Obama’s Tax Proposals

The White House fact sheet seems most worrying. Page one, chapter one has this:
“Nearly one-third of all foreign profits reported by U.S. corporations in 2003 came from just three small, low-tax countries: Bermuda, the Netherlands, and Ireland.”

So we made the top three. Looks like our low corporate tax-rate continues to make us very few international friends..

There seems to be two dimensions: 1) employment – and the potential conflict/complementarity between domestic and overseas employment 2) tax – the capacity of governments around the world to levy taxes on organisations that operate on an international scale. The US proposal links the two dimensions.

However, it isn’t necessary to see the relation between overseas and domestic employment of firms as zero-sum in order to see a problem with taxation of multinationals. FDI by US companies into Sweden may have employment effects (likely to be positive by Desai’s account) but isn’t likely to create a decline in overall government tax take. FDI into the Netherlands or Ireland will almost certainly reduce overall government tax take, regardless of employment effects. The worries about ‘jobs moving overseas’ seem less significant to me than the worries about lost tax revenues (from the wealthiest entities in the world).

The problem is amplified when the lost taxes are not just due to different tax rates on the same activities but when transfer pricing means that the taxes levied in one jursidiction are in effect being levied on activities conducted elsewhere. Obviously, there is a significant amount of this kind of activity being undertaken – and huge amounts of lost revenue.

The upshot of this is that we should probably be less worried about the globalisation of production (although there are very serious issues of displacement, retraining etc for specific groups of workers) and we should be more worried about the globalisation of tax avoidance (a sub-category of the financial globalisation that has us where we are now). This also has the happy consequence that it places less emphasis on competition between different national labour forces and more on the need for governments to be able to raise the revenues they need. It doesn’t help Ireland’s position of course, given the transfer pricing issues here, the role of the IFSC etc. Apart from the various other issues, it suggests that we move as quickly as possible to develop some pathways to development that can complement the FDI strategy.

Seán Ó Riain
On the contrary, we need to stick to our last! The shoes we make are the finest……
We have a massive tax avoidance industry inIreland created by years of funny ct rates! One of my last cases, never formally commenced, involved an indigenous company, employing very many people, who made things. I cannot be specific as it would not be fair and might also be a breach of OSA. They had many corporate entities, one of which was fantastically (!) profitable, and strangely, liable at only 10%. I was looking back a few years to ascertain the scope of the “audit”. This was the old manufacturing rate of CT. The cost of sales was not 40%, not 4%, but 0.4% of sales. Such gall would of course be the opening negotiating position, but these accounts were fully signed off by one of the big auditing companies, not a Bernie Madoff type! Accountants and tax advisors would have been fully employed and paid for the structuring. There were no international aspects, except that it had an export company.
But there were many employees most of whose wages were in the accounts. Like Goodman, the meat exporting company publicly commented upon in the early 90’s, there were alleged cash payments in addition to the declared wages to skilled staff. So there was probable evasion of PAYE, PRSI, CT and VAT as turnover would have been down to provide the cash payments. Not unusual, but it was a work of art and it will only get more audacious. But it did represent a substantial operation. Possibly 10 M pounds and euro were evaded.
My point: we have the legal cloak and the expertize infrastructure for large operations. As tax becomes a greater threat to cashflow, it will of its own, prompt a move to a “quality” jurisdiction. That will only accelerate as companies come under pressure.

I hope that MNEs reading this, will take it as an advertizement for such services. I am retired. But others are legion!

There will be intense lobbying against the proposals but opposition from say the two Democrat senators from California will probably be offset by some Republican support in an election year.

It will certainly have some consequences.

An amendment to the stimulus bill in February, introduced by California Democrat Barbara Boxer and John Ensign, a Nevada Republican, to allow a second tax amnesty (the first one was approved in 2004) on repatriation of profits, had been rejected by 55 votes to 43 in the Senate.

The use of Ireland as a corporate tax haven has been significant.

US Bureau of Economic Analysis data shows that the combined net profit of US corporations in Ireland was $8.58 billion in 1997, $13.39 billion in 2000 and reached $31.3 billion in 2003 – – despite a slowing in activity because of the high tech bust. The $48 billion net profit in Ireland in 2005 compares with $37.01 billion in the UK and $74.06 billion in the Netherlands. US companies in Germany reported net profits of $11.22 billion in the same period while French operations made $9.52 billion and their Italian operations made $8.58 billion.

In 2005, US tax expert Martin Sullivan did an analysis on what he termed a $4.8 billion tax subsidy, which was the equivalent to an economic development grant from the US Treasury payable in part to the Irish government and in part to corporations investing in Ireland. He said of the $18.3 billion of profit reported by Irish subsidiaries of US multinationals in 2002, $13.7 billion did not belong there. With a statutory tax rate of 12.5%, Ireland collected approximately $1.7 billion of extra corporate tax on that shifted profit.

“That’s pure gravy for the Irish Treasury. At the same time, US corporations enjoyed a 22.5% lower rate (35% minus 12.5%) as a result of shifting income from the United States to Ireland. On $13.7 billion of profit, that is a tax reduction of $3.1 billion. Combining the two, the total US subsidy for Ireland attributable to profit shifting in 2002 equals $4.8 billion,” Sullivan said.

Reading the detailed and poorly reported press release, the change in the deferral rules is only planned to take place at the earliest, in 2011. This announcement will have the effect of temporarily speeding up inward US investment in Ireland. There are still many profitable companies in the USA. Just not in finance….

Unfortunately, they are hiring in the IRS. 800 does not seem to be many, but the biggest targets are few and will produce the most of his target.

$86Bn of the $210Bn are to come from the attack on the currently legal use of tax havens to shift dividend and other income and expose it to US tax. This should not impact on Ireland over much, and may even facilitate more US investment here, as there is less advantage to shifting it offshore once earned here.

I am not an expert on US tax law but these reforms appear sensible and just and should not impact too much on Ireland, as we invited very genuine industrial operations here. The main spin-off for us is the payroll which includes the tax element paid here.
The tax havens are being hammered.

Ireland has now been removed from the White House statement. Obama must have spotted the shamrock bowl on his mantelpiece!