Tax Haven Dictionary

Haven  / ha-ven:  (n) a place of safety or sanctuary; shelter.  [Old English hæfen, from Old Norse höfn; related to Middle Dutch havene, Old Irish cuan to bend].  Example:  ‘Ireland is a safe haven from (insert:  e.g. dragons, personal ownership of semi-automatic rifles, taxation on corporate profits)’.

The level of self-delusion over Irish corporate tax rates is scaling the heights of the fantasy world we constructed for ourselves during the property boom.  'There is nothing wrong with our tax code', 'we are playing by the rules', 'its’ the fault of other countries','everything in our cocoon is fine – don’t bother us'.

To the question –is Ireland a tax haven – we get a torrent of answers:  some defiant (‘we are not, nor have we ever been, a tax haven’); some convinced (‘are we a tax haven?  Of course, we are; what planet are you living on’); and some more nuanced (‘we have many of the attributes of a tax haven’). 

Personally, I’m not terribly interested in the labels.  What’s important is what is actually happening.  Let’s look at a table produced by Dr. Jim Stewart of TCD, based on a US Government report.  This research into the tax paid by US multi-nationals in various countries found the following:

As seen, Bermuda is a league-leader in providing the most secure ‘haven’ from corporate tax liability followed by Luxembourg and the UK Caribbean Islands. Next up is Switzerland, the Netherlands and, ahem, Ireland.  A long way off is Germany, France and the UK.

There is the argument that it’s not Ireland’s fault, it’s the fault of US tax law.  Ok, for those who don’t have a grasp (and don’t pretend to have one) on the complex world of international corporate tax accountancy – and I’m one of them – we can make two observations:

• Either those US companies operating in Germany, France and the UK are either ignorant of the ability to reduce their tax liabilities, or

• There is something in the tax law of Bermuda, Ireland, etc. that allows US companies to drive down their tax liabilities – something that is missing in the tax laws of, say, Germany and France.

Which is the more reasonable I leave to you.

And, my, some are getting downright self-righteousness.  Take the example of France.  How dare the French authorities attack us when their effective corporate tax rate is so low?  The oft-quoted figure for France’s effective tax rate is 8 percent – compared to Ireland’s 11.9 percent.  However, this is incorrect – by a country mile.  This claim is based on a PricewaterhouseCooper and International Finance Corporation study.  Here is what Jim Stewart wrote about that report:

‘ . . . the PWC/IFC data cannot be relied on to estimate effective tax rates because it is based, not on real data, but on a “standard firm with 60 employees”, a standard size (102 times income per capita) and a fixed gross profit margin of 20% (p. 13). Existing nominal tax rates are then applied in estimating tax paid. This means that estimated tax rates apply to small companies employing less than 50 and with capital employed of under €3 million. Interpreting such results can be difficult given that many countries have low tax rates for small firms, for example 15% in France. A new incorporated entity in Ireland is exempt from corporation tax for the first three years.’

So the claim that France has a lower effective tax rate is not based on data but on a standard model firm which enjoys a low rate of tax for small companies in France (a feature of many other countries).  Can we get a broad estimate of effective tax rates in other countries?  Yes, by showing the amount of corporate tax paid as a proportion of net profits (operating surplus minus investment).  This is a ball-park figure but Seamus Coffey shows similar results.

This is an economic measurement, not a company account by account compliation.  The actural effective rate is likely to be slightly lower in all cases.  But it shows French companies paying nearly four times more than companies in Ireland.  In fact, every country pays a higher rate than Ireland.  Ireland is a low corporate tax regime.

Another interesting insight is the multi-national profit per employee in the EU-15 states.  The following is taken from Eurostat for 2010 (for Denmark, Spain, Luxembourg, Portugal and the UK the figures are for 2009) and it excludes financial institutions. Further, it refers to gross operating surplus - that is, before investment in tangible goods.

These kinds of stats surely do help the Irish Government to woo foreign investment – ultra- low tax rates and ultra-high profit levels.  No wonder that some multi-nationals refer to us as ‘Treasure Ireland’. 

Now put that all together with the facilities that Ireland offers to multi-nationals in terms of using the country as a transit point in an international chain of tax avoidance – and you have a real package.  And it is our package – the story in the Sunday Business Post yesterday suggesting that Ireland may abolish the ‘double Irish’ tax vehicle shows that it’s not all the fault of other countries. 

Unfortunately, the debate is focused on tensions between Ireland and the US, France, Germany, Britain, etc.  What is not appreciated is the damage that Ireland’s tax regime is doing to developing countries.  As Dr. Sheila Killian of NUI Limerick states:

‘A wider problem is that it’s not just the US that is losing tax . . . the loss in relative terms to countries in the global south is even greater. A recent Action Aid report details the case of a Zambian sugar company routing interest and dividend payments through Ireland and the Netherlands in order to avoid tax in Zambia; this in a country where 45% of children are undernourished, and 90% of rural dwellers live in poverty. Lives are, quite literally, at stake here.’

Lives at stake – that puts Ireland’s corporate tax regime into some perspective. 

So is Ireland a tax haven?  What does it matter what we call it.  Some use the term semi-tax haven, to acknowledge that foreign companies here engage in real economic activity (in Bermuda all you need is a postal address).  Others such as Richard Murphy of Tax Research UK refer to us as a conduit-tax haven – pointing out our helpful role in the international chain of tax avoidance.  Tax sanctuary, tax refuge, tax harbour, funny tax place – put whatever name you want on the tin. 

But when it comes to the final tax bill we are a lot closer to Bermuda than Germany. 

If only we had their weather. 

Comments

[Seamus Coffey (@seamuscoffey)]

US companies don't have to use Ireland to defer their US tax liability.

US companies cannot avoid incurring the 35% corporation tax liability on their foreign earnings but they can defer actually paying it. Apple has a massive deferred tax liability with the US Treasury on its foreign earnings but has structured it so that the tax is not actually payable until the money is repatriated.

Although everything we heard in the Senate Sub-committee hearing indicates that the money is already in the US - and was never in Ireland. The companies are based in the US, have their small staff in the US, convene their board meetings in the US and hold their massive assets (cash reserves) in the US. Ireland is a strange tax haven for Apple when they don't even send the money here!

And US companies can use lots of countries to take advantage of the loopholes in the US tax code. The recent hearings in the US Congress and UK parliament have shown us that Microsoft use Singapore, Starbucks and Hewlitt-Packard use the Netherlands while Amazon use Luxembourg. And that is only the companies that have been hauled in by politicians. There is lots more, both in Ireland and other countries.

The reason companies use Ireland, Luxembourg, the Netherlands etc suits US companies and the US Treasury. The Treasury charges a 35% tax on foreign earnings but a credit is given for tax paid elsewhere.

The US don't want their companies paying a 30% tax on their foreign earnings in Germany, France etc. because it means there is a much smaller slice for the US to collect. The US want to facilitate the move of US company profits to low-tax environments or even no-tax environments. The difficulty the US faces is not in imposing the liability; it is in collecting the cash. There are exemptions that could be removed from the US tax code to facilitate this. Primary amongst these is the "same country exemption" for Subpart F (or passive) income. There is little sign of that changing any time soon.