Ireland’s tax regime nurtures innovation in avoidance
A tax-based industrial policy will not produce an innovative economy, writes James Stewart
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Irish tax policy has in recent years attracted considerable international criticism, but within Ireland it is seen as inviolable. Enda Kenny, the Irish prime minister, denies that the country has become a “brass- plate location” where international corporations try to book their profits so as to benefit from low tax rates. He has described the low tax rate as a “cornerstone of Irish industrial policy”.
It is no doubt true that a sudden change of policy would hurt investment in the short term. What Ireland’s government seems not to be aware of, however, is the vast quantity of profits that are not subject to corporation tax anywhere in the world because of “double Irish” tax strategies.
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This ruse involves two Irish companies, one of which makes sales to customers and pays hefty royalties to the second, which is resident in a tax haven such as the Cayman Islands. The sliver of profit attributable to the first company is taxed at the Irish rate of 12.5 per cent. But the lion’s share, attributable to the second company, is barely taxed at all.
In May last year, Michael Noonan, the finance minister, told parliament that it was impossible to know how many companies avoid paying tax in this way. In fact, we have some idea.
In 2011, 19 subsidiaries registered in Ireland between them avoided paying tax on €33bn of profits in this way. (Apple’s was one of them.) That sum is equivalent to one-fifth of Ireland’s entire economic output for that year. Several more companies have similar arrangements, but their profits are excluded from the total because their legal structure means they do not have to file accounts.
American companies can pay between 10 per cent and 25 per cent tax on profits they make in the US, depending on what measure you use. But some pay almost nothing on profits they make outside the US, and Ireland has in some cases become central to these tax- avoidance strategies.
How did industrial policy in Ireland became so dependent on such a favourable corporate tax regime?
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Some clues can be found in the European Commission’s report on Apple and Ireland. The report says that at times there was extensive contact – which the commission describes as “negotiations” – between Apple’s tax advisers and the Irish tax authorities. There can be little doubt that other companies are engaging in similar talks.
A tax-based industrial policy will not produce an innovative economy at the cutting edge of technology and research. Instead, it will lead to an emphasis on tax reduction.
Those with the best knowledge of the tax system will be the ones appointed to senior management jobs. They lean in turn on tax advisers, whose prosperity brings them considerable influence in formulating tax policy and legislation. Meanwhile, those skilled in new product development, production expertise, logistics and marketing, are being sidelined.
The tax regime for foreign direct investment in Ireland will probably have to change, not least because of the commission’s intervention. However, there is little reason to think that the underlying conduct will change much in the near future.
The affected companies will seek other tax incentives to do business in Ireland. The prime minister has already spoken of the need to improve the competitiveness of the tax treatment available in the country for research and development expenses and intellectual property rights.
It is time for countries to work together to fight abuses of the international tax system. An economy dominated by slide rules is scarcely better than one specialising in brass plates.
