Thursday 23 November 2017

How German firms find Ireland's corporation tax regime just fine

While Chancellor Merkel may urgently want changes in Ireland's rate, she risks damaging major German companies located here who are major beneficiaries of the 12.5pc regime

Angela Merkel claims Ireland's corporation tax is a key reason for the country's financial crisis. Ireland is host to over 300 German companies that benefit from the 12.5pc corporate tax rate. Several German banks are based in Dublin's IFSC
Angela Merkel claims Ireland's corporation tax is a key reason for the country's financial crisis. Ireland is host to over 300 German companies that benefit from the 12.5pc corporate tax rate. Several German banks are based in Dublin's IFSC

Emmet Oliver

A year before Ireland's controversial banking guarantee was agreed and the economy went into a deep slump, the German Ambassador to Ireland at the time, Christian Pauls, stood up and gave a speech at Clontarf Castle, Dublin, to a group of visiting German industrialists.

His remarks drew a sharp rebuke from the Irish government, indignation from the Irish media and a subsequent apology from Mr Pauls himself.

Mr Pauls poured scorn on Ireland's recent affluence telling his audience that "junior ministers earn more than the German chancellor" and that "20pc of the population are public servants".

He described the country's health service as chaotic with hospital waiting lists that would not be tolerated elsewhere.

He claimed that Irish doctors were offered annual salaries of €200,000 to work in the public sector, but turned their noses up at what they called "Mickey Mouse money".

While Mr Pauls later apologised (and clarified) many of his comments, there was little doubt he was giving voice to opinions of Ireland held on a widespread basis in Germany.

In addition, if Mr Pauls was standing up in the same venue today, he probably wouldn't find himself apologising so fulsomely. Instead he might be praised for at least identifying some of the ills (rampant wage inflation across the Irish economy) that brought about Ireland's economic calamity.

The German view of Ireland's downfall -- such as it exists -- has two central planks, the Irish paid themselves too much and the Irish let their public sector get out of hand.

But recently Mr Pauls' own Chancellor, Angela Merkel, did her own quick fire diagnosis of Ireland's economic malaise. Corporation tax, Merkel said amid election campaigning in Hamburg, was a key reason for the Irish banking crisis.

Unlike the reaction to Mr Pauls' comments four year ago, Ms Merkel's comments were greeted in Dublin with some puzzlement. While the Irish banking crisis had a multitude of causes -- easy credit, poor corporate governance, over leveraged balance sheets, lax regulation -- nobody before that moment had pinpointed corporation tax as a cause.

Even now it is hard to see a direct connection.


Was Ms Merkel claiming that Ireland's corporation tax revenues were so puny during the boom years, that the Department of Finance was forced to depend on other types of revenue raising (ie property) to make up the difference?

In other words did Ireland's corporation tax regime fuel Ireland's property boom, albeit indirectly? Maybe.

Either way the Merkel comments underlined once again the at times irrational dislike the German political classes appear to have for the 12.5pc tax on corporate profits operated by Ireland.

The political classes, however, are one thing. What of German business? They appear to have a very different view.

Ireland is now playing host to 300 German companies, many of them multinationals, employing more than 20,000 workers. The names of German companies here -- the vast majority utilising the 12.5pc rate -- reads like a who's who of German industry -- SAP, Siemens, BASF, Allianz, Bayer, Bertlsmann and Hannover Re.

Far from being so-called "brass plate'' operations, the presence of German industry here is substantial and real.


For example, Hannover Re writes hundreds of millions of euros each year in re-insurance business for north America and the UK via its Irish operation, Hannover Re (Ireland). It writes premiums totalling €424m a year from an office in the IFSC for example.

The vast majority of these companies are benefiting directly from Ireland's 12.5pc corporation tax rate. In the case of one subset of this group, financial services, the benefits are significant and any radical changes to Ireland's 12.5pc rate is likely to damage these companies and the unique units they have established here, often in the IFSC.

While the German government has been less vocal in the Irish corporation tax debate than the French government, there is no doubt a radical tax harmonisation plan wouldn't be all one-way traffic for German industry and German banking.

This is because German industry and German financial services already derive significant benefits from the current Irish regime. The obvious benefit is the actual low rate of 12.5pc, versus a headline German rate of 30.2pc, according to IDA figures.

One tax advisor who advises several German (and US) companies located here told the Irish Independent a rise in the rate would have a "huge impact'' on German firms here.

"They have substantial operations here in terms of employees and assets and it would have a huge impact,'' he said.

He said that at the moment German companies were able to keep profits from their overseas subsidiaries out of the hands of the German exchequer and in some cases even profits that later get repatriated back to Germany cannot be touched, he explained.

No tax advisor in Ireland believes a modest one or two percentage point increase in the 12.5pc rate is going to drive German companies away.

But the German banks here have already been reducing in number and last year the group which represents them warned they could depart the market if financial regulator Matthew Elderfield pressed on with plans to change the corporate governance rules of IFSC banks.

The 12.5pc "brand'', as tax advisors describe it, is clearly important to these firms, although not everything. The regulatory environment is also important.

But the benefits of Ireland's tax regime generally go much further than the actual rate.

There are Ireland's rules on holding companies, for instance.

Holding companies are companies that are set up to own the stock of other subsidiary companies. They are usually just set up to hold the shares of these other companies, rather than trading in their own right.

Holding companies

Holding companies in Ireland benefit from exemptions that can bolster firms based here generously.

For example recently a Middle Eastern investor used an Irish holding company to buy and hold his shares in a large listed German manufacturer, according to Arthur Cox, the Dublin-based law firm, which recently targeted German investors in a special note.

Ireland's regime made his investment in that company more attractive.

That unnamed investor could dispose of his shares and be exempt from Irish capital gains tax provided a small number of conditions are met.

A number of German funds are also using Ireland's regime on special purpose vehicles (SPVs) to house their shares in listed German companies and their holdings of German debt. These structures benefit from a range of tax benefits, crucially their profits are taxed at 12.5pc as they are treated as trading companies.

Equally German companies can park their intellectual property portfolios here and get their overall corporation tax rate down to as low as 2.5pc, experts pointed out.

Another area exploited by German companies has been cross-border mergers that involve Ireland. These generally have tax benefits for the companies merging. German banks like LBBW and Sachsen LB have both done mergers involving Irish entities, although what ( if any) tax benefits may have come from these arrangements is not known.

The regime for funds listing here is also very liberal. There is no Irish tax levied on regulated funds which marks Ireland out from many other jurisdictions. According to Arthur Cox, numerous German investment managers and promoters have made moves to locate funds here.

Allianz Global Investors, for example, has a fund management business here, which is able to avail of the 12.5pc rate.

While there are likely to be billions of euros available in tax reductions via these various regimes operated by Ireland for German companies, it is the tax on plain old trading profits that matters most to German companies located here.

True German global leaders have put down roots here in recent years, most notably SAP, one of the world's largest software companies.

While its chief company here SAP Ireland pays UK tax rates, it owns a large subsidiary here called Business Objects Software, where turnover is almost €500m a year and SAP recently injected equity into this business of €1.9bn.

On profits of almost €150m, this company paid corporation tax of €22m, but after adjustments this came to €16.1m.

The biggest beneficiaries of Ireland's corporation tax regime are the German banks who are mainly based in the IFSC. Collectively they are: Commerzbank Europe (Ireland), DZ Bank Ireland, EAA Covered Bank, Helaba Dublin Landesbank, Naspa Dublin and WGZ Bank Ireland.

Collectively they are reporting profits of over €100m a year, but were far more profitable before the financial collapse. The majority of the banks benefit from Ireland's 12.5pc corporation tax rate, but profits are not the only reason these banks are here.

They also have large balance sheets parked in Ireland -- for instance West Lb have a covered bond bank in Ireland with almost €10bn of assets, according to its last balance sheet.


All of this investment is not going to disappear if changes are made to Ireland's corporation tax, most observers agree.

One senior Irish banker says German banks would be reluctant to move assets to other jurisdictions because it could involve taking write-downs on these assets, at a time when capital requirements are already putting pressure on German banks.

If German companies ultimately have to dismantle their Irish operations, due to higher taxation rates here than before, the logistics would be considerable. Take for example Allianz, the Munich-based insurer, which has several operations based here.

One of these is Allianz Worldwide Care, which sells insurance policies to expats worldwide, but mainly to Germany and the UK. But from its Dublin base, the company also does business in north Africa, the Channel Islands, Hong Kong and South America.

Countries outside the EU are becoming more important for this company, with 53pc of premiums now written for non-EU customers. It is the kind of German company Ireland has been attracting over recent years and it also avails of the 12.5pc rate, which it says "is not expected to change in the foreseeable future" in its current accounts.

This company can essentially pick any European country to locate in under the freedom of service provisions of EU insurance law.


Whatever plans emerge from the summits ahead in Brussels, if change comes for local German Irish companies, exemptions are unlikely, says Brian Keegan, director of tax at the Chartered Accountants of Ireland.

"A key aspect of Ireland's 12.5pc corporation tax rate is that it applies across the board -- to manufacturing, to services, to banking. EU law doesn't permit a distinction between the different types of company activity when it comes to tax rates."

He says Ireland has still got a competitive advantage but it is shrinking. "Most countries across Europe have cut their corporation tax rates in the last 15 years. The average corporation tax rate in European countries used to be around 35pc. Now it's around 23pc."

The evolving debate in Europe now talks about the tax base, rather than the tax rate. Keegan says this is important for individual companies, including German firms in Ireland.

"The corporation tax base, that is, the amount of company income that gets taxed, is just as important as the rate of tax. Changing the base would have a dramatic effect on the amount of tax collected for different countries,'' he states.

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