Brand Ireland sailing dangerously close to wind – now more than ever we need Plan B
Published 14/06/2014 | 02:30
Is Ireland a tax haven, as critics of our corporate tax arrangements allege? That was never our intention – the laws were designed to attract inward investment and create jobs. But in the court of international opinion, we're sailing dangerously close to the wind.
And there has been collateral damage to our reputation. Corporate tax avoidance is currently under the international spotlight, as is Brand Ireland because of the multinational-friendly tax regime we operate. The tax system doesn't set out to treat everyone equally – its purpose, after all, is to take more from those with more to give. Except some of the global Goliaths have subverted that principle.
With them, the bigger you are the less you contribute. Especially if you employ a phalanx of accountants and lawyers to scour tax legislation for escape clauses. The minuscule tax bills paid by whopper companies with no frontiers, such as Apple, show how lucrative that plan can be.
Last Wednesday, the European Commission stepped up an existing investigation into Ireland's tax arrangements with Apple: the probe will centre on whether the Apple deal breaks state aid rules. Starbucks in Holland and Fiat in Luxembourg are also under scrutiny.
Let's focus on Apple. A bite has been taken out of its image following publicity about its complicated creative accountancy practices. Apple uses its Irish subsidiaries to reduce the tax bill owed on non-US income – and when I say reduce, think in terms of a vanishing act. This has prompted accusations that Ireland is a tax haven.
Unfortunately, our critics have a point. But we are conflicted, as our American cousins would put it, because US companies directly employ more than 115,000 staff here. Apple alone employs more than 4,000. If we clamp down, firms will shift elsewhere, and jobs will be lost.
Fundamentally, our industrial policy leaks like a sieve. If changes are made to international tax treaties, those jobs may go anyway – so a Plan B is needed. Do we even have one?
Ireland is an appealing location for multinationals and it's not our winsome charm attracting them. We hear a lot of blah-blah about our English-speaking, educated workforce. No doubt, those factors are the cherry on top. But the real draw is our laws which help the corporates to keep their profits rather than hand them over to tax authorities. Not just Apple but Google and others. An enormous questionmark is hovering above what we allow the corporates to get away with. A US Senate committee investigation last year accused Ireland of giving Apple special tax treatment, when it revealed that Apple cut billions from its tax bill by declaring Cork-registered companies as not resident anywhere in the world. One senator called it "the holy grail" of tax avoidance. Irish politicians insist that our corporate tax arrangements have not turned us into a tax haven. But this is bluster and doesn't stand up to scrutiny. Take the 'double Irish', a practice which Apple has used enthusiastically. Rather peculiarly, Irish tax law allows two companies to be set up alongside each other, one resident in Ireland and the other in a tax shelter, such as those found in the Caribbean. Money can be transferred from Ireland to the tax-sheltered company, and held there offshore without incurring a liability. Apple's various Irish arrangements led to an effective tax rate of just 3.7pc on its non-US income last year, according to its annual report.
Here's what the US congressional report into Apple's tax arrangements said: "Apple Inc established an offshore subsidiary, Apple Operations International, which from 2009 to 2012 reported net income of $30bn (€40.6bn), but declined to declare any tax residence, filed no corporate income tax return and paid no corporate income taxes to any national government for five years."
While our Minister for Finance Michael Noonan revised the treatment of so-called stateless companies in the last Budget, concerns remain that multinationals are paying a significantly smaller proportion of public sector costs in all the world's developed economies.
Clearly, tax loopholes need to be closed off, and tax laws updated. But are the multinationals too enormous for governments to check? Control can only be exercised if a common tax regime is accepted internationally, and applied in tandem. No mean feat. However, if there is no agreement, when one country gets tough on the corporates, another country rolls out the welcome mat.
Politicians have taken to grandstanding about the morality of the corporates' behaviour. But it is pointless attacking the result without addressing the cause. Multinationals are only doing what they were designed to do: maximise profit, minimise tax liability. Expecting them to comply voluntarily with the spirit rather than the letter of the law is like expecting tigers to eat tofu when steak is on the menu.
Enda Kenny describes Apple in Ireland as a "very important employer". But if the State is seen as a key ingredient in Apple's tax soufflé there may be a backlash worldwide against Brand Ireland. The Taoiseach felt its sting in California recently with jibes from the governor.
Governments are part of a global economy and must compete for foreign direct investment. Ireland has managed to do that successfully. But if international tax rules change, what are we left with? Tumbleweed where the corporates used to be located.
Over-simplifying, Europe talks about a level playing field, but that's not possible with a tiddler like Ireland and an industrial powerhouse like Germany. Instead, we have to try to be more competitive, or more innovative.
So Plan B must be to concentrate on investing in research, and home-grown industry. And we need to crack on. As a policy, trusting the corporates to stay because they like us hasn't a prayer of working.