Monday 16 September 2019

Dan O'Brien: 'Staying competitive while helping to close loopholes - our approach to taxing big business is no haven'

Denial: Paschal Donohoe argued against the tax-haven claim. Photo: Gareth Chaney Collins
Denial: Paschal Donohoe argued against the tax-haven claim. Photo: Gareth Chaney Collins
Dan O'Brien

Dan O'Brien

'Ireland is a tax haven." That claim is often made in relation to multinational companies and the tax they pay - or don't pay - on their profits here and across the world. It was made again this week.

The latest claim led to ministers scrambling to deny it. Paschal Donohoe, the Finance Minister, rebutted it on radio.

Before looking at the evidence, let me make three points.

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First, this column has been a long-standing critic of the Government's budgetary stance. The repeated caving in to vested interests, most notably public sector trade unions on pay, has been little short of scandalous. The frittering away of windfall gains - from higher-than-expected profit tax revenues and lower-than-expected debt servicing costs - has bordered on the reckless.

Second, while I am strongly pro-business, companies and industries need rigorous scrutiny. This column has regularly highlighted the comparatively high interest rates and profits of Irish banks and repeatedly presented evidence that there was/is no case for a 2011 tax break for the hospitality sector.

Third, your columnist is not an unthinking green jersey wearer. From the moment the Border backstop was put on the Brexit negotiating table I argued it risked causing that which it was designed to prevent - much to the irritation of some in Government and officialdom.

These points may be relevant to readers in relation to the conclusions of today's column: Ireland is not a tax haven and Government policy on the taxing of company profits is well designed, well aligned to the country's short- and long-term interests and has evolved in manner broadly proportionate to changes in corporate behaviour.

Those who make the tax haven claim are almost all from a part of the political spectrum that doesn't hold companies in high regard. They tend to view the making of profit as suspect, if not exploitative.

These views, I would argue, skew their judgement on the issue of taxing company profits.

This is to be seen in a number of ways. Consider how much tax governments across Europe lose out as a result of non-payment of Value Added Tax, which is many times greater than the amounts they lose out on owing to the aggressive avoidance strategies of multinational companies.

The Organisation for Economic Cooperation and Development (OECD) is the international body tasked by governments around the world with coordinating the clampdown on clever accountants exploiting tax loopholes in different jurisdictions. Its experts believe that the global loss of revenue from this practice amounts to €216bn annually ($240bn). That averages out at around €30 per person around the world.

Compare this with Europe's 'VAT gap'. The European Commission believes that €147bn is lost each year to governments across the 28-country bloc as a result of fraud, evasion, avoidance and other reasons.

That averages out at almost €300 per person in the EU, or 10 times the loss per person globally as a result of multi-nationals dodging profit taxes.

Despite this huge difference, activists pay little attention to VAT losses and remain fixated on multinational companies, so often the villains of the piece among those who are like-minded.

Assessing the scale of the problem of profit tax avoidance must look not only at guestimates of how much is lost, but also how much is actually collected and what trends in revenues show.

From general discussion of the issue one might reasonably conclude that profit tax revenues are evaporating on a scale that is imperilling health and education systems across the world. In fact, when one looks at the figures on how much governments receive from corporations - something rarely done by those who claim Ireland is a tax haven - we see no evidence of this.

The amounts of corporation tax collected across the 33 members of the OECD is at record levels in cash terms in many countries. Across that grouping of countries, profit tax revenues have trended upwards - slightly - over the decades, both as a percentage of GDP and as a share of total tax revenues.

That has happened despite a downward trend in the rate at which profits are taxed across the world.

If companies were avoiding tax by using havens or countries such as Ireland on a large scale, states' public finances data would be showing marked downward trends in revenues. The hard numbers show that there is no such trend.

None of this is to deny that Ireland benefits from multinational companies using the jurisdiction to reduce their global tax bills. Using data from the EU's statistics agency Eurostat on where profits are booked across the EU, I have previously suggested that companies based here could reduce their Europe-wide profit tax bills by around €12bn annually.

In the grander scheme of things, this is small change. But - and this is why proportionality is central - any big and sudden change to Ireland's tax regime could have a serious negative impact on Irish people, the Irish economy and the public finances given the central role multinationals play in generating prosperity here.

Any responsible government must take care to avoid doing that sort of damage to people's livelihoods.

And that is what this Government and its predecessors have done. Ireland has been fully committed to working with other countries in the OECD-centred forum tasked with narrowing the scope companies have to shift profits across borders for tax reduction reasons. A series of measures have been taken here, including the closing down of known loopholes.

Small, geographically peripheral countries have every right to seek to offset their natural disadvantages by making their tax systems competitive. All countries have an interest in creating global rules to prevent global companies from not paying profit taxes. Ireland has done both.

The Government is on the right path in the pursuit of its national interest and in its fulfilment of its international obligations.

Irish Independent

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