve a foreign tax rate of 1.9% in 2012 by using Irish companies with addresses at its Cork, Ireland, facility.

Also Tuesday, the Department of Finance published the results of its public consultation [pdf] on the OECD's (Organisation for Economic Cooperation and Development) Base Erosion and Profit Shifting (BEPS) project and in contrast with the OECD which publishes all submissions, the minister took the usual conservative approach of limiting transparency by only authorising publication of a summary of views that are not attributed to any of the 25 organisations or individuals.

So have a public consultation and present anonymous recommendations to the public.

The Finfacts submission to the Department of Finance is here [pdf].

In the early months of 2009 there were concerns in Dublin about plans by the new Obama administration to curb US corporate tax avoidance and the Dutch got upset about the Netherlands being called a tax haven while IDA Ireland, the inward investment agency, engaged a lobbying firm in Washington DC.

Toxic gridlock in Washington put paid to President Obama's ambitions on tax reform while in late 2010 attention turned to Europe where Nicolas Sarkozy, the French president, raised the issue of the low Irish corporate tax rate of 12.5% but he missed the bigger target - - the system where companies like Google were booking most of its foreign revenues in Ireland and avoiding tax by channelling profits tax-free via Amsterdam to Irish letter box companies in Bermuda. See here how the system works.

In Dublin misinformation that France's effective tax rate was 8% became a myth -  Peter Sutherland, chairman of Goldman Sachs International used this rate to criticise the French in an FT op-ed in 2010 even though it applies to only SME firms and Michael Noonan, finance minister, also used it in 2011.

The standard French rate is 33.33%.

So with Washington in gridlock, coupled with a veto on EU tax harmonisation, and a domestic taboo on questioning the corporate tax regime as jobs would inevitably be put at risk in the official view, the common attitude was that there was nothing to worry about.

In late 2010 following big public spending cuts in the UK, citizen activism against tax avoidance began when  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.

David Cameron, British prime minister, had selected Green to review efficiency in Whitheall and according to The Guardian, his report published in October 2010 reported "shocking" wastage in the government's procurement strategy. However, his suitability as a government adviser was questioned because of his alleged tax avoidance. The newspaper said the businessman 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 income tax was due on the gain.

Stories of big US consumer giants such as Apple, Amazon and Google paying no or very low taxes in the UK prompted a commitment from the UK government together with France and Germany to tackle tax avoidance which culminated in the commitments in 2013 by the Group of  8 leading developed countries and Russia, and the Group of 20 leading developed and emerging economies, to work with the OECD to produce new rules on disclosure and base erosion by 2016.

In May 2013, the US Senate Permanent Subcommittee on Investigations issued a report, which said Apple Inc. used Irish companies, taht it regarded as 'stateless,' to avoid paying corporate taxes to any national government on tens of billions of dollars in overseas income over a period of four years.

This year there have been international agreements on tackling personal tax evasion through a more comprehensive system for sharing bank information and Switzerland has signed up to it while in September, the OECD issued its first set of major BEPS project proposals.

The inevitability of international tax reform triggered Tuesday's move in Dublin.

It is nine years since Glenn R. Simpson of  The Wall Street Journal in a major investigation exposed how Microsoft was using its companies in Dublin and Irish companies in Bermuda to avoid taxes. WSJ's direct report; WSJ report [pdf; free via Tax Justice]

In 2010, Jesse Drucker of Bloomberg News exposed the Google 'Double Irish'.

Meanwhile Finfacts has been reporting over a decade on accelerating tax avoidance while being a rare voice warning that the day of reckoning would come.

For more background see here:

US company profits per Irish employee at $970,000; Tax paid in Ireland at $25,000

...and the impact on the national accounts:

The idiot/ eejit's guide to distorted Irish national economic data

The 2011 Nyberg report on the Irish banking crash outlined how groupthink works and Ireland has a history of drowning out dissent:

Groupthink occurs when people adapt to the beliefs and views of others without real intellectual conviction. A consensus forms without serious consideration of consequences or alternatives, often under overt or imaginary social pressure. Recent studies indicate that tendencies to groupthink may be both stronger and more common than previously thought.

One consequence of groupthink may be herding, if the views in question relate to institutional policies, but this need not be the case. These features may be further strengthened by the presence of external adversarial groups (such as bank competitors, hostile bidders or financial commentators). Since strategic decisions have to be implemented, for herding to be realised also requires that staff in the participating institutions follow and do not question the decisions made. Even if the decision appears materially questionable, a form of groupthink may still ensure willing staff cooperation. Much more than for board members and managers, staff prospects for advancement and remuneration depend on their perceived standing with their superiors.

Superiors often form a view of a staff member from the views and proposals they forward to them. This feeds a tendency among staff to suggest and support proposals that their superiors are known to prefer, hoping to gain a favourable reputation. This results in a bandwagon effect and a tendency to conform to superiors’ views as well as those of colleagues. Those challenging their superiors’ proposals may risk sanctions and would thus need to feel particularly confident in their preferred alternative."

On Thursday we will examine proposals to attract intellectual property activity of substance to Ireland.

Related tax links

Germany and UK agree to restrict 'patent box' tax incentives to local R&D

Architect of tax "racket" to commit EU to fight against tax fraud

Hidden Taxes Report: Kenny denies Irish special Apple tax deal despite contrary "evidence"

Luxembourg Leaks: Irish Government's guff on tax system exposed; "Racket" needs to stop

Luxembourg confirmed as massive facilitator of tax avoidance

Bono struggling again as anti-poverty campaigner and tax avoider

Apple says it may have to pay Ireland back tax; Foreign tax rate at 4.4%

Ireland's small gain from Apple's possible EU tax probe payment

European Commission: Apple given special tax deals by Ireland

Apple's foreign tax rate tumbled after 2007 Irish 'advanced opinion'

G20 finance ministers reaffirm commitment to tax reform; Ibec takes Finfacts' advice

OECD & Tax: Everything grand in Ireland's Republic of Spin?

OECD proposes biggest reform of global business tax rules since 1920s

Finfacts submission to Department of Finance consultation on corporation tax reform

OECD BEPS Project submission from Finfacts: Ireland should embrace corporate tax reform - - includes analysis of underperforming indigenous tradable sector.

Irish corporate tax policy like property bubble driven by short-term interests

IMF explains “Double Irish Dutch Sandwich” tax avoidance

Estonia heads OECD tax competitiveness index; Ireland at 15, US at 32

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