Ireland needs a new tax reality

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?

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?