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News : Irish Economy Last Updated: Mar 26, 2015 - 7:30 AM

Dell hugely benefited from Irish, Dutch, Singaporean tax havens
By Michael Hennigan, Finfacts founder and editor
Mar 15, 2015 - 4:53 PM

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Six years after Michael Dell founded his PC company while a student at the University of Texas, Dell Computer Corporation opened a manufacturing facility in Limerick, Ireland. It was closed in 2009 with the loss 1,900 jobs and over 2,000 jobs remain in mainly service positions.

EMEA (Europe, Middle East, Asia) manufacturing was switched to Łódź, Poland, where a new factory was ready to roll. The Polish government regarded the Dell investment as a coup and it named the road to the new factory “Avenue of the Terror Victims of September 11."

By December 2009, Taiwan's Hon Hai (Foxconn), the world's largest contract manufacturer of electronic goods, known in particular for the assembly of the Apple iPhone in China, announced that it would buy Dell's computer factory in Poland. The Wall Street Journal reported that 1,600 of the 3,000 workers at the Łódź facility would be transferred to Foxconn.

The Irish Government acknowledged that the closure of Dell's Limerick facility had resulted in a fall in local materials purchased by foreign multinationals but Dell continued to gain from the low Irish corporation tax rate of 12.5% and the flexibility in reducing the related taxable profit.

Micheál Martin, enterprise minister in 2006, said Dell's importance to the Irish economy was evidenced by the company's contribution of at least 5.5% of Irish exports, 2% of GDP and over 4% of all expenditure in the Irish economy. In the financial year ended 30th January 2004, Dell paid €160m in salaries in Ireland. For the financial year ended 30th January 2005, Dell paid €55m in Corporation Tax.

Dell and tax havens

Dell Products (Ireland) is an Irish tax resident company owned by Dell Products (Europe) BV, a Dutch company. Dell Products (Europe) BV produced Dell products in Ireland for the EMEA. Dell Products purchased products from Dell Products (Europe) BV, and sold them in the market through local Dell subsidiaries.

From 1995 Dell Products (Ireland) operated in 16 European countries using a commissionaire model where the local Dell company was paid a small commission to cover costs while the sales within the Dell Inc. (name of principal company since 2003) structure, were booked in Ireland.

In fiscal year ending Jan 28, 2011 Dell Products (Ireland) reported a profit of US$10.6m on a turnover of $12.5bn — about 20% of group revenues. The current tax charge in Ireland was $2.5m or 2.6% of total foreign taxes.

Foreign net profit amounted to $2.8bn from a total of $3.3bn and the current foreign corporate tax rate was 3.4%.  In 2012 the foreign tax rate was 7% and 8.7% in 2008.

Dell Inc. is no longer a Fortune 500 company, despite ranking No. 51 in 2013 and No. 44 in 2012 as Michael Dell and private equity firm Silver Lake took the firm private in a $25bn deal.

Michael Dell told Fortune magazine in 2012: "IT is about a $3tn industry. And about $250bn of the $3tn is consumer, and about $2.75tn is business, institutions, and government. And of that $2.75tn, the largest portion and the fastest-growing portion is kind of the middle."

Gartner ranked Dell third in the world for PC sales in 2014.

In January 2013, Jesse Drucker, chief tax investigator at Bloomberg, said in a report:

One purpose of tax treaties is to prevent companies from paying tax twice in two different countries on the same profit.

Dell, however, uses the Netherlands to avoid paying income taxes in either place. The world’s third-largest personal-computer maker has avoided about $4bn in income taxes since 2004, thanks partly to its use of a Dutch unit.

The subsidiary, called Dell Global BV, paid income taxes at a rate of 1/10 of 1 percent on profits of about $2bn in 2011, the most recent year for which records are available. That means the unit took credit for almost three quarters of Dell’s worldwide income. That subsidiary had no actual employees in the Netherlands as of 2009, filings show.

The Dutch company conducts its business through a branch in Singapore, where it designs and sells laptops and other equipment for the US, European and Asian markets."

In February 2013 the Financial Times reported that Dell's UK business made £1bn in sales over the period 2007-2012. In that time, it has made £12m in profits and paid £6m in tax.

Its tax bills are relatively small because the bulk of its activity comes from earning commission on sales that are booked in Ireland. Dell has used this structure — known as a commissionaire structure — across Europe since 1995. The arrangement allows distributors to earn a small income by acting an agent for a company, generally based in a low tax country, which books the sales and takes on the economic risk.

Tax authorities are often wary of these structures as they can allow profits to be shifted to low tax countries. Dell won a Supreme Court case in Norway in December 2011 against the tax authority which had argued that sales were made in Norway, not Ireland. Dell lost a similar case in Spain last year but is appealing against the decision. It is also being challenged by the US tax authority over its transfer pricing of intercompany deals."

When Dell decided to move production from Ireland to Poland it didn't have to worry about the higher Polish corporate tax rate of 19%.It was able to decide what profit it would report in Poland and Ireland through its Dell Products (Ireland) EMEA sales unit.

Dell like Google and Microsoft operate on the basis that sales are not completed in the location where they occur but in Ireland.

The House of Commons Public Accounts Committee (PAC) said in a June 2013 report: "It is quite clear to us that sales to UK clients are the primary purpose, responsibility and result of its UK operation, and that the processing of sales through Google Ireland has no purpose other than to avoid UK corporation tax."

Matt Brittan of Google told the PAC that around 99% of companies in the UK that spend money with Google do so without talking to Google Ltd’s staff as they conduct their transaction online, through an automatic auction. The 1% are big name companies are responsible for between 60-70% of the total spend of all British companies with Google. Google Ltd’s UK staff have a direct relationship with these clients and meet them regularly.

In respect of the commissionaire arrangement, the local unit cannot be taxed on a sale because it does not own the product. It can only be taxed on the commission. However, from a VAT perspective, the commissionaire acts as though he was the owner and a fictitious supply takes place to and subsequently by the commissionaire.

Double Irish tax dodges have a huge impact on the level of services exports but not on the economy.

Multinational firms like Microsoft and Google are the biggest gainers benefiting from making large charges to their Irish companies to transfer funds tax-free to island tax havens .

It's the same with toll/contract manufacturing and commissionaire trading which are discussed in international reports here and here by officials from the CSO — Ireland's central statistics office.

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