Tales of Ireland the Tax Haven: To Hell or to Arthur Cox

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Joanne Richardson is stepping down as head of the American Chamber of Commerce Ireland. To mark the occasion the Irish Independent are providing the usual frothy interview. First all, she says that the level of US investment here is all about the tax regime:

“…but it’s no secret that the favourable tax regime makes it particularly appealing.”

The recent controversies, US Senate Subcommittees and international debates on Ireland as a tax haven are mentioned but brushed aside. Their impact is apparent, however, in the reference to ‘regime’ rather than the 12.5% ‘rate’.

No one believes that one any more. A well-publicised report, published on the 25th of November 2013 by the World Bank and the large accountancy firm PricewaterhouseCoopers, claims Ireland has an effective corporate tax rate very close to the official rate of 12.5%. From the headline of the press release:

“Ireland has an effective corporate tax rate of 12.3% compared to an EU average of 12.9% and 16.1% globally.”

Feargal O’Rourke, Head of Tax, PwC Ireland said:

“The survey further demonstrates that Ireland’s statutory headline rate on profits is broadly similar to the effective rate. For many EU countries, the statutory headline rate is significantly higher than the effective rate.”

Feargal was described by Jesse Drucker in a recent Bloomberg profile erroneously as a ‘local hero’ who made Ireland a ‘tax avoidance hub’, but people might recognise him as the son of Fianna Fail politician Mary O’Rourke and nephew of the late former Minister for Finance, Brian Lenihan.

But, PwC, as a leading accountancy firm in making this claim is running at odds with the advertising made available on the websites of the Irish offices of other prominent accountancy firms.

The most well known in an Irish context is Arthur Cox, who the Irish Independent suggested were the legal brains behind the 2008 Irish bank guarantee. They have been saying that Ireland has a 2.5% effective corporate tax rate in their advertising since at least 2011:

“Intellectual Property: There are numerous advantages for multi-national companies with large Intellectual Property (“IP”) portfolios who locate and manage these portfolios in Ireland. The effective corporation tax rate can be reduced to as low as 2.5% for Irish companies whose trade involves the exploitation of intellectual property. The Irish IP regime is broad and applies to all types of IP. A generous scheme of capital allowances as well as a tax credit for money invested in research and development in Ireland offer significant incentives to companies who locate their activities in Ireland.

A well-known global company recently moved the ownership and exploitation of an IP portfolio worth approximately $7 billion to Ireland.”

(Michael Hennigan suggests that the company in question is Accenture.)

Maples and Calder agree with Arthur Cox:

“The tax depreciation and interest expense can reduce the effective rate of tax to a minimum of 2.5%.”

As do Mason Hayes & Curran:

“When combined with other features of Ireland’s IP tax regime, an effective rate as low as 2.5% can be achieved on IP related income.”

Mazars go one lower, saying that the effective tax rate is 1%:

“Of the 8 countries examined – Australia, Canada, France, Ireland, Israel, Netherlands, UK and the USA – Ireland had an effective tax rate of 1%, making it the second most competitive of these 8 countries. Israel had the most competitive effective rate at -6% (see table 1).”

Mazars table

In the Irish Independent interview today with the soon to depart head of American Chamber of Commerce Ireland, Joanne Richardson, the usual claims go unchallenged. You see so much of this stuff that you usually have to let it pass without comment. One line, however, caught my eye:

“They [US MNCs] contribute about €4bn in corporation tax a year, directly to the Irish exchequer. On products and activity sold in Ireland, they’re paying €4bn corporation tax a year. That’s a fact.”

You see, I thought that at year end in 2012 the total corporation tax paid by both indigenous and all foreign companies was €4bn.

And when you look at the Exchequer returns published on 3rd of January 2013, you see its 4.2bn.

So, is she claiming that all corporate tax returns are attributable to US firms? Irish Revenue doesn’t provide a breakdown by country for 2013, but Michael Hennigan of Finfacts informs us that “US Bureau of Economic Analysis (BEA) on majority-owned foreign affiliates of US firms show that ‘taxes other than income and payroll taxes’ payable in Ireland in 2010 amounted to $2.4bn“. (US Bureau of Economic Analysis (BEA) income statement here and employee income and payroll taxes and employees numbers for US majority owned foreign affiliates here). Using an historical rate calculator, in December 2010 that would have been €1.81bn.

In 2010 total Irish corporation tax returns amounted to €3.9bn, which is not far off the 4.2bn returned in 2012. In that time, however, Irish exports, of which US firms provide the lion’s share, increased by up to 11%.

The claim, implied by Richardson’s use of the €4bn figure, that all corporation tax returns are attributable to US firms fits the narrative that Ireland is entirely dependent on US companies using Ireland’s tax laws to avoid tax. So, if we change the tax regime, the idea suggests, we’ll have to nurse a €4bn hole in exchequer funding – after all Richardson is explicit that its the tax regime that accounts for the presense of US firms in Ireland. However, it also suggests that Irish or indeed, non-US firms are not generating enough profit to be subject to corporation tax. Obviously that is not the case, but it reinforces the argument that Ireland is ‘dependent’ on its economically eviscerating corporate tax regime. If Richardson’s view was the reality, it would be a clear signal that Ireland’s industrial policy, which has been supported by all political parties in power since the late 40s, has been a massive failure, as no indigenous industry of substance has been able to develop at all. So, apart from speculating on commercial property, the story goes, Ireland is incapable of building successful indigenous businesses that are capable of expanding beyond the domestic market. That doesn’t sound good for a so-called global economy. As it happens one of the very few large Irish internationally traded companies makes building materials – Cement Roadstone. My point here is that, of course, Ireland is capable of doing more than providing tax avoidance laws for MNCs and opportunities for property speculators, but successive governments are not willing to even try to find an alternative industrial policy.

There must be a reason for this.

Despite the rhetoric we must glean from this failure of gargantuan proportions that it’s not an industrial policy at all. Instead it’s how expensive fees are generated by a very specific but relatively small sector: Messrs Arthur Cox, Mazars, Maples & Calder, Mason Hayes & Curran to name but a few.

Now obviously, as head of the American Chamber of Commerce Ireland, which is a lobby for US firms based here, Richardson is going to ‘big up’ the contribution they make, and despite the considerable sway such an organisation has when it comes to determining economic policy, we should ignore it. But, in the interests of balance we have to know that what she says is simply not true.

So to recap, despite the rising fortunes of US companies, particularly within tech and pharmaceuticals, and the increasing number of them coming to Ireland between 2008 and 2013 corporation tax revenue has effectively flat-lined at €4bn.

Of that €4bn in corporation tax returns, less than half is directly attributable to US firms despite the fact that these companies provide over 90% of Ireland’s exports. A considerable portion of those exports are generated by three companies, Apple, Microsoft and Google which between them employ around 5,000 people in Ireland.

And the issue of employment is the final point. Corporation tax, as a portion of overall tax is relatively small, as it is in other countries (although as a potion of the tax take it’s been reducing since the 50s). However, it is regularly repeated by the likes of Richardson and the government that US MNCs are creating lots of high quality jobs here. This is the nub of the ‘value-add’ that justifies all the tax haven mechanisms. However, while income and exports for US MNCs have increased substantially in the period between 2010 and the end of 2012, the numbers employed in non-Irish firms has fallen.

Rather than holding up during the recession jobs in the non-Irish export orientated sector fell by 17,265 and has only regained by 9,754 jobs between 2010 and 2012. As the Forfas Annual Employment Survery for 2012, published last July, points out: ‘between 2003 and 2012 foreign-owned companies saw a reduction in employment of 2,057 jobs’.

A November 2012 paper from the Central Bank of Ireland provides more detail on employment in Ireland outside of non-Irish companies:

“64% of private sector workers are employed by indigenous non-exporting firms, with 56% working for indigenous, non-exporting SMEs”.

Currently, there are 375,000 people working in the public sector including semi-states. In a workforce of 2.13 million that amounts to 17.6%. The unemployment rate is 13% in or around, given the problems with the data. That means that 94.6% of the workforce are not in export orientated businesses, whether they are Irish or foreign owned. To put it another way, only 5.4% of the workforce are in Irish or foreign export orientated firms. Currently it’s unclear what the exact percentage is of those who work for US firms in 2013, but BEA data for 2010 (again, the most recently available) says it amounted to 98,500. In 2010 there was 2.15 million people in the Irish workforce. So those employed by US multinational firms that are using Ireland to avoid all but a crumb of their tax liabilities amount to just 4.58% of the Irish workforce, according to BEA figures. I have shown elsewhere that the quality of these jobs is greatly exaggerated.

You have to wonder what exactly the Irish economy would risk by no longer being a tax haven. Given the level of debt as well as the pressure and expense of paying that debt over the next decades it looks like no risk at all.

But this isn’t about the risks or benefits of one particular policy over another. It’s about who controls the taps of cash flow and manages and benefits from the managing of the money into and out of Ireland. From the point of view of those who control the political institutions of Ireland, the people who do not manage this movement of capital, can go to hell.

 

2 Responses

  1. CMK

    December 4, 2013 10:28 am

    Outstanding analysis! Only getting round to reading it now. Made all the more relevant by the news, since this was first posted, that MSD in Swords are closing (570 jobs gone); Pfizer in Kilare are letting 150 go and Baxter Healthcare are looking for 100 voluntary redundancies. Good point about the total numbers employed by Apple, Google and Microsoft. Less than the numbers employed by Irish universities, to take one example at random. Has this article been submitted to any of the broadsheets?

  2. Donagh

    December 4, 2013 1:25 pm

    Flattery will get you everywhere CMK. I noticed that, alright. This is from a post by Michael Taft in 2010: “Between 2000 and 2007, Chem/Pharm exports increased by nearly 16 billion euro, or just over 60 percent. However, employment remained static, rising by just 300. The problem is that there is almost no linkage between the Chem/Pharm sector and the rest of the economy. 85 percent of inputs in the Chem/Pharm sector are imported. In other words, increased exports may create jobs downstream – but in other countries, not in Ireland.”
    http://www.progressive-economy.ie/2010/09/reading-fine-print-in-export-figures.html

    After that, of course there was the massive layoffs in Pfizer in 2010, followed by even more in 2012
    http://www.irishexaminer.com/ireland/more-job-losses-likely-at-pharma-giant-pfizer-196477.html

    So, the Chem/Pharm sector is not a driver of job growth.

    And I am assuming you’re joking on that last point. Maybe I should clean up the sentence mishaps, just in case ;)

    And by the way, it’s a fantastic analysis http://www.youtube.com/watch?v=h_dRYMV1EN0