Yes, Say it Again: Ireland IS a Tax Haven and it’s Worked Hard to Be That Way

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1taxhavenSo the US Permanent Subcommittee on Investigations has declared that Ireland is a tax haven and Apple executives giving testimony to the committee have said that the Irish government gave them a special 2% rate. Rate in this context is irrelevant however, as the mechanism ensures that what Apple declares as taxable income is completely up to them. As many reports have suggested, Apple could pay as little as 0.05% on income earned and passed through Ireland, and the revenue appears to be sales tax on Apple products bought in Ireland. In addition they have also said that their Irish companies are not registered for tax anywhere, so that none of the $30 bn global income earned in the last number of years was taxed.The Irish government denies that it has provided special tax treatment to Apple, and that it is not a tax haven. This is the surest sign that it is one, according to Richard Murphy of Tax Research UK.

If you haven’t already you could do worse than get one of the remaining handful of copies of the first issue of Irish Left Review, which includes a good interview with Ricard Murphy about the Irish system. There is also a long article about Ireland and corporation tax which deals with this in a fair amount of detail.

However, despite all this new found interest in the topic I am drawn back to a post by Conor McCabe from July 2010 written around the time he was working on the chapter on the cattle industry in Sins of the Father. (Good news, the 2nd edition of Sins of the Father, with a new chapter on more recent developments will be published towards the end of 2013).

The post begins by talking about a book by the Irish historian Paul Rouse called Ireland’s Own Soil which, Conor explains, “shows the overwhelmingly negative effect the live cattle export business had on the development of the Irish economy post-independence.” There is very little official memory of the influence that the big players in the live cattle export business had over the structure of the Irish economy but continuities of it can be seen today. At the moment John Bruton is being castigated by the Irish Independent for his ‘creative destruction’ comments and insistence that Ireland needs to plough on with austerity. An explanation for this attitude is at least partially explainable if we look at Bruton’s background. Bruton’s family were one of the biggest exporters of live cattle. From a obituary for Joe Bruton in the Irish Independent:

“By dint of hard work and shrewd cattle trading acumen, Joe’s father and the Bruton family grew from tenant Catholic farmers to substantial land and property owners on the fringes of Dublin, North Kildare and South Meath. In addition, they also purchased cattle feeder farms in Longford and in the Burren, Co Clare. Ireland’s cattle were then sold as forward stores for finishing over in Britain and the Brutons were in this trade.”

No doubt John thinks often of his father Joe, who was involved in the setting up of the NFA (now the IFA) in the 1950s, when he goes to his office in the IFSC in Dublin’s docklands, as for two terms the Meath farmer and old Clongowes boy was President of Dublin Port and Docks Board, because of his family’s heavy involvement in the live export trade.

Conor’s argument is that the exporting of live cattle was continued even though it stymied the development of the whole economy, even during a period of massive unemployment and emigration. Indeed, in the ships leaving Ireland priority was given to cattle over people. This argument discusses the issue in relation to the continuing structures within of the Irish economy, as anyone who has read Sins of the Father would know, so it is relevant to a discussion about how the Irish government provides such favourable tax arrangements for companies like Apple and Google.

Conor continues in the post What the Hell Has Cattle Got to Do with NAMA:

“The political influence welded by the 25,000 or so ranchers helped to scupper almost all attempts to develop indigenous industry – including an indigenous beef industry, something that the American consultancy firm Ibec, simply couldn’t understand when it wrote its 1952 report: An Appraisal of Ireland’s Industrial Potentials.

Although Seán Lemass was much taken with the report, he was not able to resist the influence of the live cattle exporters, and instead implemented a ‘third way’ compromise of transplanting wholly-formed foreign factories on Irish soil as a way of industrializing the State. This was supposed to be a short-time developmental measure, but instead it ends up as the bedrock of Irish economic doctrine.

The structural deficiencies in the Irish economy, whereby indigenous capitalism is a ‘middleman’ capitalism of banking, finance, construction and landlords, start to make sense once the cattle industry – the bullock in the room if you will – is pointed out and commented upon.

The world and people which NAMA is designed to protect – the property developers and financial middlemen – grew out of the accordance which developed between the ranchers and the State from the late 1950s onwards.”

The continuities of this middleman role can be seen in attitude of agents of the Irish state regarding the US Tax Deferral Rule. The following is taken from my article on corporation tax in the first issue of Irish Left Review.

Niche Policies on Behalf of Industry
In a report read to the IIIS in Trinity College, Dublin which is a very defensive response to the Telesis report in 1981, the head of the IDA at the time Padraic White describes what policy his agency should pursuit instead of those outlined by those in Telesis:

“(iv) Identification and Development of Special Niches: In aiming to achieve high levels of output growth Ireland could identify and develop its own specialised opportunities for growth. Many attractive opportunities are beyond our aspirations in both financial and other terms. Ireland simply cannot afford the broad based technical approach of many developed countries. IDA possesses a unique combination of sectorial experience and commercial knowledge which will enable it to identify and develop suitable niches on behalf of industry: specialised computer software is an example.”

This precludes investment in an industry that is set to expand internationally, according to White, but instead can identify and develop ‘suitable niches’ on behalf of industry. Perhaps the most important way of developing that niche was to make use of the changing tax environment in the US. As a result of the rapid increase in US companies using tax havens to hide corporate profits the US government introduced the Tax Deferral policy – the ability to defer the payment of tax by US multinationals on profits earned outside of the USA35. The consequence of this change means that profits that US MNCs earn in countries like Ireland are not repatriated when they are earned but are held by the company for as long as it chooses. The deferral is an interest free loan and allows the company to hold on to that money until such time as US authorities are willing to provide windows in the tax laws to allow for repatriation of earnings at a low tax rate. One such opportunity occurred under the American Jobs Creation Act 2004, which allowed US based firms to repatriate profits at a tax rate of 5.25% rather than the standard rate of 35%.

The Deferral mechanism was one of the niches that the IDA sought actively to exploit, not to create jobs or develop indigenous companies that might be able to link back to FDI. It was to create an environment that suited the Treasury Management firms that MNCs use to manage their intra-company capital while holding on to the deferred profit income prior to eventual repatriation.

One example from the US Diplomatic cables (published in 2010 but referring to conversations recorded in the US Embassy in Dublin in Nov. 2004) shows how Ireland’s industrial policy as implemented by the IDA under White was entirely dependent on the US Tax Deferral mechanism.

“8. (C) The U.S. policy of tax deferral for foreign subsidiaries of American firms, combined with Ireland’s 12.5 percent corporate tax rate, underpinned the large influx of U.S. investment to Ireland during the Celtic Tiger period, observed Padraic White, former CEO of Ireland’s Industrial Development Authority (IDA). White recounted his numerous trips to the U.S. House of Representatives, Ways and Means Committee to defend tax deferral, and he argued that Senator Kerry’s plan to reverse tax deferral would have “killed Ireland,” had he been elected.”

The sector that White suggested the IDA should concentrate on was one that was only just beginning to develop; specialised computer software. Perhaps while responding to the Telesis report White was thinking of a new entity, Apple, which set up in Ireland in December 1980, the month the company went public offering $4.6 million shares at $22 each. A few months later Ireland adopted a 10% corporation tax rate for manufacturing. In 1981, according to the Telesis Report, 80% of the foreign companies that set up in Ireland said they did so to avail of the generous tax reliefs available.”

Ireland and its Aspiration to Become a Tax Haven

There has been a lot of the definition of a Tax Haven, but it appears that the most significant indicator are if trading partners consider your country to be one. There is much made of that fact that Ireland is not on the OECD blacklist (in fact, in 2009 the black list contained zero entries), and that the European Commission has ask its members to create “blacklists” of tax havens ahead of the G8 (even though the commission has ‘instructed them to single out only non-EU countries as havens’, and ‘has chosen not to include European countries, such as Ireland, The Netherlands, and Luxembourg’).

Yet we know that Ireland’s tax arrangements for foreign companies are modeled on those tax havens that the OECD and the European Commission apparently decry.

Yes, it’s Padraic White again and his story about the Establishment of the IFSC is told in the book he co-authored with Ray McSharry The Making of the Celtic Tiger: The Inside Story of Ireland’s Boom Economy. Dublin. Mercier Press. (2000):

In the middle of 1973, the IDA launched international services as its latest product. At the time, this category included both technical consultancy services and computer services. However, within the IDA’s own research unit, work continued to identify and analyse other service products, including those n the financial-services area. One of the economists engaged in this task was Ken O’Brien, who later, as founder of Finance magazine, would provide specialist coverage of the Dublin financial centre. Our New York office befriended a Wall Street lawyer, Bob Slater, who was familiar with the then-exotic world of offshore banking – the reasons why banks set up in specialist offshore centres, the kind of financial activities undertaken there and the nature and number of jobs created in this developing sector.

As manager of the planning unit, I agreed to take on Bob Slater, both as a financial consultant on financial services to IDA and to produce a study of offshore banking systems. His report examined the success of Bermuda in creating jobs in financial services, and he was satisfied that Ireland could emulate its achievement. And so in 1978 – innocently, in hindsight – we set out to promote international financial services to the world, and did so on a pilot basis to test-market the reaction. The IDA executives embarked on their selling mission, armed with the expert conclusions of the Wall Street expert.

During the year the IDA team soon landed some big fish in the form of two US banks that had developed specific job-creating proposals. However, the agreement of the Central Bank was first needed. Michael Killeen* considered the proposals sufficiently important for himself to go with Jerry Kelly, who was negotiating the projects, and myself to make the case for Central Bank authorisation. The reaction was not encouraging and we left the Dame Street offices feeling rather dejected. We could not give the required assurances or promises of authorisations to our foreign bank clients. The projects died and we ceased to do any more financial-services promotion. Subsequently, it emerged the bank no stomach for the projects and would not approve them. However, the IDA could never get a clear reason for this. The most authoritative word which came back indirectly was that the Central Bank believed the offshore financial projects ‘smacked of a banana republic.’ (pp.323-4.)

However, by the 1980s circumstances had changed, as Fiona Reddan’s account in the currently out of print book The History of the IFSC (link to Scribd version embedded below) describes. The plan was for the IFSC to be an offshore financial centre, and rather than being the dream child of Charlie Haughey, the plan was developed initially by the Coalition government of Labour and Fine Gael, with Ruari Quinn and John Bruton being the most enthusiastic.

History of the IFSC : by Fiona Reddan by Mark Malone

There is more to add to this – how Ireland now sees opportunities for moving IP rights to Ireland from those nasty Tax Haven that the OECD and the EU Commission are asking their members to single out. In this case Apple’s current CEO Tim Cook did Ireland a service (as the Irish solicitors involved in international tax arbitrage see it) in his testimony yesterday by flagging the 2% rate (2% of nothing is still nothing), but not holding your IP rights “offshore” on a Caribbean Island. In this sense, and this is speculation, Apple who are attributed with creating the double Irish are the model for future tax arrangements. Time will tell