Friday 28 October 2016

Brendan Keenan: Once again, Ireland finds itself a mere pawn in a much bigger game

Published 10/09/2016 | 02:30

European Competition Commissioner Margrethe Vestager with Minister for Finance Michael Noonan during a visit to Dublin Castle in 2013. Photo: Mark Condren
European Competition Commissioner Margrethe Vestager with Minister for Finance Michael Noonan during a visit to Dublin Castle in 2013. Photo: Mark Condren

William or James; Wellington or Napoleon; King or Kaiser? The story of Ireland often seems to be that of a long-suffering pawn caught in the struggles of great powers. It feels a bit like that again.

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It is not a comfortable feeling. Reading Irish history is often uncomfortable for a modern Irish citizen. No democrat could be on the side of the Stuart autocrats or the Prussian militarists but they were our enemy's enemy, and therefore our friend.

By that measure, if the EU Commission's competition arm is the enemy of Apple, does that make Apple our friend? Ever since the ruling was published, many Irish people have been writhing in discomfort at that thought.

Even Oliver Cromwell had the better arguments, with his belief in the power of parliament and limitation of kings, but that was no consolation for those on the receiving end of his fire and sword. No comparison whatsoever is intended with Commissioner Margrethe Vestager; except in the sense that many of us agree with her, but fear what will happen if she breaches the walls of our tax regime.

This is a 20-year war. It seems that the Apple arrangements were first devised in the early 1990s, when the same state-aid rules deemed that it was illegal to have zero corporation tax for manufactured exports, but not for home sales.

The government of the day, led by Charles Haughey, responded with a 10pc profits tax for all manufactured goods. This meant a loss of revenue from firms making stuff for the home market, but did succeed in keeping the multi-nationals and attracting new ones.

The commission was not happy, and nor were countries which thought some of this investment, and even more tax, would have come to them. In due course, the 10pc tax itself was ruled illegal for discriminating against non-manufacturers.

To everyone's astonishment, Ireland decided to apply a 12.5pc rate to all corporate profits, down from the standards rate of 35pc. Even the banks benefited - although they were hit with a kind of compensatory tax.

In both cases, it was clear that the law was on Brussels' side. All must be treated the same. So the universal 12.5pc rate appeared to have put the case to rest. Until now. Battle has been joined again.

A belief that the national tax rate was sacrosanct may have made Ireland complacent about responding to the growing international concern over aggressive tax avoidance by global companies, just as the Irish corporate tax system was being turned into a monstrosity by tax accountants.

As we have seen so often in the past, complacency and inertia disappear with impressive speed when a greater fear emerges. The stateless companies used by Apple have been abolished. This week saw firm action on the tax strategy used by so-called vulture funds to shield the huge profits made by them on property purchases - mostly from the Irish state.

They tell the whole tale in miniature. The funds were using rules designed to encourage operations in the financial services centre. It is not just big IT firms that make use of the Irish tax regime: the centre employs around 40,000 people, mostly handling foreigners' savings, and the tax system is central to its success.

Albert Reynolds once boasted that Ireland did not do brass plates. Now the country must gleam with them in a satellite image. Difficult though it is, Irish governments will have to be more vigilant in closing off unwanted loopholes and avoidance schemes. That is, if there is enough such activity left to worry about.

In November, the commission is expected to make another attempt to introduce a corporation tax regime for the whole EU.

The essence of it would be that profits tax would be distributed according to where sales are made - precisely the point made by Ms Vestager.

Any such system would reduce the attraction of Ireland's low rate and international tax arrangements. How much it reduces them will depend on the details. There seems little doubt that Ireland's already limited bargaining power to negotiate on those details has been eroded by the Apple case.

Unlike those historical analogies, this time there is no clear choice of allies for Ireland. The best contender - especially after Brexit - is the United States. Yet even President Obama was drawn into the fray over the tax avoidance "inverted" takeovers of large US corporations by small ones based in Ireland.

Leaving the EU (and the euro) alongside Britain makes no sense. Aside from the horrendous costs, access to the EU market is the other main reason US multi-nationals locate here. The idea that we could collect much larger sums of tax from the foreign firms by changing the tax rules is equally impractical.

Just 14 of them contribute half of all Ireland's corporation tax - about €3bn a year. Perhaps they might be willing to pay a bit more before making other arrangements elsewhere, but, even if they were, it would not transform total tax revenue of €45bn. If they weren't willing, much of the €3bn could disappear, along with the income tax, PRSI and Vat which the companies generate.

The sad thing is that Ireland's other much-touted advantages - young population, English-speaking, good education, efficient legal system - were all genuine enough but most have been allowed to fritter away. They have not kept pace with economic requirements, so that tax advantages are now more important than they were 20 years ago.

Fixing that will take a long time, even if a start were made now, which is not the case. Changes to the European tax regime, if they come, will arrive a lot sooner and we could find ourselves once again a casualty in a much bigger game.

Irish Independent

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