From Saturday’s The Irish Times, David McWilliams writes:
Luckily for us, there is no financial constraint for a craic bailout. The ECB has set interest rates to zero. The NTMA borrowed billions this week at negative interest rates. This means that money is free.
The State needs to spend when the private sector is saving, which is what is happening now. The country should issue a perpetual bond, as George Soros is advising the EU to do, or a 100-year bond as Austria did two weeks ago, to cover spending.
At zero interest rates and with the ECB ready to buy whatever the government issues, fiscal policy becomes monetary policy. This means the Government just issues IOUs, gets the money and can spend the money whatever way it chooses. A craic bailout should be first on the list.
And in the Sunday Business Post, Aidan Regan proposes:
Here’s how it works. The government issues a 20 year fixed interest rate bond that amounts to the equivalent of 10 per cent of gross national income. This equals around €30 billion. The Irish state could issue this type of long term bond tomorrow at effectively zero per cent. If you adjust for inflation, it would mean that the markets will pay the government to do it.
Taking this sum of money, the government would create a rigorously independent body to oversee the creation of a new national wealth fund. The board of the fund would employ various asset management experts to invest the money on behalf of the state. They would be mandated to generate a capital return of anything between 4-8 per cent per annum.
Basic mathematics would suggest that the probability of the Irish state generating a return greater than 0 is high. And anything above 0 means the state can pay off the debt while creating wealth and value for its citizens. If the compound interest return to the people’s wealth fund was 5 per cent, the Irish state could repay the debt issued to create the fund in less than 15 years. After this point, all capital returns go back to Irish society.
But more importantly, the state now owns the capital assets that it bought to generate the return. The Irish state has gone from being a debtor to a wealth owner. It has created value. If Apple or Amazon stocks go up, then so does the wealth of Irish citizens. This is because they now own a part of these profitable tech firms through their national wealth fund.
Next Wednesday the General Court of the European Union will give the first judgement in the state-aid case against Ireland in relation to the taxation of Apple over the period 2005 to 2014. Yesterday, the OECD published the first set of aggregate statistics from the country-by-country reports (CbCR) that were introduced under Action 13 of the BEPS project. The data are for 2016.
These are linked as the subsidiaries at the centre of the state-aid case, in particular Apple Sales International, were stateless entities for the period under investigation. Changes to Ireland’s residency rules for companies introduced from the start of 2015 meant it was no longer possible to have an Irish-registered stateless company.
The data from the OECD show that in 2016 stateless entities continued to play a significant role in MNE tax structures. Here is all the data on stateless entities by the jurisdiction of the ultimate parent.
While stateless entities are a significant feature of the corporate tax landscape they really only arise from one jurisdiction: the US. In the OECD data for 2016, 99.8% of the profit linked to stateless entities is linked to companies with their ultimate parent in the US.
Stateless entities are a feature of the US tax code. See the second paragraph of this IRS note on its own CbCR statistics. As the figures above show stateless entities do not pay significant amounts of tax and the taxation of their profits can be viewed in a number of ways.
From the US perspective, the tax is due to the US and is merely deferred by being located in a stateless entity. A formal repatriation would have triggered the tax due to the US (with offsetting credits for any tax paid to other jurisdictions). Under the 2017 Tax Cuts and Jobs Act a “deemed repatriation tax” was introduced and the tax became payable to the US regardless of whether the profit was formally repatriated or not (albeit at a lower rate). This is one of the reasons Apple’s cash tax payments rose in 2019.
Central to the Commission’s state-aid case is Apple Sales International (ASI). For the period in question this was a stateless entity with a branch in Ireland. It had an effective tax rate similar that shown in the aggregate OECD figures for stateless entities (<1%). The Commission’s state-aid finding was not linked to the stateless status of ASI; it was linked to the allocation of profits between the company’s head office in the US and branch in Ireland.
Even if these companies are not deemed to be tax resident in Ireland can it be established that their profits should be taxable in Ireland? Is the presence of a branch enough to deem the profits of the parent taxable here?
There are a couple of ways of approaching this but the key aspect is the agreements granting the rights to use Apple Inc.’s intellectual property outside the Americas to these companies. All of the licensing and cost-sharing agreements were negotiated and signed in the US, at board meetings which took place in the US, and by directors and key decision-makers who were exclusively based in the US. None of the key risks, functions and assets that underpin the creation and ownership of the intellectual property had a connection with Ireland.
With the benefit of the subsequent ruling by the Commission we know that all of this is true. However, there is one qualification that should be added to the above extract – the board meetings where the key decisions were made were not the board meetings of ASI. And this is the central argument of the Commission’s state-aid finding as set out in this paragraph:
285 The minutes of board meetings provided to the Commission demonstrate that the boards did not engage in any detailed business discussion before the discussions on Apple’s new structure in Ireland, as a result of which, according to Apple, the 2007 ruling ceased to be applied to determine ASI’s and AOE’s yearly taxable profits in Ireland. The summary of the minutes presented in Table 4 and Table 5 illustrates the discussions over the period January 2009 to September 2011 for ASI and December 2008 to September 2011 for AOE. With the exception of one business decision to transfer assets from AOE’s Singapore branch to another Apple group company, those minutes show that the discussions in the boards of ASI and AOE consisted mainly of administrative tasks, that is to say approving accounts and receiving dividends, not active or critical functions with regard to the management of the Apple IP licenses.
And that is essentially the case in a nutshell. Ireland’s position is that none of the key risks, assets and functions that made ASI hugely profitable were located in Ireland. The Commission went looking for them but all they could find outside Ireland were the minutes of board meetings where it was decided what bank account to put the profits into.
De facto, the key decisions were made by Apple Inc but they were not documented in the minutes of ASI’s board. The appropriate allocation of profits would see the profits attributed to the ASI head office attributed to Apple Inc. This is the view of the OECD.
But Apple Inc. was not part of the Commission’s investigation. The Commission looked only at the allocation within ASI and determined that “only the Irish branch of Apple Sales International had the capacity to generate any income from trading, i.e. from the distribution of Apple products. Therefore, the sales profits of Apple Sales International should have been recorded with the Irish branch and taxed there.”
The Commission has actually made a pretty strong case (aided by Apple’s poor documenting of decisions) but it only holds if you limit your view to ASI. If you consider Apple Inc. as a whole you would not allocate 60 percent of the company’s profit to the activities that happen in Hollyhill on the northside of Cork City.
And that is where we are. If the court limits its view to ASI then the Commission’s state-aid finding probably has a good chance of holding up. If the court takes the broader perspective of Apple Inc. as a whole then that probability is reduced but remains above zero. The EU courts don’t have jurisdiction over the actions of the IRS.
Will any of this result in Apple paying more tax? No. If Apple has to pay more tax to Ireland then the “deemed repatriation tax” due to the US under the TCJA will be reduced by a commensurate amount.
Robert Stack, former Assistant Secretary at the US Treasury said the following to a Congressional Committee about what would happen if the state-aid decisions are upheld by the courts:
“Now if we were to determine that those payments are in fact taxes and we were to determine that they are creditable under our rules, now when that money comes home from those companies in addition to the credit they got for the tax they originally paid in those jurisdictions they get an extra credit. And that credit to this taxpayer you asked me about means in effect the US Treasury got less money and in effect made a direct transfer to the European jurisdiction that is getting the ruling from the Commission.
So if these turn out to be creditable taxes it is the US taxpayer that are footing the bill for these EU investigations.”
But it was the US tax system that allowed this profit to be deemed “offshore” in the first place through the licensing and cost-sharing agreements provisions of the US tax code. The IRS has challenged several of these, including Facebook and Amazon, in the US tax courts but has yet to be successful.
The US might be happy to accommodate stateless entities within its tax framework to try and limit the harm of its approach to transfer pricing. We know that the European Commission has not been so accommodating. On Wednesday we’ll get a look at what the courts think.
Guest post by Stephen Byrne, Central Bank of Ireland
Today the Bank published its third Quarterly Bulletin of the year. The report contains a detailed overview of developments in the economy since the publication of last Bulletin in early April as well as our latest macroeconomic forecasts out to 2022.
Given the scale of uncertainty surrounding the economic impact of Covid-19, two different scenarios for the economic outlook are outlined in the Bulletin (see featured image above).
In the “baseline” scenario, the economy reopens in line with the Government’s phased plan, allowing for a rebound in economic activity in the second half of the year. Some containment measures would remain in place meaning that activity would be constrained in some sectors for a longer period. Beyond the initial rebound, recovery is expected to be gradual, in line with a slow unwinding of precautionary behaviour as the effects of the shock on consumers and businesses lingers. The unemployment rate is set to decline from its second quarter peak of about 25 per cent as the year progresses and is projected be around half that level by the end of this year, before averaging just over 9 per cent next year and 7 per cent in 2022.
The baseline scenario sees output recovering to its pre-crisis level by 2022. However, the level of activity will be significantly below where it would have been had the economy grown in line with expectations before the outbreak of the pandemic.
In the “severe” scenario, the strict lockdown period is assumed to have a more damaging impact on economic activity and is not successful in effectively containing the virus. Stringent containment measures would remain in place, or would be re-instated, albeit not as severe as before, based on an assumption that there would be a resurgence of the virus at some point over the next year. In this scenario, there is a subdued economic recovery with a larger permanent loss of output. Unemployment remains higher for longer in this scenario and would average just below 17 per cent in 2020, while consumer spending is projected to fall by around 14 per cent and GDP by over 13 per cent this year. In this scenario, the projected recovery in growth in 2021 and 2022 would not offset the loss of output this year, leaving the level of GDP in 2022 about 5 per cent below its pre-crisis level.
Both of these scenarios assume that a Free trade agreement in goods between the UK and the EU, with no tariffs and quotas on goods, takes effect in January 2021. If such an agreement is not reached, then the EU and the UK would move to trading on WTO terms from January 2021. Box D of the Bulletin discusses the implications of such an outcome.
Finally, an accompanying signed article explores alternative long-term recovery paths for the economy and assesses the impact of fiscal and monetary policy supports. The Article considers how hysteresis – or scarring – effects could influence the pace and nature of the recovery. The paper shows that, as a highly open economy, Ireland benefits from the positive effects of monetary and fiscal policy measures implemented abroad. The assessment of the combined effects of domestic and international policy supports indicates that the actions will help to meaningfully reduce the scale of the output loss in Ireland from the pandemic.