There’s Something of the Night About Irish Entrepreneurs, MNC HQs and Ireland’s Loose Tax Regime

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It’s funny the things you notice when you’re re-reading something in light of additional information you may happen to get. When I first came across this IDA report used to advertise the ‘unique’ qualities of the Irish entrepreneurial mind I thought it was the usual gloss generated by the IDA when advertising Ireland as a location for MNCs to avoid tax. Look how it oozes their particular brand of blarney:

“Irish executives and entrepreneurs are equipped with the psychological and cultural competencies that can give Ireland a competitive advantage if properly supported, according to new research launched today by the Irish Management Institute (IMI).

Both Irish executives and entrepreneurs reported in the research a consistent pattern of preference for right-brained thinking, which includes attributes such as intuition, the ability to make seemingly unrelated connections and tolerance of ambiguity.”

However, returning to it after reading this very enlightening Central Bank of Ireland report made me look again at the opening and the date.

“10/06/10

Right-brained thinking a quality feature of the Irish, opening the potential for the country in innovation and to be a management HQ for global firms

Now ‘management HQ’ could be IDA biz-speak for ‘hub’, or ‘centre of excellent’, or…

The following is from the above mentioned article in the Q2 Quarterly Report from the Central Bank of Ireland report published in April this year:

“The UK authorities announced their intention to introduce controlled foreign companies (CFC) legislation in 2008, targeted at curbing multinational companies shifting profi ts abroad to reduce their tax liabilities. Following this announcement, a number of high profile UK companies relocated their headquarters to Ireland, see Voget (2010)14. The multinational pharmaceutical company Shire, which lent its name to this phenomenon, was the first major company to relocate to Dublin in April 2008. Other companies which announced plans to relocate their headquarters to Ireland as part of the ‘Shire effect’ include Figureer International PLC, United Business Media and WPP. Following proposed reforms to the CFC tax regime in the UK budget in March 2011, a number of these companies, including WPP, have indicated that they intend to return to the UK. While these types of companies have large balance sheets, their contribution to the local economy in terms of employment tends to be limited.

In May 2009, the Obama Administration announced plans to curb US companies utilising tax havens and remove the tax incentives for shifting jobs overseas. While Ireland was initially included in the list of countries included in the tax haven list, it was later removed. Subsequently a number of countries relocated their multinational headquarters from countries remaining on the list, to Ireland. These included Ingersoll Rand, Accenture, Covidien, and Cooper Industries.

Although the international insurance services industry was already well established in Ireland, the White House proposals led to a number of insurance companies relocating to Ireland, including Willis, Zurich Financial Services, RSA Group, Beazley and XL Capital.

The influx of new companies into Ireland is notable in gross foreign direct investment positions from 2008 onwards, see Box 3 Chart 1. The decline in foreign assets in 2011 is due to falling values in foreign investment owing to the turbulence in global markets.”

So we can assume that the publication of the research by the IMI and the IDA is designed to try and get jobs for Irish people who have the ability “to make seemingly unrelated connections” and possess a “tolerance of ambiguity”. It seems that they would need it.

Here’s an excerpt from a brochure document produced by Bradley Tax advisors which provide a lot of detail on why this is happening with regard to the changes in the UK:

“Since April 2008 an increasing number of multinationals have moved the tax residence of their corporate headquarters to Ireland. U.K. groups such as Shire Pharmaceuticals, Henderson, Charter, United Business Media and WPP are now headquartered in Ireland.

Why Ireland?

Ireland’s 12.5% rate of corporation tax was and continues to be a big factor in attracting large multi-national tax groups to set up operations in Ireland. This initially led to growth in the financial services, pharmaceutical and technology sectors. However, in recent times, it is Ireland’s treatment of profits made by foreign subsidiaries of Irish resident companies that has been attracting attention and encouraging, in particular, UK firms to move their holding companies to Ireland and become tax resident there in order to reduce their tax burden.

In accordance with general principles, an Irish holding company with a foreign subsidiary should only be taxed on the profits of the subsidiary once its profits are repatriated by way of dividend. Controlled foreign company (CFC) rules refer to the timing of taxing profits of companies with business operations in foreign jurisdictions and these rules seek to impose exceptions to the general rule such that profits of a subsidiary may be attributed to the parent and therefore taxable when the profits arise. The UK tax regime has such rules and these rules create a substantial regulatory compliance burden as UK firms with overseas subsidiaries have to manage the interaction between the UK tax system and the systems in the various countries it operates subsidiaries from in order to minimise their CFC exposure.”

The rest of the document also explains in detail how Ireland’s tax regime is specifically designed to ensure that foreign multinationals will never be liable to pay any tax on profits.

Such generosity, however, does to not come without strings attached, as this section on how to complete the migration process explains:

“The migration process

The most common mechanism by which an Irish holding company is set up in Ireland is that a new parent in incorporated in Jersey or Guernsey to acquire the existing parent. The migration can be achieved by way of a cancellation scheme of arrangement approved by the local court or a share-for-share exchange, whereby shareholders agree to cancel or swap their shares in the existing parent or holding company in return for shares of an equivalent amount in the new parent or holding company. It may be necessary to carry out an intragroup reorganisation at the same time.

The reason for using a company incorporated in Jersey or Guernsey is that such companies do not attract a charge to Irish stamp duty on share transactions.

It is important that the new holding company will be managed and controlled and therefore tax resident in Ireland. This is a key requirement. Therefore, all board meetings must be held in Ireland, and care must be taken to ensure that UK residence is not re-established. All major decisions relating to the strategic direction of the company must be taken in Ireland and ideally at least one director should be tax resident in Ireland. It is not necessary for the UK plc to re-locate its centre of operations from the UK to Ireland.”

All emphasis in the above quotes are my own.

So, moving a corporate HQ sounds like a coup, except that such a move does not involve a re-location of a centre of operations and so, to refer back to the CBoI article, “their contribution to the local economy in terms of employment tends to be limited”. All it requires is a room in which to hold meetings and a couple of jobs for the boys and/or girls.

Incidentally, the article in the Central Bank of Ireland Quarterly report is about the difficulty in completing a statistical analysis of the money flows passing through MNCs headquartered in Ireland:

“In the first channel, all profits that were consolidated by the headquartered MNC in Ireland, outflowed from the country, and therefore over time, had a zero net effect on Irish external macroeconomic accounts. Any lag between profit inflows and outflows will, however, cause volatility on the current account. In the second scenario, profits received did not fl ow out again through the current account but via the fi nancial account of the balance of payments. As these investment income inflows are not offset by outfl ows on the current account, a permanent overstatement of GNP is recorded.”

Not GDP, GNP…

While stating that “The usefulness of counterpart direct investment data are questionable for analytical purposes” it provides this table outlining the flows of inward and outward foreign direct investment:

imftable.jpg

Data available here.

As the copper in Flann O’Brien’s The Third Policeman would say: “Sure, that’s a fierce pancake altogether”.

 

2 Responses

  1. William Wall

    September 12, 2012 11:53 am

    Even De Selby couldn’t wash off the amount of night they’ve cloaked this lot in. The IDA report though is pure Flann O Brien. I think we need the Third Policeman.

  2. Donagh Brennan

    September 12, 2012 12:05 pm

    If memory serves me right, I believe he used a contraption not dissimilar to a hoover. However, to unmask all the night surrounding this lot you’d probably need to crank up a vacuum cleaner the size of the hadron collider. Might reveal the ‘oh god’ particle.

    I’ll get my coat….