Tax is evil; there I said it. The organised extortion of money by the state sanctioned by a threat of violence or incarceration is something I principally object to. However I am realistic enough to understand that “we the citizens” need to make a small contribution towards the running of the state apparatus. A flat tax would be the most equitable way to do so and would allow for the abolition of all tax loopholes as well as so-called stealth taxes, sales tax, duties, excise and what more.
However I am digressing from the topic of this blogpost….
Irish corporate tax and specifically the low rate is a hot topic of conversation both in Ireland and across the EU. The debate mostly centers around whether Ireland should be allowed to hold on to this low rate which on the face of it has attracted such giants such as Google, Facebook, Linkedin, Dell, Microsoft, Apple and a whole raft of other big players to the country. Other EU countries rightfully seem to think that this low corporate tax rate (12.5% compared to for instance 28% in the UK) gives Ireland an unfair advantage. It turns out that they might be wrong…
During an exchange on Twitter with the fabulous @dhkirk yesterday it expired that even though the corporate tax rate is substantially lower than most other EU countries most of these multinationals only pay that tax rate on a small percentage of their revenue. See, @dhkirk was researching this to ascertain the validity of InvestNI’s statement that a lowering of the corporation tax in Northern Ireland would result in it being just as attractive to large corporates as the Irish Republic. You can read his blogpost here.
The common perception is that the large corporates sluice all their European revenues into their Irish corporate entity through the use of licensing agreements allowing them to only pay Ireland’s 12.5% corporate tax rate on not just the Irish revenues but almost *all* revenues across Europe. It now turns out that this is only part of the chain. Apparently because of a quirk in Irish law, if the Irish subsidiary is controlled by managers elsewhere, like the Caribbean, then the profits can skip across the world tax-free. This (legal) construction is known as a “Double Irish Sandwich”. Let’s try an example; ACME Inc has offices all over the world. It now register a corporate entity in Ireland. Let’s say it’s Called ACME Eire Ltd. Management of all patents and intellectual property regarding ACME Inc’s products is transferred to ACME Eire Ltd. At the same time ACME Inc. sets up a corporate entity in a tax haven (such as the Bermudas, Cayman Islands etc.) It then assigns the *ownership* of all patents and intellectual property regarding ACME Inc’s products to the corporate entity based in this tax haven. This construction than results in all ACME Inc. global companies globally are billed for us of these patents and intellectual property by ACME Eire Ltd. These fees paid to ACME Eire Ltd. can be as high as most of their revenue. ACME Eire Ltd. in return pays an “administrative fee” to the entity registered in a tax haven. ACME Eire Ltd. only pays the low Irish corporate tax rate over a fraction of its revenue. In the case of Google it reduced the companies taxable revenue in Ireland reduces its gross profit from €5.5bn to just €45m.
It appears that it means that it’s not Irelands low corporate tax rate which makes it an attractive location for multinational but rather their specific tax legislation allowing this construction. The NY Times has produced an excellent illustration of how this works. Click on the image for a detailed explanation.
Based on this it would appear that all the campaigning for Ireland to hold on to its low corporate tax rate as a change might scare away these large multi-nationals might not have been fully informed. Full disclosure requires that I admit that I have used this argument also. However I have always followed it by stating that Ireland should develop other means of being competitive than just being the cheapest tax country. Based on the information outlined above I would suggest that an increase in the corporate tax rate might not have such detrimental effects. But please remember that I am *not* a tax expert.
Following are some sources of supporting information: