Friday 27 April 2018

Controversial tax strategies brainchild of O'Rourke's son

PricewaterhouseCooopers tax chief stoutly defends Ireland against 'tax haven' claims, writes Jesse Drucker

Player: Feargal O'Rourke hails from a strong FF dynasty
Player: Feargal O'Rourke hails from a strong FF dynasty

Jesse Drucker

Google, Facebook and LinkedIn wound up here in Ireland because they could reduce their tax bills. Their success led US politicians to brand us a tax haven that must change our ways.

The grand architect of much of that success is Feargal O'Rourke, the scion of a political dynasty, who heads the tax practice at Price- waterhouseCoopers in Ireland. He talks to both multinational companies and politicians on tax policy – and often sounds like Ireland's number one defender.

"Under no circumstances is Ireland a tax haven," O'Rourke says from his corner office above the Liffey.

"I'm a player in this game and we play by the rules."

In that game, multinational companies find ways to legally avoid taxes in the countries where most of their customers are.

Google cuts billions off its tax bill each year by sending profits through Ireland to a mailbox in Bermuda; Facebook sends them through Ireland to Grand Cayman; LinkedIn uses Ireland en route to the Isle of Man. O'Rourke advised each company.

He also persuaded regulators to eliminate a withholding tax on profits that corporations move out of Ireland – while separately advising his cousin, the late Brian Lenihan, then finance minister.

Such concessions now expose Ireland to a political backlash. Across Europe, officials have grown increasingly frustrated with corporate tax avoidance as individuals are asked to pay more and sacrifice in the name of austerity. German politicians are urging Ireland to alter the tax system that lured multinationals like Apple and Google. The EU is even probing our corporate tax deals.

Cracking down on tax avoidance by multinational companies has emerged as a priority for the Group of 20 nations and the EU Commission. It costs the US and Europe at least $100bn a year.

While Ireland recently announced plans for a modest tightening of its corporate tax rules in response to the criticism, the country remains highly attractive to multinationals as a way station for their profits.

O'Rourke and other accountants like him "think up these tax strategies and the impact is tens of billions in lost tax revenue in Europe, the US and less-developed countries", says Jim Stewart, associate professor of finance at Trinity College's school of business. "He's a very aggressive leader of the tax-avoidance industry here."

O'Rourke often speaks loudly and excitedly, gesturing with his hands, yet is careful not to let disagreements turn into arguments. He said the finger-pointing at Ireland and at his profession is misdirected, and politicians around the world complaining about tax avoidance have only themselves to blame.

"Why should Ireland be the policeman for the US?" he asks. "They can change the law like that!" He snaps his fingers. "I could draft a bill for them in an hour."

Attracting foreign companies has been integral to Ireland's economic success. It boomed in the 1990s as companies like Apple, Intel, Dell and Microsoft took advantage of its cheap and educated workforce. US multinationals helped cut our unemployment rate to less than 4 per cent from almost 14 per cent.

After the tech bubble burst in 2000, Ireland morphed from a vigorous economy into a tax haven with slower job growth, says Stephen Kinsella of UL business school.

Ireland's transformation into a hub for tax avoidance can be seen in US Commerce Department data. In 2010, US companies attributed $95bn in profits to Irish subsidiaries, up more than sevenfold from $13bn in 2000. Actual employment at those units barely grew during that decade, and the companies' reported tax rate plummeted to 3 per cent from 9 per cent.

Many of the Irish subsidiaries have no offices or employees and pay no income taxes. They are merely ways to move profits out of countries where sales take place to mailbox subsidiaries in zero-tax island havens.

"What we celebrate is that we attract more foreign direct investment than anyone else in the world," Kinsella said. "What we don't celebrate is that we deliberately turn a blind eye to companies using tax loopholes that we are probably aware of to avoid tens of billions in tax around the world."

At PwC, O'Rourke oversees a staff of 500 tax accountants and lawyers, including teams in San Francisco, San Jose, New York and London. He has an apartment he rents out in the south of France, near Cannes, and lives with his wife and two children in a suburban Dublin house that was listed for sale recently for almost €1.4m. The house is no longer on the market.

The O'Rourke client whose tax strategies have attracted the most attention is Google, based in California. It uses an elaborate structure that routes its European sales through a subsidiary in Dublin. The unit in turn pays billions in royalties to another Irish company for the rights to Google's various patents.

Because the second unit is managed in Bermuda, it isn't "tax resident" in Ireland and thus doesn't owe Irish taxes.

This technique, known as a 'Double Irish', results in the majority of Google's worldwide profits avoiding income tax anywhere in the world and reduced the company's worldwide income tax bill by $2.2bn last year.

For years, Irish tax policy impelled Google to take one extra step. If those payments from the Irish unit went directly to Bermuda, they were subject to an Irish withholding tax, because Ireland doesn't have a tax treaty with Bermuda. So Google, like some other companies, has avoided the 20 per cent withholding tax by moving those payments through a unit in the Netherlands, a tactic known as a 'Dutch Sandwich'.

O'Rourke set out to simplify those structures, eliminating the need for a Dutch intermediary.

In October 2007, he met at Google's Dublin headquarters on Barrow Street with Tadhg O'Connell, the head of the Revenue division that audits tech companies.

O'Connell is understood to have rejected O'Rourke's request that royalties like Google's should be able to flow directly to units in Bermuda and Cayman without being taxed. O'Connell, who left the Revenue earlier this year to work for Deloitte, a competitor to O'Rourke's firm, declined to comment. A Google spokesman also declined to comment.

In 2008, O'Rourke's cousin Brian Lenihan became finance minister, setting much of the Revenue's policy.

Two years later, after continued entreaties by O'Rourke, the Revenue's office announced that it would no longer impose withholding taxes on such transactions.

"We take the view that if there is valuable intellectual property outside of Ireland, it's not reasonable for us to jump on that," said Eamonn O'Dea, now of the corporate, business and international division of the Revenue.

While acknowledging he considered himself an adviser to his late cousin, O'Rourke said they never discussed withholding tax and it didn't come under the Department of Finance's purview. He didn't want to be accused of exploiting his family ties to benefit clients, he said.

"I have been extraordinarily careful over the years to ensure no one could ever make a valid criticism of me that I got where I am because of family background," he said.

Even as he promotes Ireland's current tax practices, O'Rourke foresees a new order. Changes in Ireland and worldwide are inevitable, he said, primarily because the OECD is targeting tax avoidance. He predicts we will eventually prohibit companies like Google and Apple from setting up units in Ireland that don't owe income taxes here.

If O'Rourke's prediction comes true, the 'Double Irish' will disappear from the tax avoidance lexicon. Once it's gone, he said, paraphrasing Richard Nixon: "You won't have Ireland to kick around anymore."

©Bloomberg

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