Tax Havens

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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?

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Opening the Low-Low Corporate Tax Rate Door

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The Government’s paper on Ireland’s effective corporate tax rate confirms what the dogs in the street have known for a long-time:  Ireland has a low,extremely low, corporate tax rate.

There is that vexed question of what corporate income counts for the purposes of determining the actual rate of tax companies pay here.  Professor Jim Stewart produced data which showed that the effective tax rate of US multinationals operating here was 2.2 percent in 2011.  This was disputed because Stewart – using the US’s Bureau of Economic Analysis – included the $140 billion that US multinationals move through Ireland on their way to other places, including tax havens.  Some claim you can’t count this because it is not taxable in Ireland.

But, of course, that is the point.  The issue is not the Irish corporate tax rate per se but the role that Ireland plays in the global tax avoidance chain – the ability of multinationals to use Ireland to avoid paying taxes that would be due elsewhere.  That is the character of a ‘tax-haven conduit’.

In this respect, it is worth remembering:

Tax havens attract foreign investment not only because income earned locally is taxed at favorable rates, but also because tax haven activities facilitate the avoidance of taxes that might otherwise have to be paid to other countries.

The Irish corporate tax rate is the sign on the door.  It’s an inviting sign – a low-tax rate of 12.5 percent.  But the real goodies are what’s behind the door – the prospect of using Ireland as a transit point in the global avoidance chain.

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Tales From Tax Haven Ireland: Running the Numbers Game

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“The extremely low effective rate figures that have been quoted over the past week and attributed to Ireland are based on a flawed premise. The figures are estimated by dividing the amount of Irish tax paid by a total profit figure that includes substantial profits made by companies that are not tax resident in Ireland. They are running together the profits earned by group companies in Ireland and in other jurisdictions and incorrectly suggesting that Irish tax does or should apply to both.”

So, Michael Noonan rejects the recent findings of Jim Stewart of Trinity College, Dublin that US companies in Ireland have an effective corporate tax rate of 2.2%. In this he is following the insistence of Feargal O’Rourke of PriceWaterHouse Coopers who claims that Stewart erroneously includes companies that are incorporated in Ireland but do not operate here.

These are companies, like, for example, Google Ireland Holdings, Bermuda, which is ‘tax resident’ in zero tax jurisdiction Bermuda but is in effect a letter box company with a registered address in Sir John Rogerson’s Quay, that is, the office of solicitors Matheson Ormsby Prentice.

The basis of O’Rourke and Noonan’s (and the government’s) objection to Stewart’s finding is that the TCD economist uses US Bureau of Economic Analysis (BEA) data.

As Seamus Coffee puts it in a response to the 2.2% rate claim, BEA methodology highlights

“…that for companies, US residency rules are based on paperwork rather than activity.  Under US law, the tax-residence of a company is the country where it is incorporated.  All companies registered in Ireland are thus considered “Irish-based” under US law.”

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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.)

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Ireland and the Shadow Banking System

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Now that we only have one copy have no copies of the first issue of the print edition of Irish Left Review left and the second issue is now available to buy either online or in these bookshops we are now publishing some of the articles from the first issue on the web. The first is Conor McCabe’s brilliant article on Ireland the Shadow Banking System.

Ireland and the Shadow Banking System

Bretton Woods and the Eurodollar Market

Conor McCabe

Ireland is a tax haven.  It is a hub in the shadow banking system.  The dominant form of business in the Irish state, the one to which national economic policy shapes itself, is that which accommodates the needs of foreign capital and finance, to the detriment of productive and social activity. This business model is an intermediary model. It is conducted by a middleman class which has positioned itself between foreign capital and the resources of the state. These middlemen are found within law, accountancy, stockbroking, banking and construction.

This is not to say that every successful business in Ireland is a middleman business, but rather that these businesses wield the most influence regarding national economic policy. The type of middlemen may have changed over the decades, but the way of conducting business has not.

The intermediary/middleman business model maintains and reproduces itself through the structures of the state. In other words, the class which benefits the most from this economic policy is also the class with the most influence over the dynamics of Ireland’s legal, education and political systems. Governments come and go but the structural dynamics of the state remain the same. As a result of the structural presence this class has within the state, policy change comes dripping slow.

The current privileged status of international finance and wealth management within Ireland – that is, paper assets over production – is the latest field of play for this middleman class. Upon independence it was live cattle exports to the UK and the transference of credit to the city of London; in the 1960s it was free access to the UK economy for international companies with branches in Ireland, followed by similar access to the EEC/EU, giving rise to construction, land and property speculation; all of this was underpinned by the selling of the State’s gas, oil and mineral rights to whatever bidder took the middlemen’s fancy.

The national resource that is for sale today is the right of an independent state to set its own laws and tax policy. In other words, it is Ireland as a mature democracy and legal jurisdiction, one that is recognised by international law that is traded by this middleman class for the private gain of its privileged players.

The current emphasis on paper assets over production reflects the fundamental changes in economic power relations which have taken place over the past forty years in advanced capitalist countries. This period has seen the financialisation of everyday life and the re-emergence of rentier capitalism. The move towards profit-seeking in paper assets is in part a response to the decline in the rate of profit and a tendency towards overcapacity in global manufacturing industries.  The pressure to return profits in a world of declining margins has seen reductions in social expenditures by national governments and stagnation in wages. The resultant decline in aggregate demand is an underlying factor in the explosion of price speculation over production.

This is part one of a two-part article on Ireland and the shadow banking system. The rise of the Eurodollar market and the decline of the Betton Woods system is covered here. The emergence of shadow banking and Ireland’s role in its operation will be covered in a future issue.

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Bermuda

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) 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.

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Facilitating Corporate Tax Avoidance is at Heart of What is Wrong

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Here we have two investigative pieces in the Irish Times and the Guardian which show that jobs created by MNCs in Ireland are not necessarily the high quality, well paid types of jobs those defending Ireland’s tax avoidance system claim. The first illustrates that most of these are call centre jobs created to provide tech support for sales that may be registered in Ireland but are in fact generated in countries within and beyond Europe, Africa and the Middle East. As they require language skills far greater than even very well educated Irish workers normally have (Ireland has one of the lowest proficiencies in a second language in the OECD ironically enough) these are not jobs created for those who have been through the Irish education system. This is despite the fact that we are told that it’s not tax that attracts these companies but our well educated workforce. Again, this is attractive and is a credit to Ireland’s high level of completion at second level which is well above the EU average, but it’s being undermined and many of the skills that these companies require are in law and accountancy which narrows considerably the ability of people to think beyond the servicing of MNCs law and accountancy needs. It is hardly a coincidence that Cathy Kearney, which the Guardian describes as Apple’s ‘top lieutenant in Ireland’ is an accountant.

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

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So 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 this in a fair amount of detail.

However, with all the coverage 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).

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Ireland Allows Google To Send it’s Profits Straight to Bermuda Company Which is Actually in Ireland

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In my long article in the first issue of Irish Left Review on Ireland’s corporate tax regime I made the point that Ireland in effect sells its abilities to make tax laws to profit hungry MNCs, in much the same way as it sells to the rights to our natural resources to large oil companies. That is, whatever economic benefit there is, and its small, goes to the ‘agents’ who negotiate the deal, with very little, if any, benefit appearing in the economy.

Still, with all the attention being on Google for a while now, there was one fact about the Irish government’s arrangements with the search engine company that I had missed.

Recently these arrangements, known as the Double Irish with the Dutch Sandwich have been given a lot of attention and are often explained. For example, see this New York Times info graphic. However, while listening to Jim Stewart’s interview on Morning Ireland last Friday in a conversation about Google’s ‘grilling’ before the UK’s Public Accounts Committee on taxation, I found out that the ‘Dutch Sandwich’ is no longer used, and instead Google’s earnings from its EMEA market goes from Google Ireland to Google Ireland Holdings, which is registered in a solicitor’s office at 70 Sir John Rogerson’s Quay and also in Bermuda. So, by passing these to the Bermuda registered company, the earnings go straight to Bermuda. Google Ireland Holdings has no employees and is ‘owned’ by Google Bermuda which also has no employees. Both are unlimited companies, so under Irish law, they do not have to publish accounts.

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AlJazeera English: Firms enjoy tax haven in bankrupt Ireland

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A recent AlJazeera English report called Firms enjoy tax haven in bankrupt Ireland which uses a short excerpt from the recent Anarchist Bookfair IFSC walk tour.

Ireland is one of the country’s that’s been hardest hit by Europe’s debt crisis.But amid the austerity, billions of dollars are still flowing in and out of the economy.The problem for Ireland is that it is not collecting much of a share of the money. Laurence Lee reports from Dublin.

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Ireland is Hardwired into the Tax Evasion Network

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As reported today, “[Eamon Gilmore] did not believe that multinationals having headquarter operations in Ireland that used offshore locations as part of their tax avoidance strategies, put the country in a difficult position when it came to the subject of tax havens”.

The Tax Justice Network has made a point in recent years of replacing the term ‘offshore’ and tax haven with ‘secrecy jurisdictions’. This is their reason for creating the Financial Secrecy Index which lists Ireland at 31.

“The Tax Justice Network has estimated, conservatively, that about $250 billion is lost in taxes each year by governments worldwide, solely as a result of wealthy individuals holding their assets offshore. The revenue losses from corporate tax avoidance are greater. It’s not just developing countries that suffer: European countries like Greece, Italy and Portugal have been brought to their knees by decades of secrecy and tax evasion.

These staggering sums are encouraged and enabled by a common element: secrecy. Secrecy jurisdictions, a term we often prefer instead of the more widely used term tax havens, compete to attract illicit financial flows of all kinds, with secrecy as one of the most important lures. A global industry has developed where banks, law practices and accounting firms provide secretive offshore structures to their tax dodging clients. Secrecy is a central feature of global financial markets – but international financial institutions, economists and many others don’t confront it seriously”.

Irish politicians don’t take it seriously either, for the obvious reason that it remains good business for the Irish executives who operate the subsidiaries of foreign banks here, and who work in the law practices and accounting firms that advise large multinational firms on the international tax strategy. For a relatively small economy Ireland has a disproportionately large number of experts on international taxation.

So it’s unlikely, when talking about the need to attract foreign direct investment, or saying that that the Irish economy has to become more competitive to boost the export sector as a means of reducing the deficit that Eamon Gilmore or Enda Kenny would say that as a means of doing that we have to build on our excellent relationship with our largest trading partner: Bermuda, the off-shore the tax haven.

Taken from Mary Everett, The statistical implications of multinational companies’ Corporate Structures, Quarterly Bulletin, Central Bank of Ireland, April 2012

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The New Dependency Theory

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The crisis that began in late 2007, and which seems to be continuing for the foreseeable future, has highlighted the role of global wholesale financial markets in creating what may be described as new dependency relationships. Old dependency theory was a structural-Marxist theory. It hypothesised that the world capitalist economy is structurally arranged to facilitate massive transfers of capital from developing countries to the developed world. The new dependency theory agrees that net outflows of capital from developing countries have been continuing unabated for the past three decades. But—and this is a key difference between new and old dependency theory—these illicit flows are a problem not only for developing countries but also for developed ones.

This is so for two reasons. First, the net flow of capital is not necessarily transferred to or invested in the developed world. Rather, the transfer of financial resources from developing countries joins a large pool of capital registered in offshore locations. Second, there is evidence that developed countries are subject to net external outflow of capital as well. In contrast to old dependency theory, the new theory suggests that capital transfers do not necessarily operate on a regional or intra-national basis; rather, wholesale global financial markets have emerged as gigantic re-distributive machines that play a key role in the continuing and growing gap between rich and poor world-wide.

In developed countries, the main detrimental impacts of illicit flows are growing income inequalities and a weakening and narrowing of the tax base, as effective (as opposed to nominal) tax rates by corporations and rich individuals decreases continuously. For developing countries these problems are compounded further: they include poor governance structure, a large black economy, lack of capital for basic infrastructural projects, and over-reliance on foreign aid money that generates harmful political-economic dynamics.

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