OECD BEPS Project: Ireland should embrace corporate tax reform

OECD BEPS Project: If new international corporate tax rules take effect from 2016, at least €50bn or half the annual value of services exports will be vapourised. Nevertheless, Ireland should support reform to a) protect the 12.5% corporation tax rate that will continue to give the country an advantage in competing for mobile investment b) remove the taint of sleaze that is associated with being a facilitator of massive corporate tax avoidance and c) enable the production of national accounts that are free of huge distortions which mask the enduring underperformance of the indigenous exporting sector over the past fifty years.

The Government like its predecessors had banked on the status quo being preserved through the EU veto on tax harmonisation and political gridlock in Washington DC. However, the unexpected international support for tax reform over the last eighteen months has left it floundering and the responses to various revelations about Irish involvement in tax avoidance have not been convincing.

“I want to reemphasise that all companies operating in Ireland — domestic businesses and multinationals — are chargeable to corporation tax at the 12.5% rate on the profits that are generated from their trading activities here,” Michael Noonan, finance minister, said in answer to a Dáil question last February.

What is missing from this narrative is that when Google booked 41% of its 2012 global revenues in Ireland; Facebook booked 48% and in 2011/12, Microsoft diverted 24% of its global revenues, the tax due in Ireland was calculated after the booking of big charges to shift most of the profits tax-free to Irish offshore mailbox companies in Bermuda and the Cayman Islands.

The offshore companies are protected from public scrutiny through unlimited status under Irish company law.

Apple Inc. for decades has been able to present its offshore non-tax resident companies that contain the ‘Apple’ name as normal Irish tax-resident companies with addresses at its Cork headquarters. It even filed an Irish tax return in respect of some transactions in one of the companies according to a 2013 report from the US Senate Permanent Subcommittee on Investigations.

Apple’s Irish company in the British Virgin Islands is named Baldwin Holdings Unlimited – – Baldwin is a breed of apple.

The tech giant’s ex-US revenues in recent years have amounted to about 60% of the global total and with the help of the Irish companies, the foreign profits tax rate has been 1.8% in fiscal 2011, 1.9% in 2012% and 3.6% in 2013.

Both Microsoft’s main Irish companies, Microsoft Operations Ireland Limited (MIOL) and Microsoft Ireland Research Unlimited (MIR) are subsidiaries of Round Island One Unlimited, Microsoft’s Irish shell company in Bermuda.

MIR handles licensing of Microsoft’s intellectual capital (IP) and also employs about 400 in Dublin. It’s a conduit for billions of dollars in royalties and it may well be both tax resident and non-tax resident in Ireland.

Microsoft’s effective corporate tax rate in Ireland in 2011 (including the Irish companies in Bermuda) was 5.69% according to the US Senate’s Permanent Subcommitte on Investigations.

The Government is publicly supportive of the Organisation of Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) project that the think-tank for mainly developed country governments, was asked to undertake by the G-20 group of leading developed and emerging nations.

Behind the scenes, the Government is likely the target of intense lobbying from groups such as the Irish unit of the powerful United States Chamber of Commerce. It should resist it because the biggest threat to the Irish corporation tax rate is not from the OECD but a US minimum foreign profits tax to deter profit shifting to countries such as Ireland and island tax havens.

The Obama Administration has proposed such a measure without specifying a rate and last February in The Wall Street Journal, Robert Pozen, a former senior executive of Fidelity, the giant mutual fund manager, proposed a 17% minimum foreign rate to fund a cut in the headline US corporate tax rate of 35%.

A US foreign profits tax above the Irish 12.5% rate, would kill the latter as an incentive and while US tax reform may seem a distant prospect today, history shows that like the progressive era a century ago in response to robber-baron capitalism, when the Standard Oil Trust was broken up and a corporate tax became law, growing inequality will not always be accepted as inevitable.

Ireland’s offshore companies are tax avoidance entities and they should be closed down over time.

The Irish authorities haven’t a clue about the operation of these mailbox companies — which don’t have any real-world existence – –  and the multi-billion charges that come from them to transfer profits from Ireland tax-free. Some of the accounting is inevitably suspect.

A different standard applies to the directors of a local firm who engage in questionable accounting and they risk imprisonment.

Jobless exports surge

In the early years of the last decade Irish subsidiaries of US companies became the most profitable in the world in terms of sales revenues and as profit shifting to low corporate tax and no-tax jurisdictions accelerated, Irish exports rose but job numbers  remained static.

In the period end 2000 to end 2013, the value of inflation-adjusted exports rose 59% while according to Forfás , the public research unit, direct jobs in foreign-owned  exporting firms fell from 184,000 to 172,000 despite a 22% overall rise in the size of the workforce.

Even though only accounting for 10% of total headline tradeable exports, indigenous firms added a net 5,000 jobs in thirteen years to 177,000 at end 2013.

In 2013 the total value of exports was €177bn and if excess transfer pricing and virtual services exports were eliminated from the total, to result in a discounted €100bn, indigenous exports (including tourism and transport) would only amount to 24% of that discounted total.

So while jobs in the indigenous sector may have lower pay and typically no pension coverage compared with those in foreign-owned firms, the job creation ratio for a given level of output is 4:1.

Consequences of reform

Enda Kenny, taoiseach/ prime minister, said in a speech on April 3rd that the US is “Ireland’s largest trading partner in services.”

In 2012 services exports overtook goods exports for the first time and the development was hailed by the Government as reflecting competitiveness – – which it wasn’t.

The rise in recent times reflects tax avoidance rather than trade and we estimate that in 2013 €45bn of the value of computer and business services was tax related – – this amounted to 48% of total services exports.

As the big services multinationals have been posting double-digit revenue growth in recent years, the tax-avoidance component in services exports from Ireland will soon rise to over €50bn.

In the real world, the elimination of fake services exports will not have a big impact as royalty and other charges offset the values, and companies such as Apple, Google, Microsoft, and Facebook, employing about 10,000 mainly European nationals because of the demand for multilingual skills, will still have incentives to stay in Ireland, with lower employment levels.

Ireland also has low non-wage labour costs and with the exception of the UK, hourly pay compares favourably with most of Europe’s developed economies.

The investment of over $5bn by Intel, the US computer chip giant, in Ireland in recent years is a signall of confidence in the country as a location for high tech manufacturing.

However, the reality behind the Government’s permanent jobs publicity campaign is that the FDI (foreign direct investment) sector ceased being a jobs engine in 2000.

Less than one-third of IDA Ireland supported firms do even basic R&D (research and development) in Ireland and Craig Barrett, the former Intel CEO, suggested in a newspaper interview earlier this year said that this situation is unlikely to change.

An opportunity?

Tax avoidance has distorted the national accounts and in recent years companies moving their headquarters to Ireland with no physical presence or limited ones, have artificially boosted gross national product (GNP) while exporting is made look easy when ministers conflate for impact, data on exports by Irish-based foreign firms to particular markets such as China, with data on indigenous exports.

Since the introduction of export profits tax relief in 1956, indigenous exporting firms have been provided with similar incentives to those available to FDI firms but the performance has been poor with limited activity outside the English-speaking world.

In food, our area of strength, we could do better but reforms in agriculture are overdue while to politicians, ready-made FDI jobs involve no hard choices.

In 2013 Ireland’s agri-food exports were valued at €8.7bn, compared with €16bn in Denmark (population 5.5m) and €79bn in the Netherlands (population 17m).

The trade surplus as a ratio of exports in the sector was lowest in Ireland at 19%, and down from 52% in 2000; it was 37% in Denmark and 32% in the Netherlands.

The foreign sector will continue to be important for the Irish economy but the biggest potential for job creation is in the indigenous exporting sectors.