Corporation Tax: Effective Tax Rates

The table below has eight different answers that are used to address the question of the effective rate of corporate income tax in Ireland.  Some of the details behind each approach are in this DoF Technical Paper (done jointly with Kate Levey) with #3 and #5 judged best for gauging the effective tax rate on the aggregate total of corporate profits in Ireland.

 

But, of course, the choice is yours.

On a related matter the Tax Strategy Group papers for Budget 2014 were released last week including one, albeit somewhat redacted, on Corporation Tax Policy.

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56 thoughts on “Corporation Tax: Effective Tax Rates”

  1. This is just another installment of the saga ‘were not a tax haven’ and instead of the 3-year 11.9% effective rate talking point based on a ceramic flower pot manufacturer, we now have eight to chose from.

    The political purpose is to undermine the reality that the big US firms in particular in Ireland pay little tax with the assistance of the Irish authorities.

    Wonder what happens when a local Irish firm is discovered trying to transfer profits via bogus invoices from Bermuda?

    US Bureau of Economic Analysis data is questioned even though the Irish authorities haven’t a clue what the Irish offshore companies are used for.

    It took a US Senate report on Apple to reveal that its Irish companies are not tax-resident anywhere.

    It must be a bit awkward to prepare a paper when some keys issue have to be ignored such as the Double Dutch Irish sandwich scheme.

    As for the “best for gauging the effective tax rate on the aggregate total of corporate profits in Ireland,” this question cannot be seriously answered.

    There are large redomiciled companies, mainly American, with no operations in Ireland or just a small office staff that in recent years has impacted annual GNP in the range 1 to 2.9% while profits of MNCs are transferred via ‘administrative charges” that in a recent year rose by €2.6 billion at Microsoft to offset a rise in revenues and thereby minimise profits reported in Ireland.

    Its not surprising that Apple did as it pleased as in Dublin the Irish tax avoidance companies are not seen as an Irish responsibility unless there’s a US Senate report.

    Apple’s foreign tax of 1.9% on about 60% of its global revenues in fiscal 2012 reflects gridlock in Washington DC and Irish facilitation of it.

    Apple booked $100bn in sales through Irish subsidiaries in 2013

  2. From the IT Article.

    “The CSO figures show that, since 2003, the effective tax rate has averaged 10.9 per cent, while the Revenue shows an average of 10.7 per cent over the same period.”

    Average is a funny word, if you want it to be meaningless you can make it meaningless.

    There are 10 hypothetical companies.
    9 are local companies each making €1000 in profit.
    They all pay an effective tax rate of 12.5%
    so the government gets €125 * 9 or €1125.

    The tenth company is a much bigger MNC. It makes a profit of €10 million and pay tax at 1%.
    The government gets €100k

    Now if we like we can say that the effective tax rate is an average of 11.35% for these 10 companies or we could say that the average effective tax rate is 1.01%. depending on if we decide to weight each companies profits or not.

  3. Looking at Chart 1 in the Govt Corporation Tax policy, (Page 4 of link above), the most disappointing aspect of corporation tax is how little it has contributed as a % of total tax. This is true all the way from 1989, when FDI was a much smaller part of the economy and of employment.
    It seems that it is not just the FDI sector that receives favoured status, it is an entire corporate class, who receive preferential status.

    What a pity that reliefs of all kinds were not limited by a de minimus corporation tax amount for each person employed, dependent of course on company profitability.
    Equally, there has been no effort to limit the abuse by employers of subcontracting the ‘self-employed’ sole trader, who is also a company. The unfortunate ‘subcontractor’ has, during the recession, been left unemployed with no social security net.
    Yet, the practice continues. Plus la change.

  4. @Joseph Ryan
    “It seems that it is not just the FDI sector that receives favoured status, it is an entire corporate class, who receive preferential status.”

    I think that is harsh. All businesses in Ireland pay tax on profits and are accounted for much as in the UK. Irish indigenous company profitability is low or non-existent for many reasons, some to do with director’s ambition, some to do with the tiny agrarian home market and geographical separation from export markets, occasionally because of the crowding-out effects of state sector interventions.
    While there remains the distorting effects of certain tax incentives notably for property plays, I dont think these operate as perversely as they did before the bust. All in all from a private sector entrepreneur’s perspective there isn’t much that is especially compelling about Ireland as a place to build a business.

  5. In one of the parts of that CT policy document that hasn’t been redacted we read this: “Even though the main purpose of our competitive CT rate is to create employment and thereby benefit from increased PAYE, PRSI and VAT, CT receipts made up 11.5% of total tax revenue in 2012 – €4.2bn.”

    What chance of we have when these people apparently believe their own BS? How do large numbers of brass plate companies fit with this rationale?

  6. @Tony Owens
    “I think that is harsh…….All in all from a private sector entrepreneur’s perspective there isn’t much that is especially compelling about Ireland as a place to build a business.”

    It may sound harsh, but the returns speak for themselves.

    It is important to remember that a corporate tax structure is very important to a profitable company, and irrelevant to a struggling loss-maker. Even a corp tax rate of zero % is of no use to a loss maker, so lets looks at the incentives over the years for profitable companies.

    1. An extremely low tax rate of 12.5%, to retain earnings within and grow a business. Regrettably much of the profits made and tax saved was squandered in a property craze that was not remotely connected to the business that generated the profits in the first place.

    2. Hugely favourable reliefs for company contributions directors pension funds, which are exempt from corp tax, personal income tax, USC and partially exempt from PRSI. Albeit that this relief has been reduced in recent years, it is still a highly favourable relief.

    3. Over the years, there have been reliefs in the form of capital allowances, initial allowances, capital allowance for leased asset-(tax relief for banks) etc, regardless of the numbers employed in the organizations.

    4. The plethora of property reliefs, even some of which have been recently introduced, eg CGT 7 year skys-the-limit exemption for industrial buildings.

    From a policy perspective, the interesting thing about all these reliefs and incentives is that none, not one, was or is in any way dependent on job creation. This despite the usual palaver on the first page of the Tax Policy document (http://www.finance.gov.ie/sites/default/files/TSG%201311.pdf).

    “Even though the main purpose of our competitive CT rate is to create employment and thereby benefit from increased PAYE, PRSI and VAT, CT receipts made up 11.5% of total tax revenue in 2012 -€4.2bn”

    If the main purpose is to create employment, why is that none of the reliefs or incentives are related to employment creation.

    Regrettably, I believe that the reduction in rates to 12.5% by McCreevy, was a lazy and blasé approach to attracting FDI. It had the added advantage for McCreevy that it played very well with his ideological views and helped his corporate business friends in no small measure.

    Nothing was extracted for the massive tax reduction of the late 1990s, not even a compulsory pension contribution from companies.

    I do not believe that I am being harsh in adjudging that the corporate ‘class’ have received very favourable treatment.
    The return in terms of sustainable employment have not been commensurate with the level of favouritism afforded to the sector.

  7. @JR
    I largely agree with your points but it is important to separate the parties concerned here.
    Really it is only the property-related reliefs that are relevant to the welfare of indigenous business (as distinct from company directors who I accept are well-treated in Ireland’s regime especially in relation to use and taxation of pension contributions).
    The low corp tax rate is of little relevance to the SME businesses who predominate, given that there has historically been little taste for either generation of or retention of profit in our SME’s.
    It is probably fair to say that most Irish SME’s are lifestyle businesses which are shaped to furnish the directors with tax-efficient earnings and pensions rather than for sustainable growth. The instability of the tax, credit and political environment does not really encourage long term investment in stranded assets in Ireland unless some form of political leverage is available.

  8. @Tony O

    “It is probably fair to say that most Irish SME’s are lifestyle businesses which are shaped to furnish the directors with tax-efficient earnings and pensions rather than for sustainable growth. The instability of the tax, credit and political environment does not really encourage long term investment in stranded assets in Ireland unless some form of political leverage is available.”

    Irish ‘inheritance’ or ‘gift’ tax is levied on only 10% (ie 90% is ignored) of the market value of relevant business property. Wealth accumulated via extraction from a business (or, like most employees, simply ‘earned’ by ordinary punters, after tax) is taxed on 100% of its value.

  9. @ MH,

    We all know that Apple’s tax strategy is a “sham” that exploits an “absurdity”. None other than Sen. Carl Levin (D) has told us:

    Prior to 2012, ASI, like AOI, had no employees and carried out its operations through the action of a U.S.-based board of directors, most of whom were Apple Inc. employees in California. Of ASI’s 33 board meetings from May 2006 to March 2012, all 33 took place in California.

    In short, these companies’ decision-makers, board meetings, assets, asset managers, and key accounting records are all in the United States. Their activities are entirely controlled by Apple Inc. in the United States.

    Everything about these companies happens in the United States and Apple is exploiting an “absurdity”. Again from Sen. Levin:

    Apple is exploiting an absurdity, one that we have not seen other companies use. The absurdity need not continue. Although the United States generally looks to where an entity is incorporated to determine its tax residency, it is possible to penetrate an entity’s corporate structure for tax purposes, and collect U.S. taxes on its income, if the entity is controlled by its U.S. parent to such a degree that the shell entity is nothing more than an “instrumentality” of its parent, a sham that should be treated as the parent itself rather than as a separate legal entity. AOI, AOE and ASI all sure seem to fit that description.

    The “absurdity” he is talking about is not in Irish tax law; it is in US tax law. The “absurdity” allows a company that carries out all its operations in the US not be taxed there solely because it is incorporated somewhere else. Sen. Levin calls it a “sham”:

    Our legal system has a preference to respect the corporate form. But the facts here present this issue: Are these offshore corporations so totally controlled by Apple Inc. that their identity as separate companies is a sham and a mere instrumentality of the parent, and if so, whether Apple’s claim that AOI and ASI owe no U.S. taxes is a sham as well.

    Is there a mistake in what Sen. Levin is saying? The intellectual property assets of these companies are held in Cupertino, California. The financial assets of these companies are managed in Reno, Nevada. The cash of these companies is on deposit in banks in New York, New York. How come Sen. Levin failed to include Ireland in his description of the “sham” and the “absurdity”?

    Yes, the companies are Irish-incorporated. That is well understood. But Irish-incorporated is not the same as Irish resident. By the way what are the Malaysian tax residency rules for companies?

  10. Whatever the ‘effective tax rate’ on business ….

    … fact is we do not have enough entrepreneurial talent creating viable export businesses which in turn create employment.

    Lunacy to see reasonably educated graduates emigrating and creating such employment abroad.

    Minor point:

    Mick ‘Wexford Youths’ Wallace, whatever one may think of his elegant sartorial attire, has created more jobs than anyone else in the Dail; decent jobs. Spose he could be appointed as a second junior Minister for Housing to assist Jan O’Sullivan in the upcoming re-shuffle?

  11. @Tony Owens
    “It is probably fair to say that most Irish SME’s are lifestyle businesses which are shaped to furnish the directors with tax-efficient earnings and pensions rather than for sustainable growth.”
    Regrettably, there is a substantial amount of truth in that.

    @DOCM

    Thank you for the link.
    What Ruairi Quinn did in May 1997, within a month of a general election, that he was about to lose, is a matter for Ruairi Quinn.
    It was McCreevy that brought in the low rates, boasting the bells and whistles for his supporters.
    In addition the distinction between trading and ‘passive’ income, made in the article, was soon massaged to suit local political interests.

    ‘Trading Income’ was expanded to include income made between the buying of a few ‘soggy, boggy’ fields and, wait for it, ‘making it ready’ for development. i.e A fence here or there, or nowhere, and a few loads of stones in the gap on the way in.

    The bottom line here is that, worldwide, the corporate structure (and its better off shareholders) has been favoured with low taxes and with lax and generous, very lax and very generous in Ireland, oversight of the responsibilities that should have gone with the benefits of limited liability.
    [Many Irish SMEs do not for instance, file accounts, because they have become ‘unlimited’ in Ireland; and in another Irish wheeze, structure their organization so that the parent company, with limited liability, protects them perfectly well from its brass plate location in the Isle of Man; where for some reason it avoids the EU filing directives.]

    Ireland is fighting a rear-guard action in a battle that she is going to lose in relation to the corporate tax rate.
    One way to mitigate the potential job losses, would be to start to structure corporate taxes in a way that favoured job creation and retention, over tax breaks for executives and equity holders.
    We might in that case be fighting a battle that, from the foot soldiers point of view at least, could be worth the candle.

  12. @ Seamus Coffey

    Your position mirrors the official line and that of professional services vested interests.

    It’s untenable in a real world of common sense and is equivalent to a smaller fish who uses his restaurant to launder cash on behalf of a criminal gang, protesting his innocence.

    In fact the Department of Finance warned in 1998 about Irish offshore companies with “no connection with the country and some may be used for tax evasion, money laundering and fraud.”

    President Clinton’s Treasury department had inadvertently opened a huge loophole for American companies to ramp up tax avoidance overseas.

    Congress refused to rescind the measure at the insistence of the likes of General Electric and in Ireland the US companies succeeded in getting an exemption in a measure to clean-up the offshore company mess that had been requested by the EU.

    More recently, a measure was included in a budget at the request of the American Chamber in Ireland to allow US companies transfer patent funds (mainly profit shifting) directly to island tax havens without withholding tax ie no need to use the Amsterdam route.

    Senator Levin, a courageous fighter against abuse, was right on Apple and right when he slapped down the letter from the Irish ambassador last May which protested that Ireland isn’t a tax haven because the OECD said so.

    What Apple and others term “Irish subsidiaries” to the world at large are increasingly associated with sleaze.

    Your stance dovetails with the Irish helpless or victims syndrome.

    Richard Bruton today in The Irish Times brags about climbing the export rankings in recent years because of the Action Plan for Jobs – that’s the fairytale; the fact is most of the rise in services in recent years has been tax-related..

    Double digit rises in fake services exports/output to about €45 billion cannot be called what they are and while Apple does not book the same levels of revenue in Ireland as others that are classified tax-resident and then followed by huge profits transferred overseas, your defence of the “flawed premise” argument of the Government and non-responsibility for profits in “other jurisdictions” that result from multibillion opaque charges in Irish accounts risk you being the naive Doctor Faustus of this drama.

    A local company has few options but to pay what is demanded while Enda Kenny and the Revenue tug the forelock to the big boys.

    Prof John Kay wrote in the FT last year:

    A serious reform agenda would involve a principled reappraisal of the basis for taxing corporations both nationally and globally, and a strategy for effective enforcement of existing rules. Such a strategy would make clear that executives of companies which present accounts to tax authorities that are essentially false, and the accountants who support them, will in future run serious risks. The door they hear closing behind them might be the door of a prison cell rather than the door of 10 Downing Street.

    The Obama administration has proposed a minimum foreign profits tax without specifying a rate, to deter US companies from diverting profits to no or low tax countries.

    The US will reform its dysfunctional tax system at some point and the serious risk for Ireland is that a minimum foreign profits tax would be set above the Irish 12.5% rate to also fund a lowering of the 35% headline rate.

  13. @ MH,

    Perhaps Sen. Levin was on to something.

    Senator LEVIN. All right. Now, relative to ASI, Mr. Bullock, is ASI functionally managed and controlled in the United States?
    Mr. BULLOCK. As a practical matter, applying the Irish legal standard of central management and control, I believe that it is centrally managed and controlled from the United States.
    Senator LEVIN. And does Apple agree that it is functionally managed and controlled in the United States?
    Mr. BULLOCK. Under Irish law——
    Senator LEVIN. No. Under our law, do you believe that?
    Mr. BULLOCK. I do not believe that central management and control is a legal term under U.S. tax law.
    Senator LEVIN. All right. Do you believe it is functionally managed and controlled in the United States?
    Mr. BULLOCK. Yes.
    Senator LEVIN. Mr. Cook, do you agree?
    Mr. COOK. We have significant employees in Ireland. We have about 4,000. And so there is a significant amount of decisions and leadership and negotiations that go on in Ireland. But some of the most strategic ones do take place in the United States.
    Senator LEVIN. Would you agree on balance that ASI is functionally managed and controlled in the United States?
    Mr. COOK. From a practical matter. I do not know the legal definition of the word.
    Senator LEVIN. As a practical matter, you would agree that it is functionally managed and controlled in the United States?
    Mr. COOK. Yes, Senator.

    There is no doubt that the engineering behind Apple’s stateless income scheme is a sham. But there is also no doubt where the scheme is operated from. And its not Hollyhill! ‘Check the box’ and the ‘look through’ rule play a far more significant role than any provisions here.

    Any chance of those Malaysian residency rules?

  14. A US minimum foreign profits tax is a possibility but remains remote. The US will want to maintain the position where US firms have the incentive to minimise their foreign income tax. It is not clear that a minimum foreign profits tax can achieve. If it was set at 20% then countries with effective taxes up to 20% would be attractive for the international operations of US MNCs.

    Suppose that companies choose the UK for those operations because they will pay 20% tax which is no different to what they will pay in the US under the minimum foreign profits tax. It makes no difference to the companies where they pay the 20% but it makes a big difference to the US. It will be a 20% income tax with credits awarded for income tax paid elsewhere. If a 20% tax has already been paid how much is left for the US? It suits the US that their MNCs minimise their foreign income tax. Maintaining that incentive with a minimum foreign profits tax would not be easy.

    Addressing the deferral provisions that have been appended to Subpart F over the years would be a better place to start. The ‘look-through’ rule expired for all tax years ending 31/12/2013. It was originally introduced as a temporary measure for three years in 2006 but was extended twice since then, for two years on each occasion. It will be interesting to see if it will be stuck on some bill before the end of this year to allow its use for tax years ending during 2014.

    The Senate report on Apple is clear on why the scheme is/was effective.

    Apple has exploited weaknesses and loopholes in U.S. tax laws and regulations, particularly the “check-the-box” and “look-through” rules, to circumvent Subpart F taxation and, from 2009 to 2012, avoid $44 billion in taxes on otherwise taxable offshore income.

    If the US continues using ‘check-the-box’ and extends the ‘look-through’ rule again why should we be their policeman to prevent firms from using them?

    Limiting the use of the ‘same-country’ exception to companies which are actually in the same country would also be effective if the US really wants to strengthen the anti-deferral provisions in Subpart F. But do they?

  15. You avoid dealing with the Irish dimension and the responsibility of the Irish authorities for Double Dutch schemes etc

    Routing billions through Ireland to avoid tax is nobody’s responsibility?

    The accounts filed in Ireland by the resident companies are contrived to result in a small reported profit with most going to Bermuda etc

    Do you know that profits generated in Ireland are legitimately taxed?

    Of course you don’t.

    You were obviously limited in what you could cover in what is a political document.

    It’s no news that these offshore companies are mailbox entities in lawyers’ offices, controlled in the US.

    The transactions are shielded from public scrutiny thanks to Irish company law.

    I’m interested in the Irish aspect to this issue not bullshit on residency rules of other countries.

    In Apple’s case it treated one company as both tax-resident and non-tax resident.

    There is a direct nexus between these mailbox companies and Irish resident companies.

  16. @ MH

    We can take it you know the Malaysian tax residency rules for companies so!

    The “Double-Irish” scheme effects no tax except for the deferral it allows of US corporate income tax for US companies.

    A structure where a company has a sales operation in one country paying royalties to a holding company in another country can be set up anywhere. This would have the same outcome for the tax paid in the source (where the IP is held), intermediate (where the sales are booked) and destination (where the customers are located) countries. The “Double-Irish” offers no particular advantages for that arrangement.

    Transfer pricing rules allow most of the profit to be attributed to the holding company. Again these are common. How much would you pay for the non-US rights to Google’s intellectual property? If Google had a holding company in Bermuda and offered the rights for auction how much would it raise? I would be delighted if they accepted an offer of costs + 4 per cent from me. If on sales on €15,000 million with costs of €300 million that would mean a royalty fee of €14,688 million. And of course a profit of €12 million for me! Google won’t do it because the incentives don’t align. I have neither the incentive to maximise sales or minimise costs but I sure have the incentive to make that offer. Weak and all as this is it is enough to satisfy the “arms-length” principle.

    So what to do? The soundings from the BEPS group are that efforts will be made to align profits with substance. This is what Pascal Saint Amans means when he says he intends to target schemes like the “Double-Irish”: the ability of firms to place their valuable intellectual property in low- or no-tax jurisdictions where they have no substance. There are no proposals yet to change the value or pricing of that IP but there may be proposals on where it can be located.

    There are few countries which charge withholding tax on royalties paid for foreign intellectual property. The sales company/holding company structure can be set up an infinite number of ways. The “Double-Irish” allows the deferral of the US corporate income tax due on the profits as it enables the use of the ‘same-country’ exception to the Subpart F anti-deferral provisions in the US tax code.

    The ability to avail of the ‘same country’ exemption can be achieved from many countries, including Malaysia. It probably is.

    The “Double-Irish” scheme is overblown as a scheme that is key to the tax strategies of US MNCs. It depends on the ‘same-country’ exemption to defer the tax on passive income which the US views as being in the same country even though in practical terms they are not.

    Using ‘check-the-box’ and the ‘look-through’ rule it is possible to create the “any country” exemption. The passive income transfers can be between any two companies and the payments can be designed so as to be ignored for the purposes of the anti-deferral rules in Subpart F.

    Why favour the use of the ‘same-country’ exemption via a structure like the “Double-Irish”? The ‘same-country’ exemption is a permanent feature of the US tax code and needs a vote to be repealed. The ‘look-through’ rule is only temporary and needs a vote to be extended while ‘check-the-box’ is only a regulation from the US Treasury that can be changed at any time.

    If that is the case, why Ireland? What makes us unusually attractive? I’m sure you have your theories; I have mine.

    What part of Irish corporation tax law would you like changed?

  17. @ Seamus

    Help me out here to understand something.
    If the DOF asked you to do a report why didn’t they give you access to revenue?
    That way you would have been able to give us a definitive answer as to the effective rate of corporation tax rather than you doing a report on the reported different incorrect rates attributed by different bodies because the DOF don’t make the information available.
    It seems bizarre they asked you to write a report containing the different attributed rates when they could have just done a few sums and got the correct answer.
    Why do you think they don’t disclose the average effective rate?

  18. I have always wondered why MH does not extend the same withering srutiny of the conduct of public affairs in his country of residence?

  19. @ eamonn,

    Do you mean revenue or Revenue?

    If you mean sales, particularly of MNCs, then those figures are available from the CSO through the exports data. There are the External Trade figures on goods, the services figures from the Balance of Payments. I’m not sure what that would add though as tax is based on profit not revenue. So the imports side would be equally important, particularly service imports. There may be concerns about the pricing of such flows but that’s a different question.

    If you mean Revenue well… The Revenue do make aggregate data available on Corporation Tax and it has improved in recent years. We can now see how the transition from Gross Trading Profits to Taxable Income is actually made but historical figures only go back to 2009.

    The calculation of Taxable Income is as important as the rates or reliefs. If you get a number and multiply by 0.125 it should not come as a great surprise that the effective outcome is close to 0.125. The fact the Taxable Income figure can be reconciled with the Operating Surplus from the CSO supports its accuracy. Though both the CSO and Revenue get their information from the same sources – the companies.

    When you say “Why do you think they don’t disclose the average effective rate?” who/what are you referring to?

  20. @ Seamus Coffey

    I assume you have another nixer with the Irish Government coming up as again you have a tax lawyer’s detail but you have avoided dealing with the specific issues raised above about the huge transfers between resident and non-resident firms and the reliability of the accounts that are filed in Ireland.

    Basically, what’s reported as profits in Ireland is after profits have already been charged.

    These Byzantine schemes usually require deception and Apple was able to operate its “stateless” scheme for decades because even though it controlled the companies from hq, the Irish companies likely had the Cork address and profit transfers from say Australia would have been transferred through Irish bank accounts. Otherwise there would have been a risk of revenue authorities getting in on the loop.

    The “Double-Irish” scheme effects no tax except for the deferral it allows of US corporate income tax for US companies.

    Leaders of several countries in Europe and Australia must be deluding themselves.

    Obviously placing IP in a mailbox company is a scam.

  21. @ Seamus

    Yep I mean the Revenue commissioners.

    So you work out what was the total level of profits before tax or any avoidance measures (R and D exemptions etc) for companies registered for tax in Ireland. Maybe use the definition of Eurostats “implicit tax rate”.
    You then take the figure for the total Corporation tax paid.
    You divide one by the other and you get a %

    You could even trawl deeper and give %’s for MNC’s and a % for indigenous firms.

    I am saying that you should have asked for access to the actual figures.

    Why didn’t you do that rather than give us a basket of guessed answers?

    It makes it look like a PR exercise.

  22. @ Seamus Coffey

    The UK introduced a rule in 1988 that a company
    incorporated in the United Kingdom is always UK-resident.

    Besides tax avoidance/ evasion, what is the purpose of the Irish non-resident co?

    Since 1999 there has to be a link with a resident company but thee is clearly no regulation of these entities.

  23. @ MH,

    It is the detail that matters. I don’t have a “tax lawyer’s detail” but I do have the detail from the Senate reports which go much further than the soundbite criticisms of the actual hearings. Details matter.

    The transfers between the firms were dealt with. They are a matter of fact not choice. Google have a sales company in Ireland and a holding company in Bermuda. The countries can be replaced with any other and the royalty transfer from the sales company to the holding company will be the same. Google can, any maybe might, move its sales operation somewhere else. There is nothing particular about Ireland that affects the price “charged” by the holding company. If they were to move their sales operation to another country the profits reported there would be much as they are in Ireland now. What is unique about Ireland that means it would be different?

    There is not a scintilla of evidence that Apple’s profit transfers “would have been transferred through Irish bank accounts”. Zero. Zilch. Relative to Ireland the numbers are massive. The effect they would have would be noticeable in the CSO’s statistics; either as export sales in the trade data or income flows in the Balance of Payments data, and also possibly in the Money and Banking Statistics from the Central Bank. Have you such evidence? It is not clear how long the Apple scheme is in place but it depends on ‘check-the-box’ (1996) and the ‘look-through rule’ (2006) to work.

    I’m not sure what you mean by “revenue authorities getting in on the loop”. The companies are not tax resident here so only subject to tax here on their profits sourced here. In the US, Apple will have “checked the box” for these companies so will have filed with the IRS about these companies. It would be easy for the IRS to get “in on the loop” by following through on the filing made by Apple. You cannot “check the box” without actually doing so.

    On its financial accounts Apple also has to declare a tax liability on its foreign-source profits on which the tax has been deferred. It would be improper accounting not to do so. If you look at Apple’s most recent balance sheet you will see it has a deferred tax liability of $16.5 billion. Check for yourself here. See the item labelled “Deferred Tax Liability Non-Current”.

    Apple Balance Sheet

    They’re so good at keeping the revenue authorities out of the loop they put it in the financial accounts!

    Further in their 10K form Apple say they only provide for a deferred tax liability on the basis of foreign-source profits that they may repatriate to the US. They also say that:

    The amount of unrecognized deferred tax liability related to these temporary differences is estimated to be approximately $18.4 billion.

    This tax liability is unrecognised because they do not intend to repatriate the funds.

    That is a total deferred tax liability of $34.9 billion and there it is in black and white in Apple’s financial reports. The current system of corporation tax confers the taxing right on the US. Again it is their choice to allow this deferral but the tax liabilities are there. Clear as day. Where is the deception? Who is out of the loop?

    Leaders of several countries are not giving out about the “Double-Irish”. They are giving out the ability of companies to attribute their profits to IP held in low- or no-tax jurisdictions. And by doing so their ire is misdirected because that has zero impact on the tax paid in their countries.

    There is nothing in the “Double-Irish” that facilitates the location of IP anywhere. All that is involved is a sales company and a holding company incorporated in the same country. That confers no special ability to place IP in a low- or no-tax jurisdiction. Companies can do that regardless.

    If Google had an Irish-incorporated sales company and a Bermudan-incorporated holding company the tax outcomes in Australia, the UK, Ireland and elsewhere would be the same. Why would they be different? There is nothing in the “Double-Irish” that affects Australian tax.

    In fact one could say there is nothing in the companies placing the IP in a low- or no-tax jurisdiction that affects Australian tax. In the current system profit is attributed by risk, functions and assets. Apple doesn’t earn profit by selling devices to customers in Australia; it earns profit by designing a product in the US that Australians want to buy. The current rules attribute the profit to the activity in the US.

    If the US didn’t have such a convoluted deferral system there would be no IP in Bermuda and the profits would be attributed to the US parent. Take out the Bermudan stopover and the amount of tax paid in Australia remains the same. These are US companies that owe US taxes.

    Those questioning the system need to address the source principle which sets out as a matter of fact where the profit is attributed. For Apple, that is in the designing and branding of consumer devices. Lots of companies can make similar devices but very few can charge $500 a go for them. The ability to do that comes from activities in the US and the taxing right is conferred to the US through international tax treaties. If the US chooses to allow companies to defer the actual payment of that tax liability that is their choice. If the US had no deferral provisions there would be no benefit to US MNCs in placing IP in a mailbox company. Take US deferral out of the picture and the discussion is very different.

    What is getting at some leaders is the ability of companies to sell to customers in their countries and not pay tax on the profit generated. But retailing does not have massive profit margins. Hence the profit attributed to it is low. If they want to change the taxing rights they need to change the source principle. There might be changes to where companies can locate their IP but that will only the benefit the country the IP moves to (this may be Ireland!) not the country the company sells in. If the countries of the customers want more taxing rights they need to promote a move to a system of formulary apportionment.

    Germany thought the same a decade ago when they were pushing the CCCTB. It took a couple of years but when they did the sums they found out they would lose more than they would gain and the CCCTB was quietly put back up on the shelf.

    Various leaders like making a lot of noise about corporate taxation. How come they are not making noise about formularly apportionment?

    There is nothing that can be changed in Ireland that will lead to more corporation tax being paid in Australia, the UK, the US or any country. Some might think Ireland has a massive role in the global system of corporation tax but we are an insignificant element trying to squeeze into the odd niche or crack. The crack we have found are the deferral provisions in the US tax code. And it may not be there forever. Change is coming at international level and change in the US cannot be discounted.

    The current system of international tax treaties confers taxing rights. Ireland cannot take taxing rights from anybody. As I said details matter. Carry on.

  24. @ MH,

    The use of the non-resident companies is linked to the deferral provisions in the US tax code. There should be no confusion about that. It is matter of labeling whether that is called deferral/avoidance/evasion but it is a US taxing right that the US can choose to exercise.

    In fact, since 1999 the importance of companies incorporated in a country but not resident there for availing of the US deferral provisions has reduced. Since 1999 the rules have been significantly relaxed. This is most notable seen with the ‘look-through’ rule that was introduced in 2006. There have been other changes. The noises from the Senate are that they have gone too far but there is still no concrete proposals to roll back on them (though the ‘look-through’ rule has expired and requires an extension).

    Ireland could move to a situation where all Irish-incorporated companies are considered Irish resident. It would make little difference to the tax outcomes for US MNCs. And it would make absolutely no difference to the corporation tax outcomes in Australia, the UK or anywhere else.

    It would have a number of impacts. First, the mud-slinging would need to find something else to aim at. It would be great if it actually was the system of corporation tax but that is unlikely. Second, there would be doubts about the stability of the Irish regime. There are no provisions in Irish tax law that are vital for the tax strategies of US MNCs. The non-resident companies could be removed from the stage but the companies they can achieve the same tax outcomes through many many means. But they don’t like change. It is costly and time-consuming. The Irish regime has a reputation for stability.

    Getting rid of the non-resident companies is a viable policy option. It should improve the reputation of Ireland in the popular misinformed debate. It is hard to see what other part of the regime mud can be thrown at to the extent it is now. We have a very low rate but that is what it is. But what impact would such a move on residency have for the reputation of Ireland among corporate decision makers? I have no idea. There are people whose job it is to make these choices. It is not easy.

  25. @ eamonn moran

    You say:

    So you work out what was the total level of profits before tax or any avoidance measures (R and D exemptions etc) for companies registered for tax in Ireland. Maybe use the definition of Eurostats “implicit tax rate”.
    You then take the figure for the total Corporation tax paid.
    You divide one by the other and you get a %

    I had to read this a few times because I couldn’t figure out the point. You are saying this is what we should have done, right? But it is almost precisely what we did do. For the figures from the Revenue Commissioners look a Section 3.2 and in particular:

    Table 3.2.1: Calculation of Taxable Income from Total Income
    Table 3.2.2: Calculation of Tax Payable from Taxable Income

    The percentage you ask for are based on the numbers in these tables. Abridged data back to 2003 is in later tables with some detail provided on changes to the deductions that have occurred over the past few years. Or am I misinterpreting you altogether?

  26. First, the mud-slinging would need to find something else to aim at. It would be great if it actually was the system of corporation tax but that is unlikely.

    Governments have legitimate concerns about tax bases, gaming the system and fairness between what applies to local and foreign companies with big market shares.

    Twitter got a tax break to stay in San Francisco and also a policeman to patrol outside its offices to keep angry citizens at bay.

    There is a prospect of some change – like it or not.

    As for Apple, to the world, most of its non-resident companies use the Cork address and appear to be part of its operation there – “AOI is active in just two countries, Ireland and the United States” the Senate report says.

    Companies like Apple don’t like being publicly associated with small tax havens. That’s why Accenture moved its hq from Bermuda to Ireland.

    The Irish Apple company in the British Virgin Islands tax haven is Baldwin (a breed of apple) Holdings Unlimited.

    It’s not a surprise that Apple would have been an expert in covering its cash channels. For the Irish companies, it did not really matter which overseas branch of a US bank held the cash.

    There is nothing in the “Double-Irish” that affects Australian tax.

    The OECD’s latest document covers issues on tracking ecommerce payments.

    Currently Google can declare part of its revenues in Ireland rather than Australia.

  27. @MH,

    Apple did not put its cash reserves in an “overseas branch of a US bank”. Any money on deposit is in New York banks. You can see what Apple does with its accumulated profits in its annual reports.

    Currently Google can declare part of its revenues in Ireland rather than Australia

    Can you give us a country where Google would not be able to do this?

    And again if Ireland is majorly at fault what elenents of Irish Corporation Tax law should be changed to improve the situation?

  28. I know where Apple keeps its reserves. My reference was to channelling its funds not the ultimate destination.

    All the deposits were not always held in New York. Braeburn (another breed of apple) Capital the money manager dates from 2006.

    I have for years reported that some of the cash of US companies is only technically ‘trapped’ overseas.

    This debate is getting petty.

    I did say that the OECD has made some proposals on your Google question.

    I have worked in financial management in US and European multinationals.

    The MNC model has been positive in many ways over the decades but with the cost of competition for mobile investment and massive tax avoidance, education and law enforcement etc also falls on people with squeezed incomes.

    I really don’t know what your real angle is on the issue given the level of negativity.

    The Irish Government should positively embrace the prospect of international reform not embrace vested interests and the likely intense lobbying that’s going on behind the scene.

    You were hired because you support the official line that profits shifted from Ireland to related companies in island tax havens were irrelevant to the Irish tax issue.

    Joe Nocera, NYT columnist asked last year:

    “Question for the government of Ireland: Do you really want your country to be known as an offshore tax haven? Indeed, at a time when your citizens are dealing with the pain of an austerity program, how can you justify allowing Apple to pay virtually no taxes on a subsidiary established solely to avoid taxes in the United States? Just wondering.”

    Joe isn’t an economist but why wouldn’t he ask such as question? Times are changing as the Swiss for example will eventually find out.

  29. @ MH,

    The details of how the system operates are not “petty”. They are the facts.

    A debate on source, residence and transfer pricing is needed but that is not happening. It is a pity. Without such a debate there will likely be confusion and/or disappointment from the changes that result from the ongoing BEPS project.

    Why would my angle be influenced by “the level of negativity”? Or is it my negativity? Not sure. I tend to be influenced by what I can see. Ireland is a low-tax, stable environment that allows US MNCs to avail of the deferral provisions in the US tax code. Virtually everything else that arises is as a result of the international system of corporation tax, not Irish Corporation Tax.

    You were hired because you support the official line that profits shifted from Ireland to related companies in island tax havens were irrelevant to the Irish tax issue.

    They are relevant to global tax issue. If there is something uniquely malignant about the Irish tax system you have yet to tell us what it is.

    What would you change about Irish Corporation Tax that would, in your opinion, improve the situation?

  30. @Seamus Coffey & Michael Hennigan

    Socratic & Habermasian communicative dialogue very informative.

    Corporate Power over Senate/Congress in the U.S. will ensure that the debate goes on … and on.

    @all

    Blind Biddy looked absolutely stunning last night in Windsor. Charles, apparently,could not keep his eyes off her – and Camilla kept hers firmly on Charles; the One-eyed Shia Sheik, a seasoned diplomat, didn’t bat an eyelid.

    Biddy now on her way back to Kharkov; still no newz on Paddy Zhukov. tbc

  31. @ Seamus Coffey

    Thanks, that is some seriously high quality posting. Can I ask what are your feelings on how all this will play out?

  32. @ Seamus Coffey

    I agree with John Foody. You have provided an invaluable clarification of many aspects of a complex situation which should help people make up their own minds as to where the interests of the country lie.

  33. Michael Taft always worth noting on these matters – completing de Troika

    Professor Jim Stewart produced data which showed that the effective tax rate of US multinationals operating here was 2.2 percent in 2011. This was disputed because Stewart – using the US’s Bureau of Economic Analysis – included the $140 billion that US multinationals move through Ireland on their way to other places, including tax havens. Some claim you can’t count this because it is not taxable in Ireland. But, of course, that is the point. The issue is not the Irish corporate tax rate per se but the role that Ireland plays in the global tax avoidance chain – the ability of multinationals to use Ireland to avoid paying taxes that would be due elsewhere.

    […] corporation tax is not the only ‘tax’ that companies pay. They also pay social insurance (or the ‘social wage’). We have looked at this before and – surprise, surprise – found that Irish employers also pay a low, low effective social insurance.

    If Irish employers were to pay the same effective social insurance rate as employers in other EU-15 countries […] , revenue would rise by €6.4 billion.

    Read on:

    http://www.irishleftreview.org/2014/04/09/opening-lowlow-corporate-tax-rate-door/

    IMHO, ‘effective social insurance rate’ receives insufficient attention.

  34. @Seamus Coffey,

    Exceptional high quality posting even by your own normal high standards. A complex issue made simple.

  35. ‘Ireland is a low-tax, stable environment that allows US MNCs to avail of the deferral provisions in the US tax code. Virtually everything else that arises is as a result of the international system of corporation tax, not Irish Corporation Tax.’

    I think this is the best summary of the situation by Seamus Coffey but it is not surprising this statement didn’t make it in to the DoF document or won’t appear on any IDA promotional literature. This is what principally attracts Apple and other multinationals to Ireland. Also, it is relatively easy to get young Europeans with language skills to move to Ireland for a few years and employment/social insurance taxes are particularly low compared to other European countries. That is why Ryanair employs all its staff out of Ireland for example.

    This has been an interesting debate but Mr Coffey displayed a certain brittleness by introducing the ‘Malaysia factor’ that is unworthy of anyone who purports to be an intellectual. How on earth is anything that happens in Malaysia germane to the debate on whether or not Ireland is a tax haven? It was an ad hominem attack against Michael Hennigan who wisely ignored it. That said, it was probably equally unwise for Mr Hennigan to, in effect, suggest that Seamus Coffey is a DoF stooge. On this point though anyone can see that Mr Coffey was going to be more welcome in the DoF than Jim Stewart of TCD. I have followed this thread and recent discussions on this topic closely and it appears to me that you can get whatever answer you want simply by using the data in a selective manner. Naturally the DoF want to produce the best spin for Ireland and if I were the Secretary General I would logically choose Seamus Coffey over Jim Stewart.

    There are two other issues in this particular thread that surely merit a separate thread. These are: (a) the mangling of Ireland’s real export statistics from all the profit-switching transfer pricing; and (b) the fact that, as Michael Hennigan adverts to, the Revenue would jump on any small Irish company that presented fake invoices to lower its taxes but a blind eye is turned to this behaviour when it is carried out on a massive scale by multinationals.

  36. While the FDI sector has been a crucial factor in Ireland’s modern development, the indigenous international trading sector has underperformed in the last half century.

    National accounts distortions mask the challenges faced by indigenous firms and ministers invariably cite export statistics for example for China, that are dominated by exports from foreign firms that have not required any Irish marketing/ sales efforts.

    Total indigenous exports (including tourism & transport) mainly to English speaking countries account for a quarter of total annual exports of €100 billion excluding the €77 billion excess of transfer pricing and fake exports.

    What is striking is that both the FDI and indigenous sectors have the same level of employment at about 175,000 (excluding tourism & airline jobs).

    So with a jobs ratio of 4:1 for a given level of exports, the greatest jobs potential and value added is in the indigenous sector.

    There is a bias towards FDI among policymakers as evidenced by the response to Budget submissions, ministerial pandering, and the non-response to the stripping of Elan to a shell operation with less than 100 employed in Ireland and then to be acquired by a US white-goods suppler that now avails of the Irish corporation tax rate.

    Food is Ireland’s strength but in 2013 Denmark (population 5.5m) with the highest price levels in Europe, had double the Irish export value and crucially its food trade surplus as a ratio of exports was 37% compared with Ireland’s 19%.

    FDI jobs are ready made and do not require any culling of sacred cows.

    According to Macra na Feirme, there are more Irish farmers over 80 than under 35 while the amount of land that comes on the market annually is less than 0.5%.

    In France there is a bias towards helping young farmers (under 40) not only in buying land but also in finance support and it has been estimated that 30% of young farmers have no prior family connection with agriculture.

    Why not? What other entrepreneurial sector requires prior family involvement?

    To me corporate tax reform is a much bigger opportunity than a risk but the powerful vested interests have access to political leaders who likely haven’t spent a day in their lives in the trading sector.

    There are about 10,000 employed by the big services firms with 70 to 75% hired from overseas.

    There would still be a case for centralising some operations in Ireland if the Double Dutch scheme is axed.

    Until about eighteen months ago when corporate tax reform became an international issue, anyone who questioned the status quo was viewed in the same manner as dissidents during the bubble – “talking down the economy” – and it was usually only a left-wing TD who would dare question the gods of existing policy.

    The Government has been floundering in response to avoidance revelations and now after 3 years of using the flower pot firm template estimate, there is now a bigger choice.

    Has either Kenny, Noonan or Bruton been forced once in an interview situation by an informed interviewer to defend the Double Dutch scheme?

  37. The issue of corporate tax reform is not going to disappear as it is part of the growing inequality debate and this week, Paul Krugman’s impressive review of Thomas Piketty’s book was published in The New York Review of Books:

    http://bit.ly/R4soRC

    The current OECD reform project was triggered in the UK in in late 2010 when following big public spending cuts, protesters against tax avoidance, 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. According to The Guardian, Green banked the biggest pay cheque in corporate history in 2005 when his Arcadia fashion business, paid a £1.2 billion 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 tax was due on the gain.

    Margaret Hodge MP then took up the issue and House of Commons hearings revealed the cosy relationship between Revenue (HMRC) officials and Big 4 accounting firms working on behalf of MNCs (multinationals).

    A Google executive recently said that it’s up to governments to set the rules on traffic speed and the firm obeys whatever rules are set.
    Of course every issue cannot be specifically codified and revenue authorities do usually have a lot of discretion on abuse of the system. However, a different standard usually applies to MNCs compared with domestic firms and when a prime minister or taoiseach hosts a leader of an MNC, staff of course get the message on who matters.

    Simply, the directors of a local firm that engage in questionable accounting risk imprisonment while a blind eye is turned to questionable accounting practices at MNCs.

    Dodging tax in Ireland by locals has changed since a ‘Come on the Taxpayers’ banner was unfurled on Hill 16 during a Dublin-Kerry football All-Ireland in the 1970s. Now claiming loopholes that are disallowed and using tax havens, usually involves punitive financial penalties, if not prison and public naming.

    What of course is missing from the Google argument is that the MNCs have the money to influence the rules and as recently as Jan 2013 the MNCs’ tax lobby group lobbied the OECD to include a clause in a then planned new tax convention allowing companies to continue to finalise deals in a low-tax country, and thereby avoid paying taxes in higher-tax markets even if that’s where most of the business happens.

    It should also be noted that before the Internet age, the rules of the EU single market were abused when software was sold on CDs. It was a stretch or more precisely a joke to claim that a relatively small staff at Microsoft Ireland were responsible for sales in Germany and the rest of Europe.

    1. Given the escalation of the various loopholes over the decades, it is better now to await the international moves but over time the offshore tax avoidance entities should be closed down.

    2. The control and management test is essentially a fiction. Whether resident or offshore, divisionalised or not, central finance functions call the shots in most MNCs on reporting profits, tax and cash.

    3. The Irish authorities haven’t a clue about the operation of the mailbox companies: Last January it was revealed that a foreign government had requested Bermuda to investigate three of Microsoft’s Irish subsidiaries in the island nation. The information had been inadvertently made public by the Bermuda Supreme Court.

    The government of Bermuda was responding to a Tax Information Exchange Agreement (TIEA) request (the foreign government wasn’t identified), which is part of an international monitoring system, established by the Organisation for Economic Cooperation and Development (OECD), which Bermuda assented to in 2005.

    4. Apple Inc was able to present its offshore companies that contained the ‘Apple’ name as a normal Irish companies with addresses at its Cork headquarters. It even filed an Irish tax return in respect of some transactions in one of the companies.

    5. The argument that Ireland isn’t a tax haven because resident companies have to have operations of substance in the country doesn’t stand up.

    Last month an ‘Irish’ company, King Digital Entertainment, maker of the hugely successful ‘Candy Crush Saga’ mobile video game floated on the New York Stock Exchange. In its SEC filing it has a Dublin address and a London phone contact number.

    King operates in a number of cities with its main operations in London and its only presence in Ireland is a ‘headquarters’ that is located in the offices of a Dublin law firm. Nominee companies with the same address were listed as the shareholders.

    Other large redomiciled MNCs can avail of the Irish tax rate while having a small office staff in Dublin.

    Besides distorting the national accounts and giving some business to big professional service firms, what real value does Ireland get?

  38. @ John Foody,

    How will this play out?

    It is very difficult to say. There will be changes; definitely from the OECD and possibly in the US. But corporate profits are a bit like electrons – you can know where they are but you can’t know where they are going.

    From a purely Irish perspective it will be a matter of finding another niche. Given the sounds from the OECD it could be the linking of IP and substance. Many of the companies in the spotlight have at least some substance here and if they require substance in the location of their IP then Ireland could step forward. We are obviously not an attractive location for IP now (outbound royalty payments: €35 billion; inbound royalty payments: €4 billion) but a combination of changes at international and domestic level could make it relatively so. There have been some changes in recent Finance Acts but until the OECD changes are introduced it is almost impossible to know what the impact will be.

    The US is in gridlock and the longer that remains the better it is for Ireland.

  39. @ Elia,

    The ‘Malaysia factor’ was not in any way intended as an ad hominem attack against any contributor and I apologise if it was seen as such.

    It was a reference to the residency rules for companies in Malaysia, nothing else. I don’t think the question was ignored because it was viewed as a personal attack (I don’t think any contributor here has any influence over the tax residency rules in Malaysia); it was ignored because the answer to the question doesn’t suit the narrative that was been served.

    A key point of the issue is that US MNCs are making use of Irish-incorporated companies which are not tax resident in Ireland because they are “effectively managed and controlled” somewhere else. Through these the US MNCs are availing of the many deferral provisions in the US tax code.

    It might have been more useful if they had just been directly contributed to the thread but here are the residence rules for companies in Malaysia:

    A company is resident in Malaysia if at any time during that basis year the management and control of its business is in Malaysia.

    What does this show? Very little, hence it was not a key point above. But it would be possible for US MNCs to have Malaysian-incorporated companies that are tax resident somewhere else. Maybe they do, maybe they don’t.

    Here are ten countries which exclusively apply the test of management and control for company residency:
    – Brunei
    – Cyprus
    – Guyana
    – Malaysia
    – Mexico
    – Paraguay
    – Singapore
    – Slovakia
    – Slovenia
    – Sri Lanka

    And in Ireland, the test of incorporation is generally applied but through the ‘trading’ exception some foreign-owned companies can have the test of management and control solely applied to determine their residence.

    Of course, the residency rules of other countries have little relevance to what actually happens under Irish rules. We do know that US MNCs have Irish-incorporated companies that are not tax resident in Ireland. At least now it will be the case that they have to be tax resident somewhere.

    The minor point was that there is nothing unique about the Irish residency rules. So why use Ireland? We can all have our theories: tax treaties, EU membership, stability, transfer pricing oversight, withholding taxes….

  40. Jesse Drucker of Bloomberg News last year in a profile on Feargal O’Rourke of PwC wrote: “Changes in Ireland and worldwide are inevitable, he said, primarily because the Organization for Economic Cooperation and Development is targeting tax avoidance. He predicts his country will eventually prohibit companies like Google and Apple from setting up units in Ireland that don’t owe income taxes there.”

    Developed countries do not like being viewed as tax havens but some provide tax haven services while Western companies also prefer to use island tax haven services indirectly via countries like Ireland, Netherlands and Switzerland.

    While Apple’s offshore mailbox companies were stateless according to the company but most of them had Cork addresses.

    Irish claims of no responsibility for huge transactions between tax resident and non tax resident companies are risible – Other countries could provide the same services is hardly a credible defence!

    These are extracts from Newspeak standard comments made in response to the US Senate report on Apple.

    Kenny:

    “Ireland’s corporate tax rate is statute-based, very clear, very transparent, and we do not do any special deals with any individual companies in regard to that tax rate.”

    Gilmore:

    “They are not issues that arise from the Irish taxation system. They are issues that arise from the taxation systems in other jurisdictions and that is an issue that has to be addressed first of all in those jurisdictions.”

    Apple:

    Apple said in a comment that it does not use “tax gimmicks”. It said the existence of its subsidiary “Apple Operations International” in Ireland does not reduce Apple’s US tax liability and the company will pay more than $7bn in US taxes in 2013.

    IDA Ireland:

    “One crucial point that often goes missing in U.S. debates about corporate tax is that any company not ‘managed and controlled in Ireland’’ is not considered resident in Ireland and is not subject to Irish tax in the first place.”

    Ireland will continue to have a tax rate advantage and it is a significant host of FDI.

    American companies are not going start doing significant research in Ireland – less than one-third of FDI firms do any R&D – but why does the country have to be so helpless begging for American jobs while its food surplus is dwindling decade after decade and the majority of farms are economically unviable?

    OECD BEPS Project: Ireland should embrace corporate tax reform

  41. @ MH,

    The IP transactions in schemes such as Google’s are between resident sales and non-resident holding companies that are Irish incorporated.

    In the Apple scheme there were no transfers between Irish-incorporated companies. The holding companies are Irish incorporated but the transactions were with companies in Apple’s international sales markets. Unlike Google there is no evidence that any of the income flows generated by Apple passed through Ireland. They went directly to the US.

    Income taxation is organised on either a territorial or a worldwide basis. In a territorial system countries do not take “responsibility” for the profits of resident companies earned outside that jurisdiction. It is assumed that that the profits will be taxed in the country of source. The domestic country does not take responsibility for them. Several countries, most notably France, operate a territorial system of corporate income tax.

    A worldwide system taxes all profits with foreign-source profits taxed at the higher of the domestic and foreign rate. Ireland operates a worldwide system but because the rate here is lower relative to almost all other countries it is likely that very little additional tax is collected on the foreign-source income of Irish resident companies.

    Who is taking less responsibility: France who only tax the French-sourced profits of all French-incorporated companies or Ireland who only tax the Irish-sourced profits of some Irish-incorporated companies? The comparison is, of course, facetious but is asking Ireland to take responsibility for the international actions of MNCs not equally so?

    There are two transfers that are key when using holding companies in low- or no-tax jurisdictions to avail of the deferral provisions.

    The second is the royalty payment for the use of the IP. There are €35 billion of royalty payments made from Ireland each year most of which, presumably, ends up in the Caribbean.

    The International Trade in Services data from the CSO show that in 2012 around two-thirds of the royalty payments from Ireland went to EU countries. Although the actual figure is suppressed it can be deduced that most of those payments were made to The Netherlands and we can take a good guess where they ended up. Royalty payments direct to Bermuda from Ireland were €3.3 billion – 2 per cent of Irish GDP. Details on the flows of “inter-affiliate management charges” are less clear but equally important. Does taking responsibility mean stopping these?

    And there is also the first transfer. This is the cost-sharing or similar agreement that allows the likes of Google to place its international rights in Bermuda or some other low- or no-tax jurisdiction.

    There are legitimate concerns over the destination of the royalty payments but there is no dispute over the value of the IP. Google is valuable because of the ideas behind it. The Irish sales company paying substantial sums to the Bermudan holding company are, in general, appropriate.

    But what about the transfer that gets this hugely valuable IP to Bermuda in the first place? In this case it is not about a transfer price that might be “too high” but one that definitely appears “too low”. The highly-valuable US-created IP is transferred to Bermuda at a very low cost to the Bermudan holding company?

    Of the two, which is more important in shifting the profits to Bermuda: the high price paid by the Irish sales company or the low price originally paid by the Bermudan holding company. Both undoubtedly play a role but the responsibility is not all at one end.

  42. As regards intellectual capital (IP) the goal of Irish governments has been to increase patented research in Ireland as the once prevailing view in the West was that multinational firms would continue to locate their R&D divisions in the Northern hemisphere, and their manufacturing facilities in low-cost, developing countries, mainly in the South.

    In recent years Israel, China and India have attracted significant R&D investments from US MNCs.

    Most of the Irish royalty payments relate to profit-shifting.

    In fiscal 2011, Microsoft’s main Irish unit booked 26% of the global revenues and the reported net income in Ireland was $793,000 and as a ratio of revenues was 4.4%.

    Microsoft Inc’s net income as a ratio of its global revenues (including the Irish 26%) of $70 billion was 40% or $28 billion

    Charges from Bermuda in effect moved profits tax-free from Dublin to avoid paying 12.5% on lots of income.

    Microsoft had about 90,000 employees worldwide in 2011 and 1,900 employees at the Irish, Singapore and Puerto Rican companies earned approximately $15.4 billion in earnings (including the Irish companies in Bermuda) before tax (EBT), or approximately 55% of global EBT.

    IP values are set for tax dodging and while the US should fix its broken tax system, companies need the cooperation of other countries to exploit tax avoidance opportunities.

  43. @ MH,

    Transfer prices on a “cost plus” basis are pretty standard and are covered in paragraphs 2.39 to 2.55:

    OECD Transfer Pricing Guidelines

    In the IT, communications and software sectors in Ireland it looks like “cost plus 4 per cent” is widely used. Which of the OECD’s current guidelines does this violate?

    Are Microsoft’s profits in Ireland “too low” or “too high”? You seem to be making both points.

    Profits is attributed by risk, assets and functions. The risky activity that Microsoft engages in is writing software. The assets that result from that are copyrights. The function of selling software is not very profitable. Suggesting that profit be attributed to sales staff who add very little does not make sense.

    Microsoft’s profits are attributed to the assets it creates in the US. That Microsoft can place its assets in low- or no-tax jurisdictions depends on the cooperation of the US. The transfers to the assets seem pretty standard. It is the assets that generate the profits. The key is the location of the assets and it is that which is the OECD is targeting.

  44. @ Seamus Coffey

    I think that this issue has run its course…

    I don’t see much value in seeking rationality in what is a sophisticated tax avoidance scheme arranged by Microsoft.

    Microsoft Ireland Research, which operates from the offices of a Dublin law firm and is a subsidiary of Microsoft’s Bermuda-based Round Island One, has about 400 employees in Dublin. It’s unlimited and licenses to the local EMEA company in Dublin and so on.

    Possibly no tax authority has access to its accounts – after all to other jurisdictions, it appears that it is a normal Irish tax resident company.

  45. @ MH,

    The issue will be running for a time yet. The system is in need of change. The aims of the BEPS group are lofty but we must await what they actually deliver.

    The tax structures put in place by the companies are complex but the tax benefits gained are not the sole result of the domestic Irish regime of Corporation Tax. Is it still not clear what exactly you want changed.

    There are big problems with information availability and exchange at the moment. The country-by-country reporting proposals from the BEPS group could be significant in this regard. The provision of information on the full activities of companies to tax authorities and not just on the activities in that country will be a big shift. It is possible that suggestions that arise three or four years after country-by-country comes in, if it does, will be more important than the current ones as the countries will see more clearly what is going on. This will continue for a good while yet.

  46. @ Seamus Coffey

    but the tax benefits gained are not the sole result of the domestic Irish regime of Corporation Tax. Is it still not clear what exactly you want changed.

    I’ve already made the first point, and the second point is covered in a linked to piece above, which I repeat here.

    OECD BEPS Project: Ireland should embrace corporate tax reform

    Rather than “talking down the economy,” I’m trying to do the opposite

    1) The official bias towards the FDI exporting sector has coincided with a jobless exports surge since 2000, rising facilitation of corporate tax avoidance and a dwindling food trade surplus as a ratio of exports from 61% in 1990, coincident with a state agency’s assessment that the majority of farms are not economically viable;

    2) Nevertheless, despite a small role in exporting, the indigenous trading sector provides more direct jobs than the FDI sector.

    3) The national accounts are hugely distorted, usually without any clarification, which suits politicians as performance is artificially boosted and it avoids them having to deal with issues such as the farm crisis;

    4) At this point it is better to await the outcome of the OECD BEPS project. However, over time, the tax avoidance entities should be axed and it shouldn’t matter if they decamp to Labuan or wherever as long as Ireland doesn’t facilitate abuse (the Revenue may well have enough powers already to deal with artificial tax shelters);

    5) Ireland would retain some key FDI advantages and there is no risk of a mass exit of FDI firms;

    6) With a job creation ratio of 4:1 for a given level of exports, what could the underperforming indigenous sector achieve if it got some serious attention?

    Prof John Kay writes in today’s FT:

    In Ireland, almost all the problems I have described came together to make the country appear, from its GDP statistics, better off than it was. The resulting hubris left it worse off than it need have been.

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