Budget 2014 Changes in Irish Corporation Tax Regime is No Change At All

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I have been looking for detail on the proposed changed in the corporate tax regime announced by Michael Noonan in the budget. So far I can’t find anything, but this is the clearest so far:

“Under current Irish tax law, Irish registered companies that are managed and controlled from other jurisdictions, are not tax resident here. Such companies, resident here but controlled and managed from offshore locations such as Bermuda and the Cayman Islands, form part of the international tax structures of major multinationals such as Google and Microsoft. Although they may pay no corporation tax, they are not “stateless” in terms of tax residency and are outside the scope of the measures proposed by Mr Noonan. A spokesman for Mr Noonan’s department confirmed this was the case.”

Both Google and Microsoft, and of course Apple use secretarial services provided in the offices of firms of Irish solicitors to create subsidiaries that are ‘resident’ or incorporated in Ireland, but are not ‘tax resident’ here. This is because these subsidiaries, the Irish legal flim-flam goes, are ‘managed and controlled’ in the offices of firms of solicitors in Bermuda or the British Virgin Islands. These subsidiaries, such as Google Ireland Holdings Ltd (Bermuda) or Synopsys are nothing more than a post box address in a Bermuda high street, and the only managing and controlling that goes on is through the secretarial services (opening letters) provided by a busy but small staffed solicitor’s office. See Jim Stewart’s 2013 study of companies that ‘bi-locate’ in Ireland.

The key element of Ireland’s corporate tax regime is not the rules or exceptions that are provided in the law, but the absence of legislation. Colm Keena can report that these companies are controlled and managed from offshore locations because Ireland does not have Controlled Foreign Companies legislation. There has been CFC legislation in the US since 1962 as a result of US corporations using tax havens. As we all know, despite the presence of this CFC legislation there have been exceptions and amendments, subpart Fs and ‘check the box’ mechanisms through which the use of tax havens and tax deferral continues. The UK changed it CFC legislation to tighten up the abuse by companies who were bringing back profits to Britain which were ‘earned’ in tax havens. The immediate result of this was a significant move of the headquarters of UK companies to Ireland. However, as this required some of the functioning of the companies to occur in Ireland, they started to move back.

Ireland’s key part in the tax avoidance strategies of large MNCs is down to the absence of CFC legislation here which allows the ‘managed and controlled’ in Bermuda myth to continue.

As Apple was the focus of the US senates sub-committee report it appears that all the government is going to do is somehow ensure that that charge can’t be applied any more. As one tax advisor pointed out, however, it’s unlikely that any change in the legislation will be enacted retrospectively, so it can’t change the arrangements for companies that is already in place.

But we still have no idea what that change will be.

The term ‘stateless’, used by Apple in their testimony to the US sub-committee, is one that the government desperately want to irradiate from the debate.  How they might do this can be guessed by a change that was made in 2010 as part of the Finance Bill, when the news reports about tax avoidance constantly referred to The Dutch Sandwich with the Double Irish.

As part of the changes the need to move profits through the Dutch subsidiary, which was nothing other than a postbox, was removed and now MNCs can ‘move’ profits directly to their US bank accounts, via Bermuda or some other 0% tax location from the Irish subsidiary:

“The changes enabled some multinational companies to make royalty payments from their Irish-based operations directly to subsidiaries based in tax havens such as Bermuda or the Cayman Islands, without having to pay a 20 per cent withholding tax on the royalties.”

The decision was based on lobbying from the US Chamber of Commerce in Ireland, as their 2010 pre-Budget submission outlines:

Abolish Withholding Tax on Outbound Royalty Payments 

In many cases, outbound royalty payments (e.g. non-patent royalties), do not suffer Irish withholding tax, adding to Ireland’s attraction as a location in which to base intellectual property (IP) licensing and exploitation functions.  This position could be significantly improved by the abolition of withholding tax on patent royalties, thus placing Ireland on a more equal footing with our key competitors.”

So, from the statement confirmed by the Department of Finance, we can see that whatever the changes brought in there will be no change at all and the absence of CFC legislation, a key driver of the tax avoidance matrix, will continue.

Although they may pay no corporation tax, they are not “stateless” in terms of tax residency and are outside the scope of the measures proposed by Mr Noonan.

Photo shows the business address of Synopsys  (Ireland)  Ltd.  ‘Synopsys, although showing some  corporate  tax payments in Ireland in its annual accounts, as in the case of Apple Sales International also states in the  directors report that  “the  company  operates from  its  business  address,  2 Church St. Hamilton, Bermuda”. Taken from Jim Stewart, 2013.