Ireland needs to start facing down the ‘tax haven’ taunts

The contribution of US multinational companies to the Irish economy is immense. 

There are around 1,000 US companies with operations here, and they provide around 100,000 direct jobs.

Each year, these companies pay €6bn in wages to Irish employees, spend €3bn on fixed capital, and, up to 2014, contributed €2bn in corporation tax to the Exchequer. That is €11bn a year, every year.

This omits other contributions which are difficult to quantify, such as Vat and other taxes, indirect expenditure on security, logistics, catering, cleaning, and other services, as well as thousands of agency workers used by the companies.

The inclusion of largely unseen things like outsourced manufacturing, quality control and research and, of course, expenditure on professional services, puts the annual contribution north of €15bn.

There is substantial commentary that US multinationals are in Ireland solely to avoid corporation tax. 

This sometimes ignores the fact that we collect a lot of corporation tax. In 2015, corporation tax revenues surged to €6.7bn. If it was so easy to avoid our corporation tax how do we collect so much? 

Around 80% of corporation tax receipts come from foreign-owned companies.

We do know US multinationals have complex arrangements to try and minimise their overall tax bill. Everybody tries to minimise their tax bill and, while the strategies used can appear egregious, none of them is illegal.

The main determinant of the strategies pursued by US multinationals is the US tax code. The taxation of multinationals is complex but is based on a pretty fundamental principle: corporate profit-taxing rights are granted on the source principle. 

That is, countries can tax the profits from risks, functions, and assets that are located in their countries. 

Although some of the world’s largest companies have operations in Ireland, we can only tax them on the profit they generate from their activities in Ireland.

Apple alone has annual profits of $60bn. This is not attributed to Ireland because the risks, functions and assets that generate this profit are not located here. 

Apple’s 5,000 employees are important for the company, but they are not the reason the company makes $60bn in annual profits.

At 35%, the US has the highest corporate tax rate in the OECD. However, the US tax code is incredibly complex and has numerous peculiarities. 

One of these is the concept of ‘deferral’ for corporate income taxes, which means US multinationals can delay certain tax payments until the profits are transferred to US-incorporated entities in their corporate structure. The primary objective of many tax strategies used by US multinationals is to engineer such a deferral, sometimes permanently. 

These strategies do not affect the tax paid in countries such as Ireland, where they have manufacturing or trading operations, or countries around the world where they have customers. 

The tax paid in these countries is based on internationally-agreed standards for transfer pricing and permanent establishment.

The profits US multinationals earn are based mainly on activities that take place in the US and assets that are held there. 

As a result of the deferral provisions in the US tax code, some companies create an artificial division between their US and non-US source profits and give the appearance of very low tax rates on their non-US profits.

The reality is that most of the profit is sourced in the US, and the companies owe US corporate income tax on those profits. It is not the case that the profits are untaxed. 

The taxing right is granted to the US. If the US has deferral provisions that allows companies delay the payment, that is their business and, in the case of Apple, we can see that they are making it their business.

At a US Senate hearing in May 2013, there were accusations against Ireland of special tax deals and 2% tax rates. 

That was proven to be untrue, but the European Commission is investigating whether more of Apple’s profits should be subject to Ireland’s 12.5% tax. And now the vacuous noise of May 2013 is being shown up for the nonsense that it was.

Now, the US Senate Finance Committee is raising concerns that a large portion of Apple’s profits may be taxed in Ireland because it will be the US that foots the bill through a reduction in the tax owed there. 

The US Treasury Secretary has written to the Commission stating that while they don’t collect the tax until repatriation the US system of deferral “does not give EU Member States the legal right to tax this income.”

If the EU rules that Apple owes billions of corporation tax to Ireland, we can be guaranteed that there will be another US Senate hearing and this time they won’t be calling us a tax haven; they’ll be calling us a tax thief.

* Seamus Coffey is an economist at UCC and is a member of the Irish Fiscal Advisory Council. He is writing in a personal capacity.


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