Seamus Coffey: Meant to be a target of global tax reform, Ireland has instead been a big beneficiary
There were dire warnings about the effect on Ireland about US corporation tax reform, but their multinational firms have a real presence in Ireland and it's no-tax jurisdictions that suffered profit migration in the wake of the reforms. Picture: Denis Scannell
Ireland’s corporate tax regime has been under intense scrutiny for the last 15 years at least, and significant international cooperation led to the agreement for major reforms under the process led by the Organisation for Economic Cooperation and Development (OECD). Significantly, at a national level, the US Congress passed a major reform bill in late 2017, the Tax Cuts and Jobs Act.
The advocates of global tax reform may not have had in their mind that a big beneficiary of the changes would have been Ireland. Ireland’s corporate tax regime came about from a desire to attract investments that would provide employment for Irish workers and end the blight of persistent emigration.
The changes over the past decade have seen no reduction in the flow of investment and creation of employment here. Ireland now has a triple treat: Tens of billions in corporate tax revenues.
When initially touted, most of the recent developments were seen as significant threats to Ireland’s economic model, but the projected negative consequences didn't come about for a number of factors.
The first was that foreign direct investments into Ireland, and the broader debate on corporate tax avoidance, was dominated by one set of companies: US multinationals. The strategies that attracted the global headlines such as the “double Irish” tax structure could only be implemented by US companies. There were no German, or French, or Japanese, or Australian companies using the structures. The reason was because the primary rules that facilitated the structures were embedded in the US tax code.
The second reason was perhaps a failure to appreciate the reality of the huge footprint US multinationals have on Ireland's economy. There is the archetypal view of tax avoidance involving letterbox companies and brass-plate corporate operations. But US multinationals have a very significant real presence in Ireland.
When corporate tax avoidance became a hot-button issue following the 2008 global recession, the OECD was tasked with proposing reforms to boost tax revenues for governments. The initial mantra of the OECD project was to “align profit with substance”.
The view was that too many companies were declaring profits in jurisdictions such as Bermuda and the Cayman Islands, where they had no presence, and avoiding making rightful tax payments in the countries where their activities were based. While it was true that many billions of profits benefitted from using such tax regimes, it was almost all to do with US companies.
It was US law that allowed the profits of its multinationals to leak out of the US and into no-tax jurisdictions. Few multinationals from Germany or France fed large amounts of profits through these jurisdictions. These countries did not have lax tax rules that allowed profits to leak out in the first place.
Some countries might have been eyeing the seemingly untaxed profits that ended up in the small island nations, but believing that aligning 'profit with substance' would benefit their exchequers was misplaced.
The narrative at the time was that the global corporate tax system was broken, and that if the gaping holes in the US regime could be closed then most of the egregious outcomes that drove the desire for reform would be eliminated.
However, if after the deliberations, the OECD had presented a set of recommendations on US tax reform it would have been viewed as a cop-out.
Instead, we got a 15-point action plan designed to get companies to align "profit with substance". This was already happening for most multinationals from most countries, and the biggest impact from the reforms was on US multinationals.
As the reforms were implemented, the profits from Bermuda migrated. In practice, there were two likely destinations: The US itself, where the companies had their main headquarters, and Ireland where the companies had their global headquarters or significant manufacturing operations. What we have seen is a massive surge in corporate tax revenues for Ireland, with US corporate tax revenues also rising significantly. Few of the benefits flowed to the market countries where the US companies had their customers.
Future reforms could see the corporate tax system pulled apart. Maybe, there will be a move to get companies to pay their taxes, not where the substance lies, but where their customers are located. The global tax system constantly needs to be updated, but major reforms would entail tearing down a system that has been in place for nearly a century. Such an outcome would be a threat for Ireland. But at this remove it seems unlikely.
For now, we are riding the crest of a wave, a wave that others, perhaps unintentionally, created for us.
- Seamus Coffey is a UCC economist and is a former chairman of the Irish Fiscal Advisory Council
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