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Comment: Change is coming to multinational taxation

Tuesday, 18 February 2014   (0 Comments)
Posted by: Author: Cliff Taylor
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Author: Cliff Taylor

How much tax do US multinationals here pay in corporation profits tax? Not a lot, in many cases – at least in comparison to their turnover here.

Change is coming, for sure, as the OECD examines the tax paid by large corporations worldwide and how many use rules in a variety of countries to minimize their tax bill.

The issue has come to prominence again as TCD academic Jim Stewart published a paper drawing on US Bureau of Economic Analysis statistics which says that US companies operating in Ireland paid just 2.2 per cent tax on profits here.

On RTE Morning Ireland this morning PWC head of tax Feargal O’Rourke took issue with the figures, saying that they included companies incorporated here, but which did not have real operations in Ireland.

Senior government figures have regularly – and unwisely – quoted a PWC study saying that companies here pay tax near the headline 12.5 per cent headline rate. This study is based on a company operating in the domestic economy (and in fairness to PWC this is clear). The whole tax structure is different for a big multinational.

It is well nigh impossible to get a completely reliable figure for all these companies and how much tax they pay here. However it is clear they pay nowhere near the 12.5 per cent rate on income routed through Ireland. A range of studies have shown rates of between 2-4 per cent for a number of the big multinationals here.

What is happening here is that they will indeed pay 12.5 per cent on profits earned in the Irish market, but this is a small proportion of the income which moves through Irish subsidiaries, much of which comes from overseas markets. In many cases structures using the payment of patents and royalties to Irish subsidiaries – which are typically European headquarters – allow the effective movement of a lot of the cash earned through Irish companies.

In general this is all perfectly legal – though some arrangements have been challenged by tax authorities, notably those in France. What is happening is that the big US companies are using the interplay of the US and Irish tax systems – and systems elsewhere – to pay very little corporation profits tax on a lot of what they earn in their operations outside the US.

Central to this is US tax law which allows them to avoid paying tax in the States provided the money is not repatriated (I am simplifying here, but that is the gist of it). This could be changed by the US in an instant, but while there is political controversy, the corporate lobbies are strong too.

Meanwhile Ireland is going to have to move, by amending our system. Already the structure which allows companies to have a company incorporated here which is tax resident nowhere – as Apple did – is being outlawed. And there is more to come, with the double Irish arrangement itself – where companies operate two linked corporations here – also for the chop.

This may not mean that the companies actually pay much more tax – for that to happen the US rules will have to change.

Ministers will continue to insist that all is fine here, but while the 12.5 per cent rate will stay, a lot of the tax bells and whistles which companies here have been able to avail of are, I believe, going to gradually be phased out.

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