Taxation

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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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Three Cheers for the USC

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The Universal Social Charge (USC) is a great tax.  Many progressives were critical of its introduction and rightfully so.  In replacing the Income and Health Contribution levies, the USC ended up increasing tax on low income earners – at a time when the economy was still melting down, people were losing their jobs and income was falling. That was inequitable and economically irrational.

However that is a criticism over rates and thresholds – elements which can be easily changed. The reason the USC is great tax is because it is simple, transparent and, most of all, no matter how many tax accountants you hire, you can’t escape it.  The tax has almost no exemptions, reliefs, or allowances – unlike the income tax system.

Dr. Tom Healy of the Nevin Economic Research Institute made an interesting observation:

‘Perhaps there is a case for abolishing income tax as we know it, replace it with USC, make the rates more progressive (e.g. by introducing three or even four bands) and then re-term it as ‘income tax’! . . You see – the beauty of USC is that, it applies to many different kinds of income,  it is not riddled, to the same extent as ‘income tax’  with all sorts of reliefs and exemptions,  it is reasonably simple to understand and operate.’

Now that’s blue-sky thinking.  Check out this little stat:  income tax– with tax rates of 20 percent and 41 percent – raises €11.4 billion in revenue.  The USC, with a tax rate of 7 percent raises €3.9 billion.  At a much lower rate, it raises over a third of the entire income tax system.

To raise the same amount as income tax, the USC would need to be raised to 20 percent (with the lower rates rising proportionally).  A tax rate of only 20 percent would raise as much as income tax.  That’s pretty effective and efficient.

This is not an argument for a flat-rate tax.  Dr. Healy points to the potential of introducing three or four different tax bands.  In fact, in the EU-15 only Ireland and Germany have two tax rates.   Other countries have three or more:

  • Austria and the UK have three rates while Sweden has two central tax rates and one local
  • The Netherlands has four tax rates
  • Belgium, Finland, France and Italy have five tax rates
  • Spain has seven central tax rates and four regional rates
  • Luxembourg has 18 tax rates (yes, 18)

So a number of tax rates can be used, rather than an essentially flat-rate.

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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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Friday Stat Attack: A Simple Graph That Can be Used in the Tax Debate

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OK, this follows on from yesterday’s post but whenever I hear someone on the media claiming that Ireland is a high-tax economy, I’m going to @ the programme with this graph.

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The question is simple:  if Ireland is a high-taxed economy how come we have the lowest tax on labour in the EU except for Bulgaria and Malta?

Don’t underestimate the import of this battle.  Keeping taxes low (while at the same time fighting off wage increases) is just a continuation of the austerity battle.  People paid for the crisis; now  there will be an attempt to make people pay for the recovery. What little is given in tax cuts will be taken away from free health, free education, affordable childcare, public services and income supports; in other words, all the programmes and infrastructure that can raise living standards.  People will be required to subsidise their own tax cuts – and this after we’ve been forced to subsidise financial institutions and the economic collapse caused by speculative activity.

So please feel free to use this graph to get the word around.  We’re not a high-taxed economy – but we are a low waged economy with even lower levels of public services and income supports.  The only high this economy experiences is rising profits.

Oh, and deprivation and emigration, too.

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The Trojan Horse

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As if we didn’t know, we now know what the Government’s intentions are regarding tax cuts:

‘Minister for Finance Michael Noonan has pledged to widen income tax bands as soon as the State can afford it to take people out of the higher tax bracket.  Mr Noonan said the biggest problem facing the tax system was the low level of pay at which people entered the higher tax rate. He said in Ireland people started to pay the higher rate on incomes of just €32,800 and this was far lower than in other EU countries.  “If I have the money that is where I will go. I would like to reduce the threshold at which people hit the higher rate,” he [said].

The standard rate tax threshold is the Trojan horse for the tax-cuts lobby.  It is true that in the Irish system people enter the top rate of tax at a very low wage level.

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Here, we enter the top rate of tax at €32,800.  In all other countries, the threshold is higher; in Germany, you don’t enter the top rate of tax until €250,000.   So that picture looks pretty clear, doesn’t it?  Well, no because it is not the full picture. I will address the details of marginal tax rates on incomes in different countries in a subsequent post.

But to make a quick point – if Irish workers are ‘disadvantaged’ by entering into the top tax rate so early, why are taxes so low?  These are the headline tax rates (personal allowances only) from the OECD’s Benefit and Wages database.

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How Do you Deliver Tax Cuts to Households Whose Income is so Low they Don’t Pay Income Tax?

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If the Irish Times report is correct, the Government is on track to implement tax cuts for ‘middle income’ families.  The Taoiseach is certainly keen on it:

‘“The priority will be to reduce the very high tax rates faced by families on middle incomes,” said Mr Kenny.’

What’s really interesting is that for many middle income families, tax cuts would be practically meaningless.  And what they need is not even on the agenda.

How much income do middle income households earn?  The following should only be seen as an approximation since it relies on income distribution data from the Survey on Income and Living Conditions which presents the information based on deciles (i.e. broken down on 10 percent categories).  Further, the latest Survey from 2011 doesn’t provide a decile breakdown; so this data is courtesy of Dr. Micheal Collins from the Nevin Economic Research Institute.  As well, the household breakdown comes from 2010 (again, as 2011 doesn’t present this data) – a breakdown for adults and children.  That’s why this should be treated as indicative.

This middle income lies in the 4th to 8th deciles, making up 55 percent of all adults and 60 percent of all children.  What is the average income for this middle group?

Avg_income

It ranges between €8,000 and €52,000 per household.  This refers to ‘direct’ income – income from PAYE work, self-employment and capital sources (e.g. capital gains).  This middle income group is made up of part-time workers, minimum wage workers, and the low-paid:  a household of two working adults would mean average gross wage of €26,000 each.  There would also be average and above-average income earners.

Data from the Revenue Commissioners is also helpful but there are some caveats.  There is a chance that there is double counting – where people might have part-time self-employment combined with part-time PAYE work.  Further, married couples are counted as one taxpaying unit.  And the data only includes those in work.  Notwithstanding these, the Revenue data corresponds with the above.

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The Terrible Debate that is in Store for Us in 2014

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We know what one of the big battles will be in 2014.  Ministers are making declarations.  Demands are being made.  Analysis (after a fashion) is being put forward.   Its tax cuts.   Daily we are being fattened up for tax cuts.

Let’s cut to the chase.  Wages will be depressed as part of the ‘wage-competitiveness’ strategy.  To compensate for this, taxes will be cut to give some increase in disposable income (take-home pay).  And with tax cuts, public spending will also be cut – public services, social protection, investment.  If this sounds familiar – tax cuts in compensation for low wage rises – that’s because it is; back to the future with a low-tax, low-spend, low-resourced economy.  If nothing is learned, nothing changes.

To clear the ground for this it has to be shown that Irish public spending his high. We had this last week with a highly misleading analysis.  Now we have, courtesy ofChris Johns in the Irish Times, an article with the sub-heading:  ‘Evidence does not support view Ireland is low tax economy’, Johns makes some incredible statements:

‘The data on international income tax comparisons do paint a very clear picture: we are at, or very close to, the top of the league tables in terms of effective tax rates . . . those who do pay tax and social insurance in Ireland shoulder a disproportionate burden, at least compared with other countries . . . if you are paying income taxes as well as PRSI and USC, you are amongst the hardest hit in terms of EU and OECD tax league tables.’

It would be nice if Johns put forward some evidence for this but, alas, that is missing.  He only refers to the fact that there are a lot of people who don’t pay income tax.  Therefore, he assumes that those who do are high-taxed.  This is pretty thin (and that’s putting it mildly).

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We’re Starving Public Services and Social Protection But All We Get is Demands for Tax Cuts

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The drums are beating.  Throughout the nation we hear a growing chorus demanding tax cuts (including the leader of the Labour Party) to relieve ‘hard-pressed’ families.  And this demand is being buttressed by some highly misleading claims that Ireland is a high public spending country.

According to Brendan Keenan, using recent OECD data, we are a high-spender.  There’s even a cartoon in the article showing Ireland ‘fat’ with too much public spending, compared to ‘lean’ European countries.  Is Ireland a high spender compared to European countries?  Of course not.  One has to know how to read these figures.

For instance, the OECD data for 2011 includes special bank payments arising out of the financial crisis.  When this is removed (and it represents some 5 percent of GDP), Irish spending falls well down the table.  It is highly misleading to claim that Ireland is a high-spending country while including payments to banks; unless one wants to make the argument that Ireland is a ‘high bank-subsidising’ country which is certainly true.

So, can we assess Ireland’s ranking in the EU-15 spending table?  Yes, with the help of the EU’s AMECO database.  We’ll look at 2014.  Even though this money hasn’t been spent yet, AMECO is working off of country’s estimated expenditure under their individual Stability Programme updates.  Any change would be marginal.  We’ll also exclude interest payments since we want to focus on spending on public services, social protection, subsidies and investment.  Further, we’ll exclude defence spending.

So what do we find when we examine government spending per capita (after all, Keenan says ‘spending per person tells its own tale’)?

GPSC

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A Progressive Tax System? The Poor Pay as Much Tax as High Income Groups?

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Remember all those observations?  About how the highest income groups pay almost all the tax and how terrible it is that begrudging lefties want to tax them more?   About how Ireland has the most progressive tax system in this quadrant of the Milky Way?  The Government has lead the chorus making this claim but in truth it is not based on comparative measurement of tax progressivity (see Note at the end of this post for a discussion of the Government’s claim).

So along comes a study that blows those arguments away.  Dr. Micheal Collins and Dara Turnbull investigated the issue in a working paper published by the Nevin Economic Research Institute, based on the CSO’s Household Budget Survey 2009/10.  They found that, contrary to the received wisdom, the poorest 10 percent income group pays as much tax as the top 10 percent tax and that our tax system is far less progressive than some have claimed.

Here’s the bottom line chart.

tax1

Oh, my.  The poorest 10 percent income group pays a tax rate of 28 percent – that is, their tax payments make up 28 percent of total income (which includes income from work and social transfers).  The top 10 percent pays a tax rate of 29 percent.  Doesn’t look that progressive to me.

How could this be?  Micheal and Dara estimated the impact of all taxation – income tax, USC, PRSI, and (and this is the key innovation of this study) indirect tax such as VAT and Excise, and levies such as TV licenses and vehicle taxes.  Previously, claims about the tax contribution of high income groups narrowly focused on income tax and, sometimes, PRSI.  But these make up only part of the tax system.  Over 40 percent of tax revenue comes from indirect taxation.  The following shows the extent to which indirect taxation undermines the progressivity of the tax system.

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Unsurprisingly, the lowest income groups pay substantially more of their income on VAT, excise and levies than higher income groups.  So when this is combined with direct taxation – income tax, USC and PRSI – we get only an overall marginally progressive effect.

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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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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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Wealth Tax: Options for its Implementation In the Republic of Ireland

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The idea of imposing a wealth tax in Ireland is not a new idea. As well as being widely debated throughout the austerity years it has formed part of recent pre-budget submissions from Sinn Fein and the United Left Alliance. Much of the criticism of such proposals are based upon the unassailable fact that it is considerably difficult to gather data on wealth in Ireland even though it is perfectly obvious that wealth distribution is heavily skewed in favour of a small, but powerful minority. The lack of will on the part of government to rectify this information gap is illustrated by the fact that the CSO’s “Household Finance and Consumption Survey”, which will include, a survey of wealth will only become available in 2014, six years after the first austerity budget was introduced.

Basing their proposals on the various bank survey’s and Central Bank of Ireland data has resulted in different assessments of how much such a tax would gain for the exchequer annually. However, in challenging the ULA’s proposal of a 5% tax on wealth the economist Seamus Coffee has estimated that it would be possible to get an annual tax income of €1 billion. This estimate was based on an assessment of the available information and a comparison with the income earned from the French wealth tax. Given the less damaging impact on the economy of such a tax when compared to further reducing the incomes of the majority of households (those earning less than 40K), this is a considerable haul.

Now, Tom McDonnell of TASC in a working paper for the NERI Institute has put together a proposal for a wealth tax that tries to overcome the limits and problems with wealth taxes as they exist in other countries at the moment. It also examines the available data and provides an indicative estimation that the top 5 per cent in the wealth distribution holds 28.7 per cent of net household assets. This leads to an estimation that the net wealth of the 97.5 percentile of Irish households is €749,000.

Below is a briefing paper on the proposal and here is a link to the paper itself.

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Don’t Ask What the Business Sector Can Do For Ireland

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In the run-up to the budget all manner of proposals are being put forward –tax measures, spending cuts.  We debate what sacrifice this or that groups can make to bring us to the bail-out targets.  There is no end of combinations and computations.  But the one thing that is totally off the table – the one thing that we should never, ever mention – is what contribution the business sector can make to repairing the public finances.  Pensioners, the unemployed, low-paid, families – we debate the different ways they can make continued sacrifices.  But the business sector has been ring-fenced, protected, safe-guarded.

The following estimates what contribution, in terms of tax and social insurance revenue, the Irish business sector could make if it made the same contribution as the average business sector in the EU-15 – and how little Irish business actually does contribute.

Corporate Taxation

Never mind nominal tax rates – it is the effective tax rate that matters; the percentage of taxation on profits when reliefs, allowances and exemptions are taken into account.  Tom Healy, Director of the Nevin Economic Research Institute, has an important post on this subject – pointing out that there are different benchmarks in assessing the effective tax rate.   For the purposes of international comparison, I will use two estimates:  net operating surplus and net entrepreneurial income.

Net Operating Surplus:  this traditional measure of profitability is the amount of value-added left to companies after payroll costs and consumption of fixed capital (decline in the value of fixed assets); in short, sales minus costs.  This is from Eurostat - here and here:

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Ireland, unsurprisingly, is at the bottom of the table.

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