Debt and taxes

The EU and its members are losing billions in corporate tax revenues due to loopholes which see multinationals pay as little as 2%, writes Europe correspondent Ann Cahill

TAXES are for small people” is the growing trend in many countries, with the multinational corporations able to make use of a variety of legal loopholes to pay as little as 2% tax on multibillion-euro profits.

While there are no definite figures for how money is being lost to the exchequer, estimates suggest the shadow economy — those not paying tax they properly should — amounts to 20% of the EU’s GDP. Ireland is at the lower end of this scale, with the sixth smallest shadow economy last year, estimated at 12.8% of its GDP or roughly €14bn that is going untaxed.

While nobody has exact figures of the amount of tax going unpaid, the estimates are that EU citizens are losing out on about €1tn a year which multinationals should be paying in tax if they were not able to use legal loopholes to eventually ship their profits off-shore to tax havens.

Of course, mentioning tax and companies together in the same sentence in Ireland raises fears that any changes to our taxation arrangements will denude the country of the companies that employ about 4% of the population and contribute a sizeable share of the corporate tax collected.

Ireland has successfully fought off attempts to change its 12.5% corporation tax rate, has refused to take part in an EU plan to raise tax from the financial services sector trading in derivatives, and is watching carefully a new proposal due out next months from the European Commission to tighten up some of the more lucrative tax loopholes for multi nationals.

Tax havens outside the EU are also in the European Commission’s sights and they estimate that Europe is losing much the same kind of money as the US — $60bn (€46.8bn) a year from multinationals and $50bn a year from individuals.

EU leaders twice called for action recently. The truth is that not everybody is committed to change or means the same thing when they call for change. In Ireland, the tax policy is credited with bringing in far more multinationals than would otherwise locate in the country, and nobody actually knows the effect of any change.

Former French president Nicolas Sarkozy’s refusal to drop the interest rate cost on the Irish bailout loan until we changed our corporation tax rate was seen as a crass attempt to bully an EU state. It was also disingenuous as France’ s stated and actual taxation of corporations is closer to about 3% when everything is taken into account.

However, Germany is serious about it and is resentful over Ireland’s price transfer policy where German companies can set up in Ireland, lend to their German office that can then offset the loan against their tax bill in Germany, for instance.

For some reason, Ireland has been in the spotlight while the Netherlands has evaded much of the criticism, even though it is an even greater favourite of multinationals looking to minimise their tax liability.

Legal evasion or avoidance is divided into aggressive/unacceptable and acceptable planning and just where the dividing line is continues to be a source of ongoing disputes between governments from the different member states who see themselves as being in competition with one another — for tax and as a location for the multinationals.

With the single market dismantling barriers to trade and companies that establish themselves in any one of the 27 countries able to trade freely in all, companies can choose which jurisdiction to base themselves.

Ireland has an advantage in being English speaking with a young well-educated workforce, very business- friendly environment with a supportive government, and employer-friendly labour laws. It’s 12.5% tax rate is not the lowest in the EU — Bulgaria’s rate is 10%, and other countries like Cyprus have a range of attractive options to allow them to legally minimise their tax payments.

The problem is that the companies are able to divide up their activities and locate in which ever country offers the best deal for that activity, including sending the money out to a tax haven like Bermuda where they will pay no tax. They can transfer all the money they made in the EU from one company to another, calling it “licence fees” for instance.

For instance, Google Ireland repor-ted revenues of €10.1bn in 2010 but paid €7.2bn of this to a second Irish Google subsidiary as “licensing fees”, and from there via a Dutch company to Bermuda where it pays no tax. After other expenses and payments for their 2,000 workforce, just €16.8m was subject to tax.

Using what is known as the “Double Irish” and the “Dutch Sandwich”, the world’s second biggest tech company cut its tax rate to about 2.4%, much less than the official Irish rate of 12.5%.

All of this is perfectly legal but it has become more popular in recent years especially with a huge amount of business now in intangible assets such as intellectual property — the downloading of songs of books, for instance, or software and even advertisements for websites.

A number of international bodies are looking at this issue: The OECD, the Council of Europe, and the G20. Even Britain, which jealously guards its sovereignty over taxation as Ireland does, has joined forces with Germany to tackle the issue.

The UK estimates it is losing several billion pounds a year through tax avoidance and this year updated its disclosure of tax avoidance schemes where it collects information on tax avoidance schemes from the public, and shuts them down.

The European Commission is putting forward its proposal for setting up a blacklist of tax havens — all outside the EU — and for dealing with aggressive tax planning and double non-tax to be published on Dec 5. It will be non-binding on member states and instead will seek to agree definitions, for instance, on what is aggressive tax planning and then to report annually on how countries are dealing with issues of abuse.

It warns that unless something is done to halt the current trend, problems of collecting tax will increase in the future, leaving a bigger burden on individual taxpayers or more cuts to public services.

This, and the much fought over issue of a common consolidated corporate tax base — setting the rules on what company profits should be taxed where — will come up under the Irish presidency, but few expect too much progress will be made on them.

The Taoiseach will represent the EU at the G20 in Russia later in the year when the commission’s document is expected to represent the EU’s official view.