November 25, 2013
Last Thursday at the bar of Na Fianna GAA club in Glasnevin, I chatted to two Irish entrepreneurs who have a successful software company about the unintended negative consequences Ireland’s multinational tax policy has on their business.
They maintained that because the multinationals pay much less tax than local Irish companies do, the multinationals can always pay more than the local companies for talent. This is a serious problem for them and given this state’s obsession with large multinationals as opposed to small Irish companies it is an argument we rarely hear.
(You might say: ”Typical McWilliams, goes to a GAA club and talks about tax policy at the bar!” Fair point. Guilty as charged.)
They weren’t the only people talking about multinational tax this week. On Friday, the OECD held a two-day global forum to come up with policy initiatives to prevent global corporate tax evasion. More seriously, last Tuesday, the US finance committee on Capital Hill heard proposals that would have a dramatic impact on Irish policy.
So if the rest of the world is talking about multinational tax and Ireland is firmly in their sights, why don’t we? The elephant in the room simply can’t be ignored.
The government promises a new economic strategy for Ireland. It will wax lyrical about sovereignty, fairness, efficiency and job creation, but precious little is likely to be said about taxation and, in particular, the way we tax multinationals.
How are we going to deal with multinationals in the next five years against a background clamour all over the world to clamp down on corporate tax avoidance? Indeed, today’s clever tax avoidance strategies are likely be tomorrow’s criminal tax evasion tactics, so what are we going to do about it?
Lets be clear. Multinationals in Ireland do not pay 12.5 per cent tax; they pay on average 2.5 per cent tax on profits. This is a joke and the joke is on you because that which they don’t pay, you do.
One of the reasons Irish citizens, small businesses and embryonic start-ups are hammered with all sorts of taxation is because multinationals don’t pay their fair share.
This stands to reason. If we have a certain bill for running the country (the amount of which we can argue about) yet one section of the economy is treated differently and more leniently to other parts in terms of what it pays, then the other sectors by definition pay more.
The multinationals operate in this country like every other business. Children of their employees go to our schools like the rest of us. Multinational executives drive on our roads, drink our water, use our electricity and get tended in our hospitals like everyone else. Their managers and workers were educated by our state. These companies are not ”corporate colonialists” living in an economic garrison; they exist as part of a functioning society. And so they should treat us with respect and pay the modest amount of tax, which we – and every country – expects them to.
Reassessing what multinationals pay is not some Marxist tract about taxing capital. It is quite the opposite and is a legitimate building block of a sensible and entirely reasonable policy where each sector pays its fair share.
Indeed, this question is part of the bigger process of national self-reflection – a sort of unforgiving economic and moral inventory – that the post-bailout environment could facilitate. This long-overdue conversation is part of the broader discourse about what type of society do we want to live in and what type of economic policies support that vision.
By demanding that multinationals actually pay 12.5 per cent – the actual corporate tax rate – Ireland would still be one of the most attractive places to invest in the industrialised world. However, the income of the citizens of the country and the returns to capital foreign investment would at least begin to be treated similarly.
The 12.5 per cent rate is still way below the 50 per cent plus marginal rate paid by many tens of thousands of Irish workers and still far, far below the level levied on corporations elsewhere.
As things stand, the deal that multinationals get in Ireland is phenomenal.
Latest US tax figures indicate that profits per employee at US-owned companies in Ireland are at $970,000, whereas the corporate tax paid in Ireland per employee is just under $26,000.
This is a deal like no other for the multinationals.
According to the US Bureau of Economic Analysis, US multinationals in Ireland reported net income of $95.6 billion. These firms employ 98,500 people in Ireland, which gives profits per employee of a whopping $970,000. In contrast, according to the IDA, tax paid per employee of multinationals to the Irish exchequer was €19,000 or $25,840 at today’s exchange rate.
The American data reveals that ”taxes other than income and payroll taxes” payable in Ireland in 2010 amounted to €2.4 billion, giving an effective rate of tax of 2.5 per cent – far below headline rate of 12.5 per cent.
If these companies were to pay tax at the very low – by international standards – rate of 12.5 per cent, the exchequer would net Euro 12 billion in corporation tax per year. €12 billion! No doubt some other jurisdictions would claim they should have a share of this, but Ireland is currently where the profits are booked.
The gain to Ireland would be huge. The budget deficit would be eliminated immediately and the country would run a surplus.
The multinationals would still be making over €800,000 profit per employee here, so they could hardly complain. Ireland would remain one the most profitable locations in the world for US multinationals.
Quite apart from the obvious benefits to Ireland, another reason we should close off tax jiggery pokery is the world is moving swiftly against countries that encourage tax avoidance vehicles.
For example, in the US on Tuesday, a proposal from the Democrats on Capitol Hill aims to impose a 20 per cent tax on an estimated $2 trillion of cash held overseas by American multinationals. The Americans want to clamp down US companies keeping their profits overseas. US tax on repatriated cash is a significant 35 per cent.
The Democrat finance committee, with the support of President Obama, argues that this move will generate more than $200 billion in revenue for the US government.
President Obama likes this simplicity and stated on Wednesday ”rather than a whole bunch of tangled laws that incentivise folks to keep money overseas, let’s have a modest but clear global minimum tax”.
So you can see where this is going. And of course where do you think enormous amounts of US multinational money is on deposit? Yes you guessed right, in the deposit accounts of the big US banks in the IFSC.
So it’s crucial we move in step with the rest of the world. Ireland has so much to gain from this and little to lose. At the moment we are riding a tax-arbitrage bubble, that will burst as political leaders in Washington, Brussels and Berlin close off loopholes and deviant fiscal behaviour. And this will be spun as a morality issue – which in a sense it is.
You could look at us as a sort of weird red-line district for tax fetishists where companies are allowed do all sorts of stuff they would dream of getting up to at home! Of course these types of deviant tax zones attract all classes of fiscal perversion, and if there are companies in Ireland that exit here only to avoid tax and have no real business here, well these are not the sorts of people a respectable economy should want to deal with. And if they moved to seek out the more exotic tax practices of committed tax havens, good riddance to them.
Proper businesses will stay because it is profitable and everyone will be better off. It’s a ”no-brainer” really.
David McWilliams hosts the Winter Tales’ book festival at Dalkey on December 7. Tickets www.dalkeybookfestival.org