Why Ireland cannot allow multinationals exploit tax systemTuesday 05 February 2013 09.35 By David Murphy
by Business Editor David Murphy
Question: what do Bermuda, the Cayman Islands and Ireland have in common?
Answer: they are all countries used by multinationals to aggressively manage their tax bills.
The Irish are slipping into bad company. Tax on profits is 12.5% in Ireland. There are limited write-offs which allow companies to reduce their tax bills to an average effective tax rate of 11.9%, says Enterprise Minister Richard Bruton.
But some US multinationals are paying far lower rates. The reason these companies can build such aggressive tax avoidance strategies is because they exploit agreements between Ireland and other countries.
Their schemes are sophisticated but legal. One of them is the so-called “Double Irish” which allows payments between companies within a corporation to shift income from a high tax country to a low tax country.
The “Double Irish” technique involves sending profits first through one Irish company, then to a Dutch company and finally to a second Irish company headquartered in a tax haven such as Bermuda or the Cayman Islands. This technique has allowed certain corporations to dramatically reduce their overall corporate tax rates.
Google uses this labyrinthine structure to good effect: its tax on group profits is reduced to 2.4%. While the company won’t comment on the figures, it points out that it employs 2,500 in Dublin and makes a significant contribution to the Irish economy.
At the IDA’s recent end-of-year-review, the agency’s chief executive Barry O’Leary highlighted the amount of tax paid by client companies – instead of how much they had saved by locating in Ireland.
A steady stream of politicians abroad is raising concerns about the issue. It is estimated the US is losing $60 billion in tax every year as a result of corporations using these arrangements.
Publicly Irish ministers and officials don’t criticise US multinationals which use these schemes. But Ministers are concerned.
Junior Minister Joe Costello recently told European journalists at a dinner: “Google tells us that it creates jobs and pays taxes, but we think it is not enough.” He said the tax loopholes being exploited by multinationals needed to be closed: “If we do not act, there will be people who force us to act.”
It was later reported that he made the comments off-the-record and in a private capacity.
In the Dáil in recent weeks, Finance Minister Michael Noonan said: “The problem with the so-called ‘Double Irish’ from Ireland’s point of view is that it has that name. People think that something we do here gives rise to it. That is not the case.”
Mr Noonan blamed tax codes elsewhere, including the way the US government treats certain tax arrangements.
The authorities here are trying to convince other countries that Ireland is a low tax environment – not a tax haven. It is an important distinction. If all the US multinationals were paying 12.5% corporation tax there would not be a problem. But they are not.
The unanswered question is whether closing the loophole could result in some US multinationals quitting Ireland. If some did leave, it would mean the constant refrain that they came to Ireland because of our “young educated workforce” is hokum.