Welcome to the New Tax Avoidance Scheme, Same as the Old Tax Avoidance Scheme

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Well, not quite – but the effect may be the same.  Many international commentators welcomed the Irish Government for ending the infamous ‘double-Irish’ tax scheme.  But just as it shut this down, it announced a new scheme: a ‘knowledgedevelopment box’ designed to reduce corporate taxation to a little over six percent.

The ‘knowledge-development box’ is based on the concept of the patent box used by the UK and the Netherlands to attract multi-nationals with preferential tax rates on income flowing from patenting activity.  However, the scope for the Irish box could be wider.

After all, what exactly does ‘knowledge-development’ encompass?  In the UK and the Netherlands, companies get a tax break on income generated from inventions.  In Ireland, we may see all manner of activities thrown in – source code, copyrights, patents, branding, trademarks and that expandable concept – R&D.  And we’ll have to wait and see to what extent it facilitates more than just actual activity in Ireland (will it encompass activity ‘managed from Ireland’).

The Government was keen not only to put in a replacement for the double-Irish scheme, but to reassure key multi-nationals.  Government officials briefed ‘multinational investors’ on the rationale for the Government’s policy (question:  were any of you included in a conference call by officials prior to the establishment of the water charge?).  The message was clear: the Government may have been forced to abandon the double-Irish due to considerable international pressure – but don’t panic; a replacement is at hand.

It is argued that we need multi-national capital to create high-end employment in the global supply chain.  No one disputes this.  Ireland’s indigenous economy, even with the best policies in place, would not have created the pharmaceutical sector we have today.  However, this common-sense observation is then used to argue that the only way to achieve this is to pursue our current accommodative corporate tax regime (that’s a nice way to describe a tax haven-conduit).  Yes, we have another roll-out of TINA – there is no alternative.

But are there alternative approaches to attracting multi-national enterprises without resorting to tax tricks or ultra-low tax rates?  Does Ireland benefit more than our peer-group EU countries from multinational employment?  This argument – that we have been more successful than other countries in attracting multi-national jobs – has been restated so many times that it is taken as gospel.  But is it true?

Let’s compare multi-national employment in Ireland with other countries which have a similar structure as our own – small open economies (Austria, Belgium, Denmark, Finland and Sweden).  Like Ireland, they have small domestic markets and are reliant on exports and, therefore, have greater need to attract multi-nationals to help generate employment, income and exports.

Knowledge Box

Ireland is about average in terms of multi-national employment – behind Sweden, Denmark and Austria but ahead of Belgium and Finland.

What’s noteworthy is that these other countries have much higher tax rates on employers (including employers’ social insurance) than Ireland.  Their effective corporate tax rates range 20 to 20 percent; Ireland’s tax rate is 8.5 percent.  Employers’ social insurance rates range from 16 to 22 percent; Ireland’s rate is 7 percent.

So these countries have much higher tax rates and don’t provide the same tax-shenanigan space as Ireland.  Clearly, these countries have found an alternative route to promoting multi-national participation in their economies.

But let’s not engage in the same type of arguments that those who blindly apologise for our current tax regime use. The above headline figure doesn’t tell us everything about the different countries’ experience with multi-nationals.  We need to investigate a range of activities: investment, payroll contributions, domestic sourcing, different sectoral impacts (e.g. manufacturing, information and communication) etc.  So the above should be treated as a first step towards constructing a comparison with our peer-group.

And we should also allow that small open economies – especially peripheral countries such as Ireland and Finland – need greater ability to incentivise foreign investment.  We are not France or Germany with large domestic markets and low-cost links to the wider European market.

But we also need to examine potential failings in our current relationship with foreign participation in our economy:  the low-level of direct expenditure (payroll and sourcing from Irish companies) of foreign-owned companies in the domestic economy; the value-added base of many multi-nationals here in comparison with other countries (e.g. administrative / sales staff in contrast with higher-end R&D staff); our infrastructural deficits; labour shortages; low language skills, etc.

And then there’s the elephant in the room –our reliance on multi-national activity is due to the chronic under-performance of our indigenous business sector in areas of employment, investment and activity in the productive economy.

We ignore all this at our peril.  If we continue to rely on tax policies to drive enterprise policies this could all come to a bad end.  Take the proposed ‘knowledge-development box’:  the EU is already conducting an investigation into the UK and Dutch patent boxes for violation of state-aid rules.  If, according to a report in the Sunday Business Post (behind a paywall – ‘Ireland Inc’s new box of tricks’), they rule against these tax schemes, our own proposed tax break will be at threat even before he gets off the ground.  The OECD, too, has warned against such schemes – claiming that if they don’t have connections between the tax break and the activities which have generated the income, then they come under scrutiny.  We dumped the double-Irish because of international criticism.  We may be walking into a similar situation.  As one expert remarked:

‘We’re stuffed if there’s ultimately a feeling that this (the knowledge-development box) isn’t an appropriate method to deliver tax’

Progressives and trade unions need to enter this debate – forcefully.  This intervention should be based on a detailed and evidence-based analysis of our experience with multi-nationals in comparison with other small open economies; a critical study of our infrastructural and labour market deficits; and most of all – bringing a harsh light on our failing indigenous sector.  On this basis we can bring forward alternative policies, something which we have failed to do.

The fact is that we are running out of road.  We need an appropriate and legitimate relationship with multi-nationals.  What we don’t need is more glorified tax avoidance schemes.

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