US Tax Cheats in Ireland Pocket Profits Worth Almost Half of GDP
It is a figure which Citizens for Tax Justice (CTJ), the US group which authored the report, says highlights Ireland’s popular use as a tax haven among US companies.
Matt Gardner, executive director of the Institute on Taxation and Policy in Washington DC, tells IBTimes UK: “It’s a clear indicator that there’s a fundamental mismatch between the amount of profits being reported in the country and the amount of economic activity in a country. It’s not a smoking gun but it raises a signal that there are potentially some games being played in these countries.”
The authors used US Inland Revenue data on the offshore subsidiaries of US companies from 2010, which has recently been released.
In Bermuda, companies reported profits which amounted to a staggering 1643% of GDP. The figure is 1600% in the Cayman Islands, 1102% in the British Virgin Islands, 123% in the Bahamas and 106% in Luxembourg.
“Clearly, American corporations are using various tax gimmicks to shift profits actually earned in the US and other countries where they actually do business into their subsidiaries in these tiny countries. This is not surprising, given that these countries impose little or no tax on corporate profits,” the report said.
Ireland, though, is by far and away the country or territory with a population of over one million people being used for such purposes (in the Netherlands, US companies reported profits equating to 16% of GDP).
Furthermore, companies which reported figures such as these in Ireland announced just 3% in tax payments in overseas regions, emphasising the fact that the country is being used as a corporation tax loophole.
A host of US companies have domiciled themselves in Ireland, taking advantage of tax breaks in the process, including Apple, Google, Twitter, Yahoo and Microsoft.
While Ireland officially has a 12.5% rate of corporation tax for trading income, a separate report released earlier this year found that US multinationals reported paying an effective tax rate of just 2.2% in 2011.
“Ireland currently allows companies to declare residence in countries where they have no meaningful activities and that should be stopped,” Gardner says.
He adds: “Every tax break you grant these companies has to be granted in higher taxes by someone else. If you ask people whether you should be lowering taxes on big companies and raising them for small businesses that don’t have the luxury of being able to engage in these offshore shenanigans, they’d say it’s a terrible deal.”
The Figures Don’t Add Up
A spokesperson for the Irish Revenue, the tax department of the government, has described the report from CTJ as “wrong and misleading” but admits that “many of these Irish-incorporated companies have no trade in Ireland”.
The spokesperson tells IBTimes UK: “It is not appropriate to compare the profits of such companies which are not chargeable to tax in Ireland, with Ireland’s national GDP”.
CTJ said that it is “impossible for American corporations to actually earn profits in a given country that exceed that country’s total output of goods and services”.
In the case of Ireland, or countries such as Switzerland and Singapore, where in both cases US firms report profits which are 9% of national GDP, the percentage is much higher than in countries in which their business is more significant (the percentage of profit to GDP is about 0.5% in Germany and 3% in the UK).
“This suggests that American corporations are exaggerating how much of their profits are earned in Switzerland, which is not surprising given that some corporations are able to obtain very low tax rates in that country,” the report says.
In 2010, the top 12 “most obvious tax havens” contributed only 4% of the GDP earned abroad by US companies. However, 54% of overseas profits were reported in these places.
“This is obviously impossible. The only plausible conclusion is that American corporations are engaging in various accounting gimmicks to make large amounts of their profits appear, for tax purposes, to be earned in these dozen tax-haven countries,” the report concluded.
The CTJ report emerged as one of Ireland’s most senior tax figures said that the country’s tax regime needs to change in the face of international pressure.
Feargal O’Rourke, the head of tax at PwC Ireland, is quoting in the Irish Times as saying: “”In what is a politically-dominated process of global tax reform, the need for optical and political ‘wins’ means that Ireland will not be able to sustain its current corporate residency rules.”
Gardner adds: “In the long run being a tax haven is not a sustainable strategy for economic development. What any country’s leadership should be doing is thinking of ways to encourage long-term economic growth, not ways of encouraging tax sheltering activities.”