Ireland inches forward on long road to tax reform
29 October 2013
Posted by: Author: Jamie Smyth (Financial Times)
Author: Jamie Smyth (Financial Times)
A few months after strongly rejecting claims by US senators that it is a "tax haven”, Dublin moved on Thursday to close a legal loophole that enabled Apple to save billions of dollars in corporate taxes.
The policy shift follows investigations by the US Senate, UK parliament and the media, which pinpointed how multinationals use Irish registered companies as part of complex tax avoidance schemes. Last month the Netherlands also pledged to review its tax policies, underlining how political support from the G20 for an OECD plan to reform global tax rules is having some impact.
"Ireland’s move is a very important signal from an important country in this area. Dublin recognises things will change and it is better to participate in the change than resist it,” says Pascal Saint-Amans, director of the OECD centre for tax policy.
Mr Saint-Amans is optimistic there is political will to rewrite global tax rules, which date back almost a century. But he says Dublin’s move is just a small step forward and what is required is a big redraft of global tax rules agreed by the international community.
Dublin published draft legislation on Thursday that will prevent Irish registered companies from remaining "stateless” for tax purposes from January 2015. This gives Apple and several other companies just over a year to amend their tax structures.
In May an US Senate committee inquiry discovered Apple saved tax on $44bn of offshore income over several years by using an Irish registered "stateless” subsidiary. Dublin initially sent a letter rejecting the senator’s claims that it was a "tax haven”. But it is now moving to amend its tax code in response to the concerns.
Tax justice campaigners claim Dublin’s move to close the Apple loophole an "empty gesture” as it fails to tackle a more common tax avoidance scheme, known as the "Double Irish”.
"This move will not make any difference in the ability of Apple and other companies to avoid Irish, and by extension, other countries’ taxes,” says US campaign group, Citizens for Tax Justice.
The "Double Irish” exploits differences between the US and Irish tax codes to move multinational’s profits from Ireland to Bermuda and other countries, which have zero rates of corporate tax. One high-profile example is Google, which routes profits from Irish registered companies through the Netherlands and then on to Bermuda, using another structure known as a "Dutch sandwich”.
Ireland’s importance as a conduit for tax avoidance is underlined by huge flows of money moving between Ireland, the Netherlands and Bermuda. Last year Bermuda and the Netherlands accounted for €18.5bn, or 20 per cent of Ireland’s services imports. Details on these imports are restricted by Ireland’s national statistics office for reasons of "confidentiality”, but economists say the vast bulk of these payments reflect royalty and licence payments by multinational corporations and are evidence of the "Double Irish”.
"Service imports have been growing extraordinarily quickly in recent years, reflecting the increasing numbers of internet companies using Double Irish style structures,” says Conall MacCoille, economist with Davy Stockbrokers.
LinkedIn, Adobe and Yahoo all use Irish registered companies to help them reduce their non-US tax bills.
Dublin says it cannot move unilaterally to tackle the "Double Irish”, as companies would simply set up similar structures elsewhere.
"We recognise there has been aggressive tax planning that plays one regime off against another,” says Richard Bruton, Ireland’s business minister. "Most of the closing off of that will have to be achieved through international co-operation.”
Irish officials say privately the "Double Irish” and other tax avoidance schemes could easily be addressed if the US repealed a rule that allows American corporations to defer paying US taxes on offshore profits. US politicians have previously proposed repealing the rule but corporate lobbying in Congress has killed it, they say.
In the absence of US action, Irish politicians walk a tightrope between assuaging the 1,000 or so foreign companies that have operations in Ireland and co-operating with global efforts to tackle tax avoidance.
Dublin fears the criticism provoked by multinational’s use of tax avoidance schemes could lead to EU pressure to raise its 12.5 per cent corporate tax rate. There is also a growing appreciation that a rewrite of global tax rules could create opportunities for low tax countries like Ireland as well as risks.
"A lot of global intellectual property, which is held offshore and which attracts a lot of profit, could come onshore in the coming years, as companies change their business models to deal with the evolving tax landscape,” says Feargal O’Rourke, head of tax at PwC in Dublin. "Ireland is really well placed to attract this.”
The big test for the global push to tackle tax avoidance will come at the G20, which must agree on the detail of the OECD plan within two years. There is a danger the momentum behind the plan will fade against the backdrop of an improving global economy.
"It is not easy to get agreement from so many diverse countries,” says Mr Saint-Amans. "But we have the G20 leaders validating the direction we are going in. A sound international tax system is in everyone’s interests.
This article first appeared in ft.com