June 24, 2014

Ireland needs a new tax reality

Posted in Celtic Tiger · 32 comments ·

Years ago, I had the wonderful opportunity to work for Jack Welch of GE fame at close quarters. It is the sort of invaluable experience that is hard to replicate, even if, at times, his pace of work was shocking for someone 30-odd years his junior. During the period we had time to chat about all sorts of things.

At one stage, we were talking about crisis or challenges, not just in business but in life in general and he sat me down, almost pointing his finger at me, and stated that you have only got to do three things in a crisis, or when faced with a challenge.

First thing is, define your reality, not as you would like it to be but as it is. Second, do something about it and, three, face into the challenge and it won’t be as traumatic as you first feared once you have defined your reality.

When it comes to multinational taxation and the changing global tolerance of corporate tax avoidance and countries’ roles in global tax avoidance schemes, Ireland has not defined reality. The reality is that the ground has shifted and countries such as the US will not tolerate the wholescale looting of its corporate tax base and the countries that facilitate this behaviour.

This implies that we have to come up with a plan B on our terms rather than wait to be hauled into the dock.

Last Friday, the EU Commission indicated that, after it has finished with Apple’s tax affairs and Ireland’s role in Apple’s tax avoidance strategies, it might broaden the investigation into the tax affair of other multinationals based in Ireland.

It remains to be seen whether this is for real, or whether it is a tactic to try to encourage us to adjust our policy in the budget.

Let’s be clear, many multinational corporations are attracted to our island because it is a sanctuary from taxes and regulations.

The European Commission is investigating the tax arrangements between Apple and the Irish government on suspicion of a selective advantage being offered to the company. In short, the commission is saying that Ireland is cheating.

This is not good. There is a world of difference between being seen as a clever tax strategist and a tax cheat.

With the government and the IDA celebrating the highest level of job creation in over a decade (see table), and our Taoiseach Enda Kenny insisting our effective corporation tax rate is 11.9 per cent, what’s the problem?

IDA Chart

The problem is that this effective Irish rate cannot be taken at face value due to the use of intercompany charges by heavyweights, such as Google and Microsoft, to minimise reported income.

This so-called Double Irish method involves shuttling profits in and out of Irish subsidiaries, largely avoiding the 12.5 per cent rate.

This little manoeuvre is what outrages the US, as they try to close a $130 billion budget deficit, and the EU, whose shaky recovery remains in a very fragile position and who doesn’t want EU states, particularly the eastern ones, to involve themselves in a giant game of beggar thy neighbour.

We, too, should be worried as Ireland has by far the most to gain from multinationals paying their dues here. Sometimes, the government’s stance seems to concern itself only with the balance sheets of the multinationals, what about the balance sheet of Ireland?

While IDA chief executive Barry O’Leary delivers messages that (the) agency’s clients paid about €2.7 billion in corporation tax in 2012, which government ministers and journalists can spin into positive headlines, the figure only represents a fraction of the potential tax revenues that could be paid here and still leave the multinationals in a highly profitable environment.

For example, Apple paid $713 million in corporation tax on foreign profits of $36.87 billion during the fiscal year of 2012 – this corresponds to a mere 1.9 per cent, a solid 10 per cent lower than the effective rate which the Taoiseach claimed.

Similar figures for Google and Microsoft come in at 4.4 per cent and 4 per cent respectively. This discrepancy highlights the failure to recognise the difference between a large multinational and a template firm.

We can all agree that a local craft shop selling its output via a retail unit is incomparable to Medtronic or Boston Scientific.

With the profits per employee of US-owned companies based in Ireland reaching dizzying heights of $970,000 per year, it’s not hard to understand the benefits of relocating here.

While O’Leary may feel that the overall tax paid, equating to €19,000 per employee, is a “high burden”, it’s pennies in comparison to the rates faced in the US and what we could levy.

It is estimated that Google cut its taxes by a whopping $3.1 billion from 2007-2010.

Overall, this method of income shifting by US multinationals is costing America approximately $60 billion in annual revenue. And now Uncle Sam wants his money.

Ireland has taken a firm stance on the 12.5 per cent rate, defiant of the mighty international powers, and for good reason, too.

Firstly the presence of these multinationals is clearly of benefit to the Irish economy – as the Minister for Jobs, Enterprise & Innovation, Richard Bruton said: ”Every ten jobs created in multinational companies lead to approximately seven jobs being created elsewhere in the economy”.

Secondly, and more importantly, if Ireland were to capitulate and raise its corporation tax rate to please Washington and Berlin, some other jurisdiction would surely take its place and reap the rewards. As British-based tax consultant Richard Murphy put it: ”Tax deals are made in hell”.

This may be true but it’s better to be on the side of the angels on this one.

We could announce a phased plan over five years to increase multinationals’ tax rate up to the effective 12.5 per cent. They would still be getting a great deal profit-wise in Ireland, but they wouldn’t be taking the mickey.

Perhaps all the income routed through Ireland now will never be taxable here, but even if a portion of it was, it could yield significant sums for the exchequer. Our budget deficit would improve dramatically and we would not risk becoming pariahs.

Yes, maybe some firms might pull out looking further afield for opportunities to evade tax, but so what? Let them go. Are these the people you want to build your industrial base on?

  1. michaelcoughlan

    First in am I?

    • patboland

      We should be tax compliant ie corporations should pay 11.9%.However we should make the clear point that we believe in low taxes and if other Countries want tax harmonisation the decision is in their hands ie lower their taxes to 11.9%.
      There is no point increasing taxes and giving the proceeds to wasteful permanent cival servants as they will simply waste it.
      Government is the problem not the solution.

  2. michaelcoughlan

    Good article.

    Narrative flows freely with a nail your colours to the mast conclusion.



    • cooldude

      Well done Michael. Adam is losing his touch lately.

      Globally harmonized tax rates are on the way. Global tax rates mean a glonal tax authority which is what the elites really want. Need to dig a little deeper in the analysis department. Well written article all the same.

      • Agreed, but some way off yet on the globalization.

        Do we really think there’s the required political will in the Coalition to adjust current corporate taxation arrangements?

        Sure isn’t it far easier to squeeze Mrs. and Mr. PAYE a little bit more again in the meantime?

        Alternatively, wouldn’t a flat tax introduction with little or no deductions, put an end to all this as established already by Estonia etc? (Similar size to us and all, and could be done in one Budget).

  3. Facts

    There are two complainants one from France and the other from USA .The French complain about the Irish Tax rate 12.5% and the USA complain about the Double Dutch and transfer pricing system ,

    Each country loses money only in their respective different area of complaint and not in both .

    The source of the problem for the French is Ireland and for the USA is Holland .( remember why Sarkozy never stayed over night in Ireland during his flying visit ) .

    The new French accord with USA in recent years had high on their agenda the Irish CT rate because jobs were lost in France .The USA were reminded that France was in the center of Europe …….not in an inhospitable clime that is both physical and economical. France must always come first …..first first first …always.

    USA is not in dispute about the CT rate 12.5 % solely but its association with a double dutch sandwich that spoils the philosophy of the clean Irish Tax rate . This association should be stopped .Its association has given the Irish Tax System a bad name and this will become worse because IDA should have been seen to do something a long time ago .They instead decided to sit on their hands and allow what has now evolved to become an Irish Stew .

    When the investigation is complete the Irish Gov will have shit in the fan on their face and due to their intransigence the French will recoup lost earnings under ‘La Methode’ .Thus future reformed tax rates will be transferred to Europe and not retained in Ireland .So all opportunity will be lost but of course the Irish taxpayers will not know that because new jargon will be invented ( sorry released as it is already coined in some French ducks stomach awaiting to be squeezed )It is called Foie Fiscal .

    • Daithi7

      Is it just me, or is this not a wonderful opportunity at a very opportune time for Ireland, to gradually harvest more tax from the resident multinationals here, while putting any blame for such initiatives on Europe, and specifically the sneaky French.

      The IDA & Dept of Finance are having this well so far IMHO also.

      They have reiterated Ireland’s corporate tax rate whenever challenged. They are using the Ryanair philosophy of publicity for FDI I.E. no publicity is bad publicity!!

      when I, or more specifically any decision making executive from any multinational reads on Bloomberg or CNN or other news sources, that Ireland is in the dock because of their overly competitive tax regime, the message that comes across each time is that Ireland is a value destination for FDI. You can’t buy that IMHO.

      There is& will be a balancing act to be mastered here, which is when to start closing out double Irish loopholes and becoming a LITTLE BIT more Euro complicit, but when unemployment is still above 10 per cent, this is not the time to hastily comply with our bully boy Euro partners ‘friendly’ requests.

      No, like a fouled footballer late in a game that they’re ahead in, Ireland should slowly & very deliberately appear to comply, all the while procrastinating for as long as possible so that we garner as much FDI as we can muster before having to account to French & German hypocrites.

      F*** em, the financial crisis & forced burning of the Irish exchecker & tax payers has shown nothing, if only that in terms of generating national wealth, we are on our own!!!

      • Gearoid O Dubhain

        Rob, all of RTE’s self employed ‘stars and personalities are paid via companies they have set up and which benefit from the low tax rate of 12.5%. What are the chances these people will rock the boat by seriously analysing and discussing the impact of a low 12.5% tax rate ? Or in any way discommoding the Government too much ?

  4. CorkRob

    The IDA and successive governments have all nervously averted their gaze over many years on the threat of losing multinational jobs if they demanded the full 12.5% CT due.

    The multinationals now know that have the upper hand (in an Economic downturn) and are pushing their advantage.

    I honestly believe that apart from a few scattered R&D roles, the majority of he roles they (& the IDA) have delivered here over the last 8 years or so have mainly been lowly paid Call-Centre jobs, generally if not exclusively going to foreign nationals with native level foreign language skills. (A trip to Career Zoo will confirm this last requirement for 95%+ of jobs on offer).

    If you park outside any industrial estate where these multinationals are located, it would be difficult to spot many Irish born citizens going to & from work – they are mainly young eastern Europeans and Asians.

    I have no problem with immigrants working here, but the IDA was established to grow Irish based Industry and jobs for Irish People.
    The quoted reductions on the dole figures still smack of Irish citizens emigrating, passing the next wave of young incoming foreign call-centre workers in the airport.

    It would be interesting to see a breakdown of the citizenship of the IDA “Client” employees by country of origin and the average wage per employee at those companies. I have a feeling it may not be as good as we all had been lead to believe it was.

    Meanwhile, we are still haemorrhaging local, well paid, Irish jobs and companies. I would suggest to Mr O’Leary & Mr Bruton that the value of a job , filled by an Irish Citizen in an indigenous Irish company, creates more than the equivalent number of jobs than one with a multinational.

    The main beneficiaries of this IDA/Multinational/Call-Centre growth Fest have been Aldi % Lidl.

    The main losers have been the Irish people and the Irish exchequer.

    It’s time to see what’s actually been happening, who’s been fibbing, hiding the facts and dressing-up their conquests.

    Print the Statistics.

    • ThomasFergus

      Outstanding post. As someone who speaks two other modern languages, I can testify that the overwhelming majority of jobs for those with languages are given to people with native language skills.
      Like I said last week, read Conor McCabe’s Sins of the Fathers, he shows how all this tax-induced inward investment had little to do with the creation of a sustainable industrial base,not to mind a functioning domestic economy, but had everything to do wtih the professional services firms (accountants, tax consultants etc), the landowners and the construction industry who benefited massively from these scams.

    • Adelaide

      Totally agree, CorkRob. This is what I find in my own anecdotal experience. My ICT job entails me going to Business Parks, the shiny ones with big name tenants and the obligatory fountain ponds, anyway, I’d rarely hear an Irish accent and what’s more telling is the relative absence of parked cars compared to the number of staff on-site. The majority arrive and leave by bus or coach. Can they not afford to run a car or are they temporarily here for the job and then move on to another foreign contract? My own hunch by observation is that they are poorly paid with little attachment to Ireland. Like you I would love to see the breakdown stats on pay and nationality make-up as I’ve always suspected they are nothing more than digital shiny sweatshops that make good PR for our incumbent clueless cronies.

      • Adelaide

        ps surely if we have been in a recovery I’d see the occupancy rates in these upmarket Business Parks increase whereas by my own observation they’ve remained steadily half-empty for the last five years, and yet investment in commercial property has been booming the last two years, is buying an empty office the sign of the increasing debasement of money?

  5. 33square

    It must be obvious to all by now that corporations have power absolute over governments. A global tax and monetary system (with necessary human UUID) will happen. There will be advantages and disadvantages.

    I personally fear the power such a system would place in the hands of a few. Could political dissent exist in such a system? Would or could a black market survive? Thrive perhaps?

    Many would no doubt believe it is the biblical mark of the beast coming into reality.

    • 33square

      If the Nazis used Dehomag punch card based IT to increase the efficiency of their so called “solution”, imagine the possibilities a global tax/monetary/id system, enabled by our ever more connected selves, where the people willingly provide reams of personal data to the powers that be, would provide to someone who wants to see the world burn for whatever “reason”

    • 33square

      A much brighter outcome than the one painted above is definitely possible. But in a world where a company can patent a lifeform and directly alter genetic material for personal gain, without knowledge of, and I guess care for the consequences, it seems less likely.

      Our human rights have not been updated to keep pace with the possibilities our technology allows.

      Propagation of genetically modified materials (i.e. genes modified by mechanical means, not selective breeding) into the naturally existing gene pool should never have happened and should have beeen considered a crime against humanity on par with the aforementioned Nazi “solution”.

  6. 33square

    As for the building of nuclear power stations in quake zones…

    • 33square

      Water fluoridation… And now metering & charging for that poisoned water…

    • 33square

      Pasteurisation of all dairy to be sold, removing vital enzymes from the diet. Then adding “probiotics” after the fact…

    • 33square

      The continued use of mercury as a dental filler… Mad as hatters…

    • 33square

      Make no mistake, you don’t have a right to life, you have a right to exist, on corporate terms, so long as you are profitable.

      • cooldude

        This seems to be the way the world is heading. Corporations now have the right to sue sovereign governments under arbitration if they make any decision which they deem to affect their profits. This will include GM foods and other environmental decisions governments might make to protect the health of their people. Under the new TIPP and IIPP style legislation the corporations will have all the power and the arbitrors will be their bought and paid for stooges. Sovereign governments will have little more power than county councils have currently. Enda and the boys know all of this but they are playing along with their bosses in getting all of this signed up under the radar.

  7. Thank you for rejecting my post. I didn’t know you were Immune To criticism Don’t fear you will never have to reject Another?,

  8. Deco

    It seems that the quisling leadership in control of the Irish state, can not extract enough money from the working populace, and can not ingratiate itself enough for those that wish to avoid taxatio, as far as possible.

    It might be the IDA bosses defending corporates that pay 4% tax.
    It might be the Taniaste and Bono scrambling over one another to welcome Obama on a electoral stunt.
    It might be the Taoiseach showing up in the NYSE beside a phoney individual with large media interests in the background.

    The Irish state has drifted towards gombeenism. It extracts a massive cut on it’s captive worker bees, forcing the to emigrate. It induces large mncs to arrive and pay little or no cut at all, so that the worker bees have a reason to hang around and get taxed ridiculously.

    And it provides a largesse to those who are in the state system to make sure that they keep the racket in motion.

    It is a ponzi scheme – like exists in most Western economies currently. A uniquely Irish ponzi scheme. The whole thing no longer adds up. The cost of propping up the banks, SIPTU, Blair Horan, the Dublin real estate market, and the social welfar system, is simply more than the money flowing in.

    Something has to give. And nobody knows what it will be. The current government have decided that more taxes on the section of the populace that produces the goods is the answer. They have a rebellion on their hands. Sure, people in the leafy suburbs will pay their property taxes. They might even boast that they can pay it.

    But I just get the sense that at some point Ireland west of Hueston Station will end all that remains of family political dynasties if things get any more “extractive”.

    The current system is bonkers. We are getting too much mnc investment, and not enough domestic capital formation.

    • How will (or would) they ‘end all that remains of family political dynasties” though Deco.

      I can’t see the mechanism.

      As far as I can see they’ll keep bending over to pick up the soap.

      • Deco

        There is a mountain of scandal going on in Ireland that the gardai have been ignoring because it concerns “people of good standing”, or “people of ood connections”.

        We need a few Ming type candidates to spill the beans. The mainstream parties for one of four MEP seats in Ireland Mid West. That one MEP was the best outgoing MEP from any of the three main parties – and she struggled. Could anybody have predicted this even twelve months ago ? Could anybody have predicted that Nessa Childers would come second in Dublin, and Brian Hayes third ?

        Once people taste a bit more accountability, they will be hungry for more. I hope that demands increase.

  9. The thorny topic of trans-national wage and tax arbitrage by corporations in collusion with compliant Governments betraying their Nation State populations…. It’s ridiculous to blast Corporations for doing what it says on the tin as they’re feckless, amoral cyborg entities. Have a look at the legal underpinning of their profit and loss account and fiducary duties to shareholders rather than the ‘stakeholder’ PR baloney. They are created to seek profit and all other costs are to be either minimised or preferably avoided. Without a worldwide Covenant On Corporation Tax, the planet is doomed from their rapacious amoral behaviour.

    But it’s the fault of Sovereign Governments for how they have failed to modernise, shape and mould The Laws Of Incorporation: they didn’t arrive from outer space! They were developed a few centuries ago to turbo-charge Capitalism. It worked, but the planet may expire unless the cyborg Corporates are reigned in by the Nation State alliances of countries like the USuk, Germany, India, China, Brazil and the rest of it. Instead we have ‘hard man’ goverments lashing out at the sick, lame, lazy and insane whilst bending and spreading with no lube in prison bitch prostration before feckless footloose interantional Capital. It was ever thus, but it can’t go on.

    Ireland Inc has played to cute hoor on all this for a few misguided decades of credit-binge pseudo development whilst systematically trashing the future of the Republic. There’s a strategic overview required that balances the short-term needs of profit and the whinge-bag mentality of O’Leary types and the longer-term Vision Thing of the real ‘movers and shakers’. Like me.

    “This so-called Double Irish method”? Erm, LOL! It’s ISFC financial porno DP from tough guy bankers who are also really just prison bitches. Double penetration: spit-roasted by the USuk and Germania but thinking they weren’t being sold into the brothel when they agreed to the wages of Sin that is the Euro. The fact that a coven of D4 & K-Club eejits and their nascent “hereditary family caste systems through property and accent” benefit isn’t really relevant ‘going forward’ as when the next crisis hits, there will probably need to be a reset button pushed on all this. I’ll be happy to Push The Button as the song goes.

    Mr McWilliams covered all of this tax duckin’n'divin stuff at the final presentation on the Sun evening at Kilkenomics 2013. Most people had gone. I watched him from the balcony as he explained the so-called 12.5% rate is a myth that many large corporates finagle their way out of and that if they even paid the agreed headline rate, Ireland Inc’s finances and citizen services profile would be much healthier. There was also stuff about the vast profit per employee of international corporations, such that them coughing up 12.5% was extremely unlikely to result in a jobs or brain drain situation. I wonder if he actually has much influence as nobody seems to have taken a blind bit of notice since last autumn in The Marble City.

    Trust me. It won’t be long before Tax Justice activists on both these Isles of Wonder get around to targetting domestic Irish exports to Britain’s supermarkets and the reverse trade to Irish consumers in revenge for all this. Unless Enda & Co man up and grow a pair on this as on Tuam and the Banksters. We’ve had enough. Don’t think we can organise that stuff in a flash?…….We move with elegance and precision. Don’t assume that because it takes us years to finalise a strike that preparations aren’t well advanced. And anyone here who doesn’t like that: What exactly are you going to do to stop us? Nothing. It’s called Consumer Power. And it will only take a 45rpm song with the right sloganeering to “Make It So”. If I have to issue a fatwa on this as well, I will.

    One caveat about the closing sentence. What “industrial base” is the author alluding to? There’s a Banking Base and a Tourist Base and an Agricultural Base, but Industrial? Viagra factories? Oh, and who is this “we”? There is no group consensus over Ireland’s future responses to it’s current predicaments, but there’s a hell of a lot of FF/FG Groupthink that postures under the rubric of “we”. As always, I’m more than happy to throw a bucket of cold water, or something more extreme, over such delusional Groupthink.

    With every good wish!
    “Mad Paddy From Brum”

    • Deco

      Sensible Paddy for Brum !!!!

      The mad Paddy is in the Department of Finance making statements about fiscal projections and targets – which are all working only because there is a Tech Boom. If the tech boom craters, then it will all fall apart and the Irish state finances will look shaky again.

  10. StephenKenny

    For a very in depth view of these and related issues, the journalists Larry Elliott and Dan Atkinson have written several very readable books: Fantasy Island, The Gods that Failed, etc

  11. Gearoid O Dubhain

    AS far back as the mid ninties, the ESRI in one of its Mid Term reviews advised that the Government should be weaning itself off its reliance on the low corporation tax reliance. The reasons it gave for this have never, as far as I have seen, been introduced into public discussion of the CT rate in ireland. Instead we are, much like the pre -recession fatwa on discussion of the looming property bubble, expected to swallow whole the mantra that a 12.5 % CT rate has to be kept in place. Also excluded from the discussion is the fact that the vast majority of companies that benefit from the low CT rate are domestic Irish companies and, laughably, included amongst these ‘companies’ are the majority of RTE’s personalities. etc, whose income is paid via companies paying the CT rate of 12.5%. That these companies do not generate job opportunities or much in the way of productivity is also ignored.
    The role of the low CT rate in facilitating the fueling of the property bubble has never been discussed either though it is as clear as day that profitable companies paying low tax were able to build up cash piles which were then leveraged by high borrowings and pumped into property with the disastrous results that we now know about.

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