Friday 21 September 2018

Richard Curran: It's time for an honest discussion about the Paradise Papers and international tax

U2 singer Bono was identified as having invested in a Lithuanian shopping centre through a Maltese-registered company Pic: Steve Humphreys
U2 singer Bono was identified as having invested in a Lithuanian shopping centre through a Maltese-registered company Pic: Steve Humphreys
Richard Curran

Richard Curran

We've been to Panama. And now we are taking a trip to Paradise. It doesn't look very pretty at all. The massive dump of millions of files relating to the clients of international law firm Appleby, provides a vast amount of information about the business affairs of a large variety of people - from the world's most profitable company, Apple, to actors in 'Mrs Brown's Boys'.

The scale and extent of the information is so vast that we have to be careful about trying to determine what it tells us and what it doesn't. It provides information but not always insight. Analysis of the papers is as much about choosing the language we use, as it is about understanding the context.

Different people are doing very different things through the papers. If we want to make any sense of the papers or gain real insight, we have to differentiate between several different practices.

There is tax evasion, which is deliberate and illegal. There is tax avoidance, where businesses or individuals structure their affairs legally to reduce their tax bill. There is aggressive tax avoidance where schemes are devised, often contrary to the intention of the laws, in order to cut tax bills. Sometimes these can be deemed to be against the law and in other cases they are contrary to the spirit of the law, but nonetheless legally watertight.

Then there is the mechanics of international business, where people make international investments that simply make common practical sense by using tax laws abroad, exactly as they were intended.

Take Apple for example. It asserts that it pays all of the taxes that are due on its operations and there is no reason to doubt this. However, what the Paradise Papers appear to show is that after the Irish Government closed down a particular arrangement in 2014, which allowed a company not to be tax resident anywhere, two of three "stateless" Irish registered subsidiaries shifted to Jersey.

Apple went searching for the best new structure and made inquiries with several British overseas territories, including the Isle of Man.

It decided to locate two of three controversial Irish subsidiaries in Jersey. The third company became tax resident in Ireland and this appears to have increased the amount of tax Apple is paying here as a result.

Apple has said the shift to Jersey has not in any way reduced the amount of tax the company was paying to any jurisdiction. Quite the contrary in fact, it may well be preserving the status quo by ensuring Apple pays just as little in corporate tax as it did, with the exception of Ireland, which is now getting an increased tax take. Apple can legitimately argue nobody is getting less and somebody is actually getting more.

The insight provided on Apple by the Paradise Papers is relevant to the global debate on how much technology companies in particular pay in taxes and therefore it is very much in the public interest.

It also virtually proves the Irish Government argument all along, that if we change our rules, and some tax haven does not, we simply lose some of the investment to another jurisdiction.

And that is why Ireland has continually argued that the best way to deal with this complex global issue is through the OECD. If countries do not all move together on these major tax issues, one will gain and others will lose. It is interesting that around the same time that Ireland closed down this loophole, the Irish Government changed the taxation policy on intellectual property held here. Instead of being able to write off 80pc of the cost of developing or acquiring intellectual property (IP) against tax over a number of years, companies could write off 100pc of it.

This resulted in the flood of €300bn worth of intellectual property shifting to Ireland, and the subsequent 'Leprechaun Economics' effect it had on our GDP growth figure. In the Budget last month, after the IP had all landed in Ireland, Finance Minister Paschal Donohoe brought it back to 80pc again on future IP shifting, but not on the €300bn already here. Apple's €13bn tax bill, which the European Commission says it owes to our Revenue Commissioners, is just eight weeks' profits for a company that is making €1.6bn per week.

This is the scale of what it at stake. It has nothing to do with illegality or breaking rules. In fact it is more about how states compete with each other using taxation policy to win the investment of giants like Apple.

But elsewhere in the Paradise Papers there are totally different things going on. Bono is identified as having used a Malta-registered company to invest in a Lithuanian shopping centre. The U2 frontman has pointed out that he was a minority investor in a company that was registered in Malta.

It seems innocuous and understandable to use this kind of structure. It appears to be part-and-parcel of how people make international property investments. Should it be any different? That is a question that goes beyond even Bono, and moves into the realm of global taxation and the rights of countries to have different rules in how tax is applied. Who are we in Ireland to argue with the application of distinctive national rules when we have built an entire economy on them?

Bono, Malta and Lithuanian shopping centres makes a good headline, but not much more than that. Should Bono or those who manage his money, not structure an international property purchase in a way that is totally in keeping with what the tax codes in those countries are trying to achieve?

Where does the term tax avoidance begin and end? If I have a legitimate business expense, then am I engaging in tax avoidance by claiming that expense against my taxes? Surely not.

But elsewhere, the Paradise Papers throw a light on how some people are using decades-old tricks to cut their tax bills in a way that is contrary to the intentions of the tax code and may also be illegal tax evasion.

Set up a foreign trust which becomes the owner of your assets. Instruct the trust to buy a villa, a boat, £200,000 worth of fine wines (as one in the papers did) and you can argue that you are not the owner or beneficiary. Then it becomes a complex battle for tax authorities to establish you are in effect the owner.

Another one is to place income in a foreign company, and borrow money from that firm. The money you spend is not income but loans from a foreign company. This is a variation of a very old tax trick which was used by Irish people in the Ansbacher, NIB and Liechtenstein cases of high net worth individuals dodging tax.

Revenue now has much greater powers and access to more information to take a good look under this kind of rock. The problem remains in finding which rocks to look under. That is about resources and expertise.

The Paradise Papers do throw light on matters of public interest but also catch what is pretty obvious long-established, and quite public international business practice, in the crossfire too.

Downright tax dodge schemes appear to be drifting off to more exotic and riskier havens in the Indian and Pacific Oceans. They used to be in the Isle of Man and Switzerland. But the tax avoidance industry is still a mainstay of so many British overseas territories, from Jersey to Bermuda.

The British economy has benefited enormously from Britain's role as a major global player in the wealth management industry through the arms-length role of these dependencies.

Britain can't call us out on corporate tax policies while doing very little about the opaque edifices of these islands.

Meanwhile, taxation has become a very international game. If you want fairer outcomes, then change the rules for all the teams. And make sure somebody gets a red card if they break them.

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