Business Irish

Friday 19 September 2014

Shining a light on a previously obscure area of our tax laws

Published 06/06/2014 | 02:30

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The EU is set to launch an investigation into the Revenue Commissioners here
The EU is set to launch an investigation into the Revenue Commissioners here

Enda Kenny was doing the rounds in Palo Alto yesterday, visiting some of the hundreds of Californian companies employing people here.

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As usual, there were the smiles for the camera and a few well timed announcements of IDA-supported jobs.

Back in Brussels, things were not quite so media friendly as news leaked out that European competition officials are about to begin a formal probe into whether the Revenue Commissioners have been breaking their own rules when they do deals with multinationals.

We are all feeling a little paranoid about Europe these days so perhaps it is worth saying what this probe is not. It is not an attack on the 12.5pc corporate tax rate.

Nor is it an attack on the average US manufacturing company that makes widgets. European leaders and bureaucrats appear to accept that there is no appetite across the continent to force this country to scrap the low corporation tax rate.

What is at stake is something much more complex and something where there is plenty of room for disagreement – transfer pricing.

Transfer pricing rules basically determine whether companies can sell services such as software to some other unit within a company and at what price. There are few hard and fast rules.

Technology companies are particularly interested in transfer pricing because so much of what they do can be shifted over the internet from one jurisdiction to another.

Software companies, for example, sell most of their programs online so it is very difficult to determine where taxes should be paid. They like to use locations such as Holland and Ireland combined with tax havens such as Bermuda to slash their tax bills to almost nothing. The more profit that can be booked here, the better for these companies.

Nobody paid much attention to transfer pricing until a few years ago. It was the preserve of a highly paid accountants who acted on behalf of the multinationals.

They would then negotiate with officials from the Revenue Commissioners.

The probe to be announced next week will take many months, if not years, to complete. It may well then conclude that there was no state aid or it may be challenged and end up in legal limbo for years to come. We have no idea of the outcome but the probe will shine an interesting light on a previously obscure area of our tax laws.

Irish Independent

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