Wednesday 17 December 2014

Act now on corporation tax to avoid worse pain later

Published 26/07/2014 | 02:30

President Barack Obama is zooming in on Ireland's corporation tax regime
President Barack Obama is zooming in on Ireland's corporation tax regime

WE were warned! Last summer, two of the most influential senators in Washington branded Ireland a tax haven. Earlier this year, the governor of California made barbed comments about our tax system while the Taoiseach was in the room.

The European Commission began investigating our relationship with Apple. Now President Barack Obama himself has cited Ireland in an attack on US firms that move abroad to avoid taxes back home.

The Government is reacting with the usual guff. President Obama's comments are being "studied" and even "welcomed" in some quarters. The truth is that the Government has missed a trick; we should have reformed our tax system years ago and acted to prevent it from becoming a global object of derision.

The reforms that will now be demanded from the international community will almost certainly be much more severe than they would have been if we had responded quickly.

Instead, we will now have to make many more compromises than would have been necessary; something that will hurt the national interest over the long-term.

How did this come to pass? How did this Government (and the last one) believe that they could resist the tide of international pressure which has swept away centuries of secretive Swiss banking laws and forced countries such as the Netherlands and Luxembourg to revise their tax codes?

The simple answer is revealed in the Irish Independent today. It is the same answer that explains so many of our previous tactical errors; hubris and a weakness for our own propaganda.

All that access to the White House on St Patrick's Day, support for the Democratic Party and all those Shannon stopovers have allowed us to believe that we have a special relationship with the United States.

The truth is that every country in the world believes it has a special relationship with the United States but in most cases it resembles an unrequited teenage crush. We are no different.

Our political elite, wary as ever of criticism, has ignored the many voices here warning that our position is untenable.

Take the analysis from Conor O'Brien of KPMG contained in the draft report on our tax system obtained by the Irish Independent's Daniel McConnell.

The accountant writes: "We shot ourselves in the foot, a great deal of the international press coverage arose as a result of international news agencies picking up on reports or articles by Irish persons."

This is what passes for high-level analysis in the Dail these days; a modern version of 'kill the messenger' from somebody whose employer stands to make money from maintaining the status quo.

Mr O'Brien's explanation is a not too subtle accusation of treachery. Is it not those who counsel inactivity who best deserve that moniker?

What should we do at this late stage beyond closing the stable door?

The first thing we need to do is talk. The country may be happy with the notion that US companies can save hundreds of millions of dollars by switching their tax domicile to Ireland but surely we can bring ourselves to understand why Americans do not share that joy?

Let's whisper it to ourselves; these "inversions" exploit our tax system to maximise profits. President Obama was being polite when he said the companies were "gaming the system".

The good news is that they do almost nothing to help the real economy inhabited by anybody who is not an accountant in one of Dublin's big tax firms. So we should cut them loose.

This loophole will be closed down by Washington within months but we should move first to ban inversions by the simple expedient of setting up a one-man quango with the power to ban companies moving here if the primary intent is an inversion.

That would stop the worst abuses, but we must go further if Washington and other G20 countries are to call off the dogs of (economic) war.

Last year, Google's Irish unit paid just €27m of corporation tax on sales of €17bn. That's all perfectly legal but there is something wrong with this. Companies like Google should be paying more tax in more countries.

That will involve difficult conversations with some of our favourite US multinationals. But we should not lose sight of the reality that the search engine is different to the many other US companies stampeding to shift operations here.

Google really does have genuine operations here. It employs around 2,400 people in the capital, dominates Dublin's Docklands and makes a real contribution to the economy by paying high salaries to thousands of people.

We need, even at this late date, to teach other governments and their voters the difference between the real corporate citizens and those flying a flag of convenience. That means an honest appraisal here and then tidying up aspects of our tax code in a convincing and morally defensible manner.

We have to accept this will end up costing money and jobs but the alternative will be worse. Whining about media coverage, as the latest draft Oireachtas Finance Committee report does, is a recipe for disaster.

Irish Independent

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