EU countries clamping down on tax avoidance is creating problems for the Republic…

Last week started with Philip Hammond’s extraordinary  threat to the EU that he would turn the UK into a tax haven, a sort of “Caymans sur la Manche”, if you will. All because Michel Barnier and his fellow negotiators are unlikely to  give the UK what it wants, a free ride.  Mr. Hammond gave the Welt am Sonntag the ill advised interview, available here (in German), during a short trip to Germany to meet the former tax inspector and current Federal Finance Minister Dr. Wolfgang Schäuble. His aggressive words may reflect the tone of that meeting, rather than the Chancellor of the Exchequer’s perspective on taxation, but in saying them he opened himself & the UK Government to a whirlwind of abuse and ridicule from those with whom he will have to negotiate.

The Houses of the Oireachtas returned during the week with the normally flurry of written questions, turning into  an  avalanche of snowy white paper, built up over the adjournment. Going through Wednesday’s questions, one in the name of, Róisín Shortall, the Social Democrat TD, caught my eye. It was, what a former Revenue colleague, who spent much of her time collating responses to PQs, called a “Joan Burton”question, i.e. complex, detailed and requiring special care in approach, as the Deputy knew what she was talking about, or was being advised by someone who was knowledgeable on the subject.

The Dáil question was about correlative adjustments and  advised among other things, that the Revenue Commissioners had 43 open applications for refunds of Corporation Tax, arising from transfer pricing audits in other countries. The answer  also makes clear that there may be far more claims, in the pipeline, as the figures did not include those received in December.

(A correlative adjustment arises from a transfer pricing audit. If the profit is increased in one country, it follows that the profit falls somewhere else. When this is agreed the company claims an adjustment in one country, reducing the profits there, while paying additional taxes on the uplift in the first State.)

The problem for Ireland is the 43 open cases are all likely to be complex cases, perhaps with multiple jurisdictions involved and substantial liabilities attached.

Life as a tax haven is becoming more and more difficult. Ireland spent much of 2016 fretting over the Apple case. The Italian tax authorities, the first to hammer Apple (see this story from Dec 2015 in the  www.thelocal.it)  have, based on this scoop (in Italian) from La Repubblica,  now agreed a deal with Google  for €280M plus. This means that the profits of Google Italia have been adjusted upwards by approx. €1,000M (Italian tax rate 27.5%) and Google Ireland Ltd., will be adjusting its profits downwards by a similar amount. This  leaves a  refund of €125M winging its way in the direction of Barrow St.  Ominously, the article suggests the Italians next target is another US company with an Irish sales structure in place, Facebook.

Mr. Hammond should carefully consider the road he is suggesting. On Thursday evening Dr. Honohan, the former Governor of the Central Bank warned that low tax FDI models were in trouble. The extremely lean and fit Dr. Honohan has changed little in the past 50 years as this picture of him from his Coláiste Mhuire days shows.

He should note that any move to taking aggressive tax positions will be challenged, as the Irish are finding out. The current UK arrangements for foreign individuals (non-doms) are bad enough, without even considering the role of London as the world’s premier money laundering location. The UK may find that all of its current activities come under the scrutiny of re-energised fiscal authorities in other States, who perhaps will all have one major target.

The recently silent Michael Taft, in his blog http://notesonthefront.typepad.com, made reference to the over dependence on Corporate Taxes in one of his last blogs last November, available here. Ireland’s willingness to put in place favourable structures for MNCs has led to a flood of cash, which is of course now under threat from the activities of other tax authorities in Europe and beyond. The Dept. of Finance mentioned a repayment of €150M as the reason for a fall in CT in December, which can only have arisen from a correlative adjustment. This perhaps shows the danger of dependence on a “one club” economics.

The failure to appreciate that the EU is based on a rules based Civil Law structure, rather than based on a Common Law,” make it up as you go along” approach (precedent) will be the undoing of UK negotiations. Fifty four years after joining, sixty two years after the Messina Conference , they still don’t get it. After the referendum the Guardian published  this extract  from the late Hugo Young’s  masterpiece, This Blessed Plot: Britain and Europe from Churchill to Blair (1998). I quote just a few lines,

This is the story of 50 years in which Britain struggled to reconcile the past she could not forget with the future she could not avoid. It is the history of an attitude to history itself. It is a record not of triumph, but rather of bewilderment concerning a question that lay in wait, throughout the period, to trouble successive leaders of the nation, and which latterly tested some of them to destruction. Could Britain, the question ran, truly accept that her modern destiny was to be a European country?”

Modern taxation depends on agreed sets of rules, and for the most part the UK played by them. These rules are agreed at different levels, OECD, EU and even bilaterally through Double Taxation Agreements.  However it is no coincidence that almost all major tax havens are Common Law jurisdictions from Delaware to Caymans, most of whom are outside tax treaty networks. If the UK wishes  to opt out, it will be the main loser, but it is also difficult to see how it can do so without the main losers being its own citizens.

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  • Roger

    Ahh, “the Republic” in question is Ireland.

  • Kevin Breslin

    A good article. It should be highlighted that the tax being avoided is the tax that should be going to the Irish Revenue.

  • murdockp

    Irelands existance is now beyond tax. it is a global player in tech and pharmaceuticals so has nothing to fear.

    however it has to play by the rules of the game. take Google. we are told Ireland it’s head office yet staff in London are paid far higher salaries and are about to move into a flagship £1.00bn building. in Dublin they work in an average nama building and staff do low cost roles. so it is obvious their head office is not in Dublin.

    same with other companies.

    tax laws should reflect how it is and it is only right that laws are tightened up. irelands are loose indeed at it is only right as an EU member that they play fair.

  • Jag

    This is how Ireland facilitates Google paying practically no tax in the UK. https://uploads.disquscdn.com/images/86752c7880b655e10bc48abe6aca0f2a3cd125f4f6029d8237c1bc2fe0ea8a3d.jpg

  • Jag

    EU tax commissioner Moscovici is before the Oireachtas finance committee on Wednesday this week. EU (that is, France and Germany) have been attacking Ireland’s corp tax system for more than a decade. Too bad for them, it’s our brand and we have structured our economy accordingly.

  • Brian Walker

    Theresa May of course reinforced Hammond’s line in the perceived threat of her Brexit speech.The line was actually untypical of Hammond’s hitherto softer approach and was clearly a fully considered position coordinated by No 10

    What’s surely been missed in this flurry is the obvious point that lowering company tax rates made a major contribution to the Republic’s success ( let’s not call it a tax haven) and does not support the British Labour party argument from Jeremy Corbyn that low rates necessarily produce a slave economy – quite the opposite in Ireland’s case.

    But then so many British analysts fail to notice the example of little Ireland right under their noses. btw I bet you Ireland will get away with it yet again The EU partners will understand that to face the problems of Brexit, Ireland will need all the help she can get. .

  • Jams O’Donnell

    I pasted this link already, but some of you may have missed it. It explains a lot about both Brexit and the English, and to me has the ring of truth.

    http://www.theneweuropean.co.uk/top-stories/the_problem_with_the_english_england_doesn_t_want_to_be_just_another_member_of_a_team_1_4851882

  • Jams O’Donnell

    “all the help she can get” Tell that to the Greeks.

  • hgreen

    Britain and Ireland are entirely different economies. Britain unlike Ireland has no reason to make itself a tax haven in order to attract inward investment. Corbyn is entirely right in his opposition to this race to the bottom on corp tax.

    Lowering corporation tax absolves businesses of the contributions they should be making to the societies in which they operate.

  • Croiteir

    Tell me Theresa – do ye want a passport to trade in financial services in the EU?

  • the moviegoer

    If it is the UK’s goal to become a low-tax investment destination, then it is not in Ireland’s interest to champion a soft Brexit. We need to make membership of the EU as attractive as possible to foreign investors. The fallout from Brexit will not be anywhere near as bad as the fallout from having a low-tax economy next door undercutting us for multinational investment. While Brexit will hit certain domestic producers hard, in the long run we can always find new markets for agri-produce. On this issue, Ireland’s interests and Britain’s interests are not compatible.

  • NMS

    Brian, I agree that Mr. Hammond had been far more careful and temperate in his language prior to his German interview. This made the interview more fascinating.

    Agreed, Ireland is not a straightforward haven, actual activities do go on there in parallel to the dubious tax structures. The Italian success in tackling the Irish agent structure, undermines the haven type structures. Ireland does not have particularly low tax rates overall, it has very low Social Insurance contributions compared to most European States & very low recurring property taxes. Low PRSI enables employers to allocate a higher proportion of the gross employment costs to direct wages.

    Ireland has one huge political advantage in that the ruling party is an active member of the EPP. There are close links with the CDU/CSU via Elmar Brok, a very early supporter of Dr. Merkel. However, when a herd of cattle stampedes, everyone in their way is in trouble.

  • NMS

    Yes, Roger, not my headline!

  • NMS

    There are a number of Irish economies, yes the MNC sector may be insulated, however many workers are directly employed in the indigenous sector, which is dependent on the UK market. They may be in deep trouble.

    Prof. Frank Barry of TCD put some of this in an historical context in this essay in Dublin Review of Books, http://www.drb.ie/essays/making-the-jump.

    The discrepancy between Google Irl salaries & the UK operation, which is technically below it in the corporate structure is interesting. There are far more staff in Ireland doing a range of technical,sales and accounting roles. The head of Google UK won the gunfight to run Europe with the beaten pugilist in Ireland leaving for LinkedIn. Google in Dublin are spread over a range of buildings at this stage.

    If you examine the UK company accounts closely, you may find the answers as to why Google & UK Govt. are so friendly. See also Jesse Drucker’s piece on Bloomberg on this issue https://www.bloomberg.com/news/articles/2016-02-03/u-k-s-tax-deal-with-google-wasn-t-just-about-offshore-havens. Mr. Drucker is now with the New York Times.

    Loose is not a word I would use about Irish tax law. It is carefully crafted with the same dedicated attention as a master craftsman gives a piece of Carrara marble.

  • Would the average British voter be prepared to sacrifice the NHS for a lower corporate tax rate? I doubt it.

  • epg_ie

    Google’s Dublin building is one of the largest office complexes in the city after the banking crisis, isn’t it?

  • Fred Johnson

    The Brits can lower their corporate taxes all they like, the difference will be Ireland will have full access to 450 million while the British, not so much.

    It also needs to be understood that it’s not just the 12.5% that plays to Irelands advantage, it’s also the overall tax structure (eg what items can be expensed, etc).

  • ted hagan

    This is a very interesting and welcome article for someone like myself who knows eff all about finance (I can prove it). All I know is that these multinational tax dodgers are always one step ahead and that the ingenious web they have created seems virtually impossible to penetrate.

  • ted hagan

    The average British voter would most likely pay higher income to fund the Nhs, plus lowering the corporate tax wouldn’t sacrifice that much tax-take compared with the amount of jobs it would bring in.

  • ted hagan

    And where else did you think it was…. or didn’t?

  • hgreen

    Nonsense. There has been no proven link between lowering corp tax and job creation. The tax cut is often just passed on to execs and shareholders rather than on investment in the business.

  • Anthony O’Shea

    Excellent article thanks for sharing

  • ted hagan

    Unbelievable . How do you think the Republic benefited so much from Apple, Google and Facebook? They created many tens of thousands of jobs. Why do you think Northern Ireland wants the same rate of corporation tax. Could it possibly be to create jobs?
    The problem is tax, it’s not that they didn’t create jobs.

  • hgreen

    It’s unbelievable that people like yourself can be so naive. The Republic is also in the EU, speaks English, has a young well educated population and is in the right time zone. One (unproven) example doesn’t prove anything. Plus a large number of multinationals don’t even pay the reduced corp tax rates.

    As for Northern Ireland our politicians are for the most part economic idiots as has been proven recently and on numerous occasions. It’s laughable you trust the opinions of people who couldn’t set up a heating scheme.

    You are a sucker if you think adjusting corporation tax is a sensible industrial strategy.

  • Adam Martin

    The UK already has the world’s biggest tax haven in the City of London.

  • lizmcneill

    It’s not just the markets, it’s the intertwined supply chains. Farm Week had the most passionate case for special status for NI I’ve seen in the dead tree media.

  • the moviegoer

    Multinationals are worth a lot more to the Irish economy than farmers and supply chains like markets can be built up elsewhere. Some kind of special status for NI would be cool but it’s not going to happen and championing the British cause on this one is not in our long-term interest.

  • ted hagan

    You just don’t make any sense. The rest of the EU has been up in arms for many years about the advantage it perceives Ireland has because of its lower corporate tax rates. Down the South the lower corporate tax rate is seen as a totem around which many of their economic policies are based.
    As economist David McWllliams said in 2014:
    ‘Ireland has taken a firm stance on the 12.5 per cent rate, defiant of the mighty international powers, and for good reason, too.
    Firstly the presence of these multinationals is clearly of benefit to
    the Irish economy – as the Minister for Jobs, Enterprise &
    Innovation, Richard Bruton said: ”Every ten jobs created in
    multinational companies lead to approximately seven jobs being created
    elsewhere in the economy”.
    Secondly, and more importantly, if Ireland were to capitulate and
    raise its corporation tax rate to please Washington and Berlin, some
    other jurisdiction would surely take its place and reap the rewards. As
    British-based tax consultant Richard Murphy put it: ”Tax deals are made
    in hell”.’

    I honestly don’t know where you are coming from.

  • NMS

    It is not the tax rate, rather the use of agency structures to book sales in Ireland, which is at the heart of most of the challenges. The Italian proposed settlement with Google gets to the heart of that issue as did their previous attack on Apple, which is referred to in the Commission’s ruling. More sensible companies have restructured their operations and are now well ahead of the competition.

    If you buy a subscription to Office 365, your contract is with Ireland. You register online and whatever software is on your machine is downloaded from Ireland. The rights to the software are owned in Ireland and your cloud service is provided from Clondalkin, Dublin 22. You can access your files from anywhere in the world. In such a case, it is hard for the Italians or any other tax authority that they have any taxation rights, other than to the VAT.

    While Mr. Bruton may be correct, the real issue is that wages & salaries in MNCs are very low compared to turnover, perhaps just 3% on average.