The great corporation tax debate
The US tax code allows some companies to defer their tax liabilities abroad, and it's not Ireland's fault that they use our system to benefit, says Seamus Coffey
How much Corporation Tax is paid in Ireland? This is a relatively easy question to answer. In 2013, €4,270m was collected in Corporation Tax receipts.
This was 11.3pc of overall Exchequer tax revenue and equivalent to 2.6pc of Gross Domestic Product (GDP).
The revenue generated by Corporation Tax in Ireland is in line with the EU average.
The answer that Ireland is in line with EU averages does not generate front-page news.
This is because it is usually a different question that attracts attention: how much Corporation Tax is paid by companies in Ireland as a proportion of their profits?
This is the effective tax rate.
The answer to this is a function of the tax and profit figures used. Gauging the amount of tax paid in Ireland is straightforward. Determining the level of profits earned is less so, particularly when many of the large companies operating in Ireland are multi-national corporations (MNCs) that have activities in numerous jurisdictions.
By referring to all the profits earned by these MNC subsidiaries it is possible to end up with very large profit figures and relative to the tax paid in Ireland these can give rise to very low effective tax rates. Figures giving effective tax rates as low as 2.2pc are sometimes quoted.
Irish GDP is around €165bn. The distribution of this can be roughly broken down as follows:
* €70bn of compensation paid to employees.
* €20bn of mixed/self- employed household income.
* €20bn of product taxes collected by the government.
* €55 bn for the Gross Operating Surplus of companies.
Gross Operating Surplus is a measure of the profitability of companies and once depreciation of €8bn is deducted a net figure of €47bn results. Comparing this to the amount of Corporation Tax paid gives an effective rate of around 8.5pc.
From 2003 onwards the average effective corporate tax rate using this measure is just under 11pc
This can be reconciled with figures from the Revenue Commissioners who assess the corporate profits using accounting and tax principles.
For 2011, these show a Taxable Income total of €40bn and a Tax Due of €4.1bn which gives an effective burden of 10.5pc. This has also averaged around 11pc since 2003.
In recent years the profit figure in the Revenue data has been lower than that reported by the CSO mainly because of the use of previous trading losses to offset current income.
In 2011, firms used €9.5bn of previous losses against their current year profits. Back in the boom times the capital gains of companies caused the Revenue measure of profits to be greater than the CSO's.
Over time these effects largely balance out and both the CSO and Revenue statistics produce an average effective corporate tax rate for profits in Ireland in the region of 11pc.
So why the confusion? The low-single digit estimates of the effective tax rate are derived when the total non-US profits of US MNCs are compared to the amount of corporate income tax they pay outside the US. These are the global activities of these subsidiaries and the data is not limited to the Irish operations.
Many of these US companies do have significant operations in Ireland and have Irish-incorporated subsidiaries as part of their global structure. However, the amount of profit attributed to Ireland can be small if they have limited risks and functions in Ireland.
Google does not generate its massive profits from 2,000 or so sales staff based in Dublin. These are replaceable and moveable without any significant cost or loss to Google.
Google's profit is derived from the invention of a dominant search engine for the world-wide web. The staff currently employed in Ireland had no role in the development of this.
Under the current system of corporation tax, Google's profit is attributed to the intellectual property rights it holds for the ideas and innovations it has developed. These were created in the US and Google is subject to the US's 35pc rate of corporate income tax on its worldwide profits.
However, the US has a system of deferral where the actual payment of this tax liability on non-US profits can sometimes be delayed until the profits are formally repatriated to the US. US MNCs can use their international operations, some of which are in Ireland, to avail of these deferral provisions in the US tax code which can be permanent if the profit is never repatriated.
Apple's financial statements show that it has a deferred tax liability of $16.5bn (€12bn).
Apple also has an unrecognised deferred tax liability of $18.4bn on profits it does not currently intend to repatriate to the US.
That is $35bn of tax which is due to the US but is deferred under provisions of the US tax code.
Apple's effective tax rate on its non-US profits appears low because the US allows a deferral on the US tax owed by Apple on these profits. That is not Ireland's fault.
Ireland's low tax rate is undoubtedly a factor in the decisions of US MNCs to set up here but the ability to use the US deferral provisions is also important.
This can be done in many countries but Ireland has built up a reputation as a stable and effective investment environment and maintained it even during the trauma of the EU/IMF programme.
Under the current system the rights to collect corporate income tax on products designed in the US, manufactured in China and sold in Australia are attributed to the US.
Recent complaints against this should be recognised as arguments against the system of international taxation, not Irish Corporation Tax.
The international system could change so that more of the right to tax is attributed to where a company's customers are, or where a company's manufacturing is done or where a company's sales staff are located. But that is not the system that is there now and the US is unlikely to support wholesale changes to it.
It is the US tax code that allows these companies to defer their US tax liability.
Ireland doesn't have to be its policeman but we are made an easy scapegoat.
Falling into the trap of blaming Ireland suits those in the US, particularly some American senators, many of whom voted in favour of the deferral provisions being used by US companies.
The profit that is actually generated by the risk, functions and assets that companies have in Ireland is taxed at close to the headline 12.5pc rate as both the CSO and Revenue figures show.
This is much lower than the EU average of around 20pc but suggestions that it is as low as 2.2pc are wide of the mark.
Seamus Coffey is a lecturer in economics at UCC