Opinion: The seeds of controversy over Ireland's tax residency rules can be traced back to the early years of the State
They say "a little knowledge is a dangerous thing". Well, a little money can be even more dangerous. Once the initial euphoria begins to fade, the consequences of one's situation can come sharply into focus – just ask any recent lotto winner. So imagine how dangerous a €14 billion windfall could be for Ireland.
The Apple ruling has brought Ireland’s corporate tax residency rules back under the spotlight. This is nothing new. While Ireland’s residency rules have long been fraught with controversy, especially in recent years, the seeds of this controversy can arguably be traced back to the early years of the State itself.
Post-independence, three decades of over reliance on its domestic agricultural sector saw the Irish economy brought to a virtual standstill by the 1950’s. With record unemployment and mass emigration, the Seán Lemass-led Government began to recognise that as a small island nation, the still-fledgling Irish State needed to throw open its doors to international trade if it ever hoped to survive. Key to this endeavour would inevitably be the country’s corporate tax residency regime.
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From RTÉ Archives, a 1968 episode of 'Work' on how the IDA has persuaded a range of foreign owned companies to operate their businesses in Ireland
For many years hence, the test of whether a corporate entity was tax resident in Ireland was one of fact. Derived from the dicta of Lord Loreburn in the seminal case of De Beers Consolidated Mines v Howe [1906] STC 198, this test comprised a series of questions aimed at establishing "where the central management and control actually abides".
These questions included an examination of where the majority of company directors resided, where the shareholders’ meetings were held, and where the company’s head office was located. In this way, the 'Central Management and Control Test’ (CM&C) placed the determination of whether a company was tax resident in Ireland or not in the hands of the judiciary, regrettably leaving this crucial question to be decided on a laborious, and often protracted, case-by-case basis.
Recognising this problem, Ireland eventually replaced the CM&C test with the far less onerous ‘Incorporation Test’ in 1999. Enshrined in S23A of the Taxes Consolidation Act 1997, all Irish-incorporated companies were now automatically deemed Irish resident. It was simple. It was straightforward. It was undeniable. But it was not perfect.
"For too long successive Irish Governments have been too slow to act"
There were two exceptions to the ‘Incorporation Test’: the first of these, the ‘Treaty Exemption’, granted an Irish-incorporated company an exemption provided it was tax resident in a Double Tax Treaty country (Ireland maintains an extensive list of Double Tax Agreements with jurisdictions all over the world). In other words, the company would not be deemed tax resident in Ireland provided it was tax resident elsewhere. The second, and much more problematic, exception was the so-called ‘Trading Exemption’. This granted Irish incorporated trading companies an exemption where it was ultimately controlled by residents of an EU Member State or a Double Tax Treaty country.
While doubtlessly framed with a view to ‘throwing open the doors’ to Foreign Direct Investment (FDI), the ‘Trading Exemption’ proved highly contentious: Irish-incorporated, foreign-controlled, trading companies could structure themselves in such a way as to be neither tax resident in Ireland (due to availing of the exemption) nor tax resident in their home countries (due to being incorporated in Ireland). Put simply, they could end up being tax resident nowhere.
This issue is symptomatic of a larger problem in international tax, in that too often, tax legislation has been allowed to develop in ‘silos’, absent an appreciation of how domestic tax measures may align with that of other tax jurisdictions in a modern globalised economy, leading to gaps.
Read more: What's the future for Irish and EU tax affairs after Apple case?
In 2013, and bowing to significant international pressure, Ireland sought to close the gaps in its own tax code, beginning with the ‘Trading Exemption’. Yet, with reputational concerns on the one hand and doubtlessly fearing the loss of valuable FDI on the other, the Irish Government chose not to take the drastic step of excising the ‘Trading Exemption’ from its tax code completely.
Rather, it chose to take the much more subdued approach of introducing the ‘Stateless Companies Test’. This test, introduced in Finance (No. 2) Act 2013, allowed eligible trading companies to continue to avail of the ‘Trading Exemption’, albeit with an added residency requirement (the company would need to be tax resident somewhere). While perceived by some as a somewhat toothless move, lacking in conviction, in hindsight the ‘Stateless Companies Test’ was in reality sounding the death knell for the ‘Trading Exemption’ because the following year saw S23A replaced in its entirety.
Yet the Irish Government again chose not to excise the ill-fated exemption, choosing instead to attach a sunset date: under the revised S23A, no companies incorporated post 2015 could avail of the ‘Trading Exemption’, and no companies (irrespective of date of incorporation) could avail of it post 2021. In this way, Ireland’s ‘Trading Exemption’ got a stay of execution, effectively giving eligible companies valuable time to regroup, consider their options, and ultimately decide whether to stay or leave. For the most part, they chose to stay.
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Nevertheless, the recent Apple ruling will undoubtedly give these same companies plenty of expensive food for thought. Ireland has always ‘punched above its weight’ on the world stage, with much more to offer than just perceived favourable tax treatment. Ireland has a young, mobile, tech-savvy and highly educated workforce. Post-Brexit, it is one of the few remaining EU Member States with English as one of its official languages, positioning it as a gateway to both the European and US economies.
But equally, Ireland can no longer afford to be complacent, nor can it afford to be reactionary: while it has stepped up in recent years in response to international pressure, for too long successive Irish Governments have been too slow to act. Indeed, it is telling that in the time that it has taken for the Apple case to move through the courts, there has been little development of Ireland’s corporate tax residency regime, perhaps waiting to see what way the wind would blow.
But now the judgement is here and a figure of €14 billion cannot be ignored. The Apple case should serve as a warning to Ireland: when you throw open your doors, people will inevitably want to look in… but they may not like what they see.
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The views expressed here are those of the author and do not represent or reflect the views of RTÉ
