Corporation Tax: Ireland’s For Sale Sign

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Because of the ongoing coverage of Apple’s Irish tax arrangements and the fact that Ireland is considered to be a Tax Haven by the US Senate once again, we have decided to publish a PDF version of my article Corporate Tax: Ireland’s For Sale Sign.

Over the weekend, the Sunday Times article, which uses new research by Jim Stewart where he shows that Ireland is the third largest tax haven for the US after The Netherlands and Luxembourg, got a fair bit of coverage. This finding shouldn’t be too surprising to anyone who was good enough to buy the first issue of Irish Left Review, or for matter, if they read the article by Mary Everett in the Q1 Quarterly Report from Central Bank of Ireland (April 2012, p56). In it the following table is used to illustrate how hard it is to figure out what is real economic activity and what is merely the movement of intra-company funds for the purpose of aggressive tax avoidance.

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The fact that 90% of Ireland’s export activity comes from US companies and that the majority of that activity is the funneling of profits through tax havens we can see that the vast majority of Ireland’s export activity is simply tax avoidance. But that is not to suggest that this money remains in tax havens waiting to be repatriated. Ireland, like The Netherlands and Luxembourg, is only a conduit. The money actually resides in US bank accounts.

Over the weekend too, it’s reported that the Department of Finance is considering closing the double Irish scheme “created by Charles Haughey in 1990”, according to the Sunday Business Post. However, as Jim Stewart argues in his paper, “changes in tax law happen all the time because Ireland prides itself on being responsive to business needs. Apple did a big reorganisation of its company around 2005 and as part of that it would have had to renegotiate its tax liability with Revenue”. Indeed Apple were not the only company to reorganise in 2005. Apple, Microsoft and Johnson and Johnson all became unlimited companies, which shields their accounts from scrutiny. Google, which also uses unlimited companies, benefited from a change introduced last year which had been lobbied for by the American Chamber of Commerce in Ireland. According to Jesse Drucker of Bloomberg this led to the Dutch Sandwich, which routed profits from an Irish subsidiary to a letterbox company in the Netherlands back to an Irish incorporated company which is registered in the Bermuda for tax purposes also being no longer necessary. Now the money goes straight to the Irish company registered in Bermuda. This helped to cut Google’s tax bill by at least $2 billion a year, according to U.S. and overseas securities filings.

The following is taken from the opening section of my article, which provides an overview of the argument, but you can read the whole thing as a PDF here.

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“As we edge towards the centenary of the events that comprised the revolution of the early 20th century, we face a stark conclusion. This is a State bereft of meaningful sovereignty due to its bankruptcy, and a State whose governing culture has been exposed as rotten. We may have little to cheer about in 2016.” – Diarmaid Ferriter on the outcome of the Mahon Tribunal – March 2012

“But the 12.5 per cent corporation tax has become a touchstone of independence, defended vigorously against EU attempts to raise it. “This is seen as our one Green card,” says Prof Ferriter. “The last vestige of our sovereignty.” – Financial Times article on the Fiscal Compact Referendum – May 2012

There is no doubt that the 12.5% rate of corporation tax in Ireland has become emblematic. But is it a remaining emblem of Irish sovereignty, as Diarmaid Ferriter suggests? On the contrary, the 12.5% rate rather than being an emblem for the right of the citizens of a country to determine their own future, is instead a totem for a sovereignty that is used to enrich those who have the power to put it at the disposal of non-Irish companies attempting to shield themselves from their global tax liabilities. Importantly, with the Irish economy remaining in deep shock with further damage being inflicted with each budget, the benefit of using it in this way does not accrue to the economy as a whole.

Neither is it sufficient to be considered as a significant part of a long term industial policy. The 12.5% rate is just the ‘for sale’ sign for a system that offers much more than paying tax at one of the lowest corporate tax rate in the world. As the debate on effective tax rates in Ireland has shown, very rarely would a foreign company in Ireland be subject to it. Instead the much referred to rate is an advert for a tax system designed to allow certain types of foreign companies to avoid almost all of their international tax obligations. These companies tend to have a lot in common, such as an ability to dominate international markets, have disproportionately high profit margins and are geared towards profit maximization, operate large intra-group financing structures and can manipulate costs through the ownership and control of patents and intangible assets. Ireland’s ability to provide this is relatively unique and extensive, combining specific rules, the absence of certain laws enforced elsewhere to control tax avoidance, exceptions and copper fastened light-touch regulation which ensures these companies will not be investigated for aggressive tax avoidance. But the benefits Ireland receives for providing such a service has been hugely exaggerated.

They are, in fact, pitifully small, in terms of jobs, investment, economic development and government revenue. The same policy that provides such generous reliefs for foreign investment that barely touch the real Irish economy has left those who do live and work in this economy with massive bank debts that they are being forced to pay for.

As many of the companies currently under investigation in the UK, the US, France, Australia and India will testify, all of their very aggressive tax structures are completely legal in the countries that they operate. Given then that Ireland is the hub of so much of this international tax avoidance we have to conclude that Irish sovereignty, through our laws and loose regulatory environment, is being used as the means to bolster the income of one small sector: Ireland’s tax avoidance industry, the disproportionately large band of tax experts in solicitor firms and accountancy offices.

As this analysis of the effects on the Irish economy of the 12.5% rate (let’s call it the 0.14% rate for accuracy), and Ireland’s corporate tax regime illustrate, given its costs in terms of reputation damage and tax expenditure and grants there is very little that it provides to the real economy; not in terms of jobs, government revenue, additional Irish business or economic stability. It does not help to fund hospitals, schools or infrastructure all of which are available to be used by companies that avail of Ireland as a tax haven at zero cost.

Most importantly it is a failure of its stated objective: ‘to bring about recovery in the Irish economy’. Instead we have the dangerous illusion of false export figures being used as an excuse to force those in the real economy to bear the burden of illegitimate bank debts placed upon an economy and a workforce incapable of bearing it. The result is the beginning of a process of stripping out what social net exists and for the opening up of public goods for private speculation.

Overall, by looking at the 0.14% rate and the corporate tax regime we are exposing the dynamics of class power in Ireland, and hopefully shedding light on how the narrow interests of Ireland’s ‘middle men’ class sell the golden harp of Ireland’s sovereignty like a hastily provided Irish passport to a visiting flank of dodgy foreign investors.

Read the whole article as a PDF here.

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