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Fiscal Policy World Economy

Winds of change

The Guardian has an article today on a topic which we will be hearing a lot more about in the months to come, the ways in which many corporations exploit the possibilities afforded them by globalization to minimise their tax burden. It followed a short piece in yesterday’s Tribune on reports that Ireland is on a list of tax havens currently doing the rounds in Washington. According to the paper,

The Department of Finance told the Sunday Tribune the list had been rejected by the previous Bush administration, which said it oversimplified the issue. It said that it shared the Bush administration’s assessment of the list.

So that’s alright then.

11 replies on “Winds of change”

mercosur (most of south america) just put a ban on this kind of tax avoidance – literally in the last month – as companies were basing all income on which ever region was cheaper.

But isn’t this the key sentence “Some UK-listed companies which have moved control to Dublin to benefit from Ireland’s low-tax regime appear to have little real presence there”.

I’d make the last 5 words bold if I knew how. A lot of the big US multinational companies HAVE a real presence here. They are not shelf companies down in the IFSC but real companies doing a real job e.g Google, MSFT, Pfizer and now Facebook. (there are lots more but these are just big names). We might have low corporate taxes but that doesn’t mean we are a “tax haven” in the way that some countries simply provide an address e.g Malta or the Caymans. I know the IFSC is a specific problem but the fact these big employers ARE big employers will surely protect them from any efforts to penalise them for putting income through Ireland?

@kevin o’rourke,

one better, i have one of the main tax advisors from pricewaterhousecooper in montevideo staying at my house this week, i’ll arrange a call between you both and he can get you the info.

This is hardly news: I moved to Ireland to work for a multinational IT company with a major presence in Ireland, and the tax benefits of being here were discussed openly. I’m at university (UCD) for another 18 months, after which I expect I will have to leave Ireland to find work.

The DEPFA bank moved headquarters from Germany to Ireland specifically to take advantage of the regulatory & taxation environment here, and won a lot of investment from all over incl. the USA. Its credit problems have had major knock-on effects on smaller US investors, such as county councils and school districts. (Try a Google News search for DEPFA – it’s ugly.)

The big European social democracies have an inbuilt (short-term) disadvantage because they try to establish civilized conditions for workers and for the weaker in their societies rather than join the race to the bottom.

It’s amazing that they have stood by and let Ireland get away with this cheap McCreevyist stunt favouring raw profit. Ironic that it may be the US that puts a stop to it. And Waterford means that we’ve been found out on pension provision too.

Guido Fawkes’ blog (order-order.com) points out that the Guardian is not averse to using offshore vehicles itself. (seen at Slugger O’Toole)

In 2006, the Guardian ran an article on a certain Irish band who offshored its money in Holland at ultra-low taxation while its lead singer advocated governments forgive debt to poor countries.

Even where the multinationals have very real operations in Ireland, that doesn’t mean there aren’t also tax shelter issues, eg in terms of transfer pricing and R & D arrangements. In other words the scale of their Irish operation may be inflated for tax reasons beyond what it really is. Isn’t this why people argue that GNP is a more meaningful measure than GDP in Ireland?

The US Government Accountability Office (GAO) report includes Ireland as a tax haven simply because Jim Hines included Ireland in his 1994 “Fiscal Paradise” QJE paper, which was in turn based on data from the 1980s. The GAO report used this Hines paper as one of its 3 (I think) sources of which locations to include. This was the only one that included Ireland. Ireland is not on any official list of tax havens.

More recent work of Hines (JPubEcon and Econ Letters 2006) finds that “the use of low-tax locations by foreign investors may help to explain (the lack of evidence for a race to the bottom), as high-tax countries are able to maintain high tax rates while continuing to attract significant levels of foreign investment”. Also “US firms with growing activity in high-tax countries are those most likely to initiate operations in nearby low-tax regimes, implying that the existence of the latter facilitates investment in nearby high-tax countries”. These results are supportive of the Irish regime.

Transfer pricing is carefully policed by the IRS and is subject to international rules. This doesn’t mean that manipulation is impossible (Hines has lots of evidence to show that it is), but it is very difficult to eradicate as it occurs primarily in industries where arms-length prices cannot be ascertained exactly. If the US and other authorities make even stronger efforts to clamp down on it (which I think they will), it is primarily the transfer of intellectual property that they will target and the Caribbean islands will be their main targets.

The Guardian article is referring to the Cadbury Schweppes case which the UK authorities lost at the European Court of Justice in 2004. The UK had tried to tax two IFSC subsidiaries of the company on their undistributed profits (under what is called “controlled foreign company” legislation). The ECJ ruled that the attractiveness of the tax regime is as legitimate a factor as any other in a company’s choice of location, and that CFC rules could not be applied when genuine activities are carried out at the offshore location. They rules that such genuine activities are being carried out at the IFSC.

James Hines and Larry Summers have just published a NBER working paper on How Globalization Affects Tax Design (http://www.nber.org/papers/w14664.pdf). I have not read it yet so I will just quote from the abstract:

“The economic changes associated with globalization tighten financial pressures on governments of high-income countries by increasing the demand for government spending while making it more costly to raise tax revenue. Greater international mobility of economic activity, and associated responsiveness of the tax base to tax rates, increases the economic distortions created by taxation. Countries with small open economies have relatively mobile tax bases; as a result, they rely much less heavily on corporate and personal income taxes than do other countries. The evidence indicates that a ten percent smaller population in 1999 is associated with a one percent smaller ratio of personal and corporate income tax collections to total tax revenues. Governments of small countries instead rely on consumption-type taxes, including taxes on sales of goods and services and import tariffs, much more heavily than do
larger countries. Since the rapid pace of globalization implies that all countries are becoming small open economies, this evidence suggests that the use of expenditure taxes is likely to increase, posing challenges to governments concerned about recent changes in income distribution.”

The paper contains tables comparing the tax structures in OECD countries in 2004.

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