This is a guest post by Niall MacSuibhne, a former civil servant.
Well, well, the Department of Finance have decided to issue a "Technical Paper" to back up the myth of Ireland as a full tax-compliant member of the World. Not surprisingly, a search for the word ‘haven’ results without a single match in its 48 pages. Nor will it surprise anyone to read the paper’s expression of thanks in Section 1.1 to ‘. . . PwC Ireland in supplying and explaining the data referred to in this Technical Paper is gratefully acknowledged.’ There is no longer any effort to hide it - Irish tax policy is now, if not run, then certainly influenced, by those advising multi-nationals on how to avoid or minimise their liabilities.
The technical paper, written by Seamus Coffey (UCC Lecturer in Economics) and Kate Levey (Department of Finance) runs through various methods of calculating the income taxable in Ireland, until it gets to its real target: Dr. Jim Stewart's recent paper and his use of US Bureau of Economic Analysis figures to calculate tax. All of the previous methods selected, luckily for the Government, produce similar results.
The difference, of course, is income attributed to Irish Registered, Non Resident companies (IRNR). These are companies “born” in Ireland which “emigrate” to the sun of Bermuda or similar spots. For the purposes of the Government’s calculations, the activities of these companies are excluded from the calculations though their income normally flows from other Irish companies. This is what is referred to as a “Double Irish” structure. In the past, you needed a Dutch conduit to connect the two (the Dutch sandwich), but the Revenue Commissioners helpfully did away with that requirement.
In effect the paper argues that only income attributable to businesses resident in Ireland should be considered and that if others decide to do make use of Ireland for nefarious purposes, it is not our fault. If one accepts this, well, then Ireland is clearly an honest, decent, upstanding World citizen. However I don't think too many people believe that.
In May 2009, Dharmapala and Hines published a paper, Which Countries become Tax Havens? In it they make the following observation:
‘Tax havens attract foreign investment not only because income earned locally is taxed at favorable rates, but also because tax haven activities facilitate the avoidance of taxes that might otherwise have to be paid to other countries.’
As the technical paper has not provided us with any bibliography, we cannot be sure whether this paper was consulted or read.
Let us look at this statement and talk about Ireland. Ireland has a low Corporate tax rate and income earned locally happens to be taxed at favourable rates. I don't think that anyone can disagree with that statement. But now the second part: does Ireland facilitate the avoidance of tax in other countries, that would otherwise be payable in those countries?
In answering this part of the question, we need to look at how Irish company law and tax law operates.
Let us go back to the original Google story written by Bloomberg's Jesse Drucker as an example. The income from all over Europe ‘belongs to Google Ireland Ltd (GIL). However as soon as it is received by GIL it takes electronic flight to Bermuda and to Google Ireland Holdings unLtd - an Irish emigré now resident in sunnier climes. It used to have to make a pit-stop in Amsterdam – using the Dutch sandwich -, but that part of the journey is no longer necessary. The payment going to Bermuda is called a ‘royalty’, which in the case of Google sweeps all the income bar the costs of the Irish operation and a very small profit, around 4% of costs. This means that if GIH has an income of €10,000 million and costs of €500 million, €9,480 million goes to Bermuda, leaving just €20 million (cost plus 4%) taxable in Ireland. However, we do not know fully what is going with Google Ireland Holdings, because it is an unlimited company and does not submit accounts.
Not only does the Irish State ‘facilitate the avoidance of taxes that might otherwise have to be paid to other countries’, but also hides it via the use of unlimited status. The use of unlimited status extends throughout the Irish corporate sector, both multinational and native alike. I think it is clear that Ireland falls within the definition of a tax haven.
For other similar purposes, the point of registration of the company is taken. The European Court ruled that the liquidation of Eurofood IFSC Ltd. should take place in Ireland because it was Irish registered and directors of an Irish registered company are liable to Income Tax in Ireland, whether they or the company are resident in the State (Tipping V Jeancard).Yet in one recent decision, the Irish Revenue accepted that an Irish registered company was resident in Netherlands, yet it still had hundreds of employees here. It became an Irish registered, non resident company with a branch in Ireland. The myth is that it is “controlled and managed” from Amsterdam because the directors may meet there, while the staff and all economic activity occurs in Ireland. This is I presume what the Government paper covers when it states:
‘A company which is not resident in Ireland for tax purposes but which has a taxable presence in Ireland will only be liable for Corporation Tax on its profits sourced in Ireland.’
Now the fall-back of the Dept. of Finance and their various apologists is that the country operates within the OECD framework. In a short and succinct critique of the “arm's length method” of transfer pricing, it is hard to beat a weekly column from the LSE academic and Financial Times columnist, Prof. John Kay in that paper from December 2012 entitled "Starbucks shows need for tax change" (subscription required), in which he finishes with the following
‘The OECD asserts that the practical difficulties of the arm’s length principle are outweighed by its theoretical soundness. The reality is that these practical difficulties arise from its theoretical weakness.’
In a previous piece by Prof Kay a few weeks earlier, in discussing profit shifting, he said.
‘Intriguingly, the consequent overstatement of Ireland’s rate of economic growth contributed to the hubris of Ireland’s era as the Celtic tiger.’
There was a response to the piece in the paper's letters' page from one Will Morris, who is chair of the OECD’s Tax Committee of the Business Industry Advisory Committee. This is part of the problem with the OECD. It takes into account the views on issues such as transfer pricing from the very companies who abuse the rules.
And given the Government’s technical paper, we should ask whether this is the case here in Ireland.