Revista nº 210. Low Tax Regimes and Financial Centres: the Case of Ireland
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Conference on
INTERNATIONAL TAX AVOIDANCE, TAX EVASION AND TAX JUSTICE
Barcelona 2nd and 3rd October 2014
Low Tax Regimes and Financial Centres: the Case of Ireland
Jim Stewart,
School of Business,
Trinity College,
Dublin, 2.
Abstract
Attracting foreign direct investment has been a major part of industrial policy in Ireland for over 50 years. However the most important current fiscal attraction is the fiscal regime, in particular what has come to be termed the “double Irish”. Policies pursued have been successful in attracting foreign investment but they have also had other effects. Publicly available data on exports of ICT services shows that Ireland”s share of global ICT exports amounted to 12.7 % in 2012, compared with 8% for the US and 7.3% for Germany. Apple and Google have become synonymous with these exports. The U.S. Senate report on Apple computer found that one subsidiary located in Ireland (Apple Sales International) had no employees, but had income of $22 billion in 2011 and paid $10 million in tax. This compares with income before tax for the group as a whole of $34 billion for 2011 and cash tax payments of $3.3 billion. Ireland is equally important in the operations of Google. It is not known how many companies incorporated in Ireland, are as in the Apple case, not resident for corporate tax purposes in any country, but it has been stated that the numbers are small. In contrast firms with a “double Irish” structure are more common. These firms accounted for over $32 billion of pre-tax profits in 2011.
Not surprisingly there has been considerable public concern at tax avoidance strategies by MNC”s. The BEPs proposals, if implemented, will result in substantial change to the tax regime for foreign direct investment in Ireland and other countries. These changes may cause affected companies and their advisors, as well as some governments to seek replacement incentives. Hence the proposals for country by country reporting may be the most significant reform in the long run, but to be really effective country by country reporting should be publicly available.
The paper concludes that a tax based industrial policy will not result in an innovative, research led economy. Rather a tax based industrial policy leads to an emphasis on tax reduction.
Key words: Foreign direct investment, Ireland, tax avoidance strategies, BEPS.
Low Tax Regimes and Financial Centres: the Case of Ireland
Attracting foreign direct investment has been a major part of industrial policy in Ireland for over 50 years. Until Ireland joined the European Union in 1973, the EU the main incentives were tax reliefs (profits on exports were tax free, extensive depreciation allowances) and capital and current grants from state agencies to private sector firm. Under EU rules grants to enterprises have been reduced in value. Export sales relief was replaced by a general 10% corporate tax rate on manufacturing, which was in turn replaced by a 12.5% corporate tax rate on all sectors. This is often described as “the cornerstone of Irish industrial policy”
However the most important current fiscal aspect of locating in Ireland is the fiscal regime, in particular what has come to be termed the “double Irish” or bi-location tax strategy discussed later in the paper. Policies pursued have been successful in attracting foreign investment as shown in Table (1), but they have also had other effects.
(1). Macroeconomic Effects
Table (1) shows that the IFSC dominates foreign investment in the Irish economy. Table (1) shows total foreign investment in Ireland for the period 2001-2013. The table shows that foreign direct investment excluding the IFSC reached a peak in 2005 of 98 billion, fell in 2006, and then rose to a curent peak of €181.3 billion . Total foreign investment in the IFSC rose from 2001 to 2007 fell slightly in 2008, reflecting the financial crisis, and has continued to rise since then. In 2013 IFSC investment was over 13 times the size of non-IFSC foreign direct investment and nearly 16 times the size of GNP. In 2001 IFSC investment was about 7 times direct investment and just over 6 times GNP.
Table (1)
The Growth of the IFSC in Dublin: Total foreign Investment in Ireland (€ billion)1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Direct 152.1 174.4 176.4 152.4 138.6 118.8 138.4 138.9 169.3 183.9 188.2 225.9 286.9
Of which Direct non-IFSC2 83.2 98.4 97.6 90.7 98.0 66.2 82.2 101.7 120.9 116.6 115.5 130.6 181.3
Portfolio 412.1 447.1 542.2 721.0 1025.9 1223.7 1329.9 1181.2 1352.6 1552.3 1727.9 1897.2 2064.6
Other 303.8 329.0 389.8 443.8 556.9 678.3 838.7 992.7 937.3 906.9 913.4 850.3 820.31
Total Foreign Liabilities 868.0 950.4 1108.4 1317.2 1721.4 2020.8 2307.0 2312.8 2459.3 2643.1 2829.5 2973.4 3171.8
IFSC2 616.3 676.6 813.3 975.4 1300.2 1566.7 1727.0 1684.6 1786.5 1945.9 2152.2 2322.3 2395.3
Notes
(1) Current market prices.
(2) This number may understate IFSC type activities, as international financial firms are no longer required to locate at the
Source: CSO (2014) Table (4) and CSO (2010) and (2008), International Investment Position, Table 1 and 3.
Figure (1) shows the data in Table (1) in graphical form.
Figure (1)
Ireland has been very successful in attracting foreign direct investment. Fiscal incentives give a powerful incentive to switch profits to Ireland via “transfer pricing”. Imported goods may be valued at an artifiially low price and exported at an artificially high price. Similar effects can occur in the digital economy where profits may be switched using royalty and license payments. These payments are a major focus of the BEPS project. The OECD/G20 report comments ( BEPS, 2014a, p. 7) on the “significant progress in addressing the serious concern raised by the separation of the location of the intangible property and the location where economic activities take place and value is created”.
Profit switching by MNC”s is evident for Ireland in a large balance of payments surplus on merchandise exports minus imports but a large deficit on the current account because of net payments abroad for services and because of dividend payments. Profit switching transfer pricing on merchandise trade has been a feature of Ireland”s imports and exports for many years (Stewart, 1989).
Table (2)
Net Exports, Payments for Services and current Balance 2001-2013 (€Millions)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Merchandise 30494 35442 32604 33903 32236 30332 28627 31179 39864 42877 43321 42405 36182
Services1 -12412 -13242 -10590 -11906 -12391 -11300 -9043 -14875 -15049 -14091 -8634 -6978 178
Of which royalties and licenses -10371 -11399 -12344 -14887 -15173 -16797 -16394 -23258 -23836 -26838 -29758 -29968 -31656
Primary Income2 -19142 -24233 -22722 -23333 -25919 -25053 -29130 -25838 -28515 -26429 -32127 -30309 -26264
Current account Balance -755 -1326 -326 -942 -5809 -6526 -10535 -10689 -5125 945 1377 2702 7633
(1). Exports of services such as computer services are less than imports of services largely consisting of royalty/licence payments.
(2) Primary income is defined as:- Primary Income covers (a) compensation of employees, which relates to the earnings of persons working outside their country of residence for less than one year (i.e. students and other short-term cross-border workers) and earnings of local staff working in embassies and consulates, and (b) investment income, which covers earnings arising from foreign investors” investments in Ireland and Irish investors” investment abroad.
Investment income excludes realised and unrealised capital and exchange gains or losses. It is subdivided into three categories: Direct Investment income, portfolio income, and other income.
Source:- http://www.cso.ie/en/media/csoie/surveysandmethodologies/surveys/bop/documents/pdfs/BopBkgdnotes.pdf
Figure (2) shows trends in the components of the overall balance of payments for the period 2001-2013. The figure shows that a large surplus on merchandise trade is balanced by large income and capital outflows. These are mostly associated with foreign direct investment and investment in the IFSC.
Figure (2)
Because outflows of income are far greater than inflows GNP is lower than GDP for every year. This is unusual for most OECD countries. Apart from Ireland the ratio for Luxembourg for 2012 was 42.8%
Table 3
GDP versus GNP for Ireland (€ Millions)
2005 2006 2007 2008 2009 2010 2011 2012 2013
GDP at Current Prices 163,462 178,297 189,933 186876 168114 164928 171042 172755 174791
GNP at current prices 139,201 155,033 163,413 161033 139596 138503 138915 142445 148529
Ratio% 85.2 87.0 86.0 86.2 83.0 84.0 81.2 82.5 85.0
Source:- National Income and Expenditure 2013, CSO July 2014, 2010, CSO, August 2011
Ireland”s fiscal regime causes considerable distortions to aggregate data. Supply chain management strategies pose particular problems for GNP statisticians. One issue is whether this affected economic policy because growth was overstated. However Irelands fiscal regime is best known for issues other than the resulting distortion to national accounts.
(2). Tax and Other Effects
While the bulk of foreign investment in Ireland consists of portfolio investment, real investment by firms such as Google and Apple has attracted the most attention. Publicly available comparative international data on exports of ICT services shows the importance of Ireland (figure 3). So that Ireland”s share of global ICT exports amounted to 12.7 % in 2012, compared with 8% for the US and 7.3% for Germany. Apple and Google have become synonymous with these exports. The US Senate PSI report (PSI, 2013, p. 26) on Apple computer describes the production and distribution structure of the main subsidiary of Apple Ireland (ASI) as follows. ASI contracts with a firm in China to produce a finished products. These are then shipped from China to the final market. While on route ASI pays for the goods. The Report states (PSI, 2013, p. 27) “Once ASI took initial title of the finished goods, it resold the goods to the appropriate distribution entity, in most cases without taking physical possession of the goods in Ireland”. Issues arise in relation to the recognition of this value added Irish in Irish economic statistics.
Figure (3)
Case Study (1) Apple
The U.S. Senate report on Apple computer (Permanent Subcommittee on Investigations, 2013a) found that one subsidiary located in Ireland (Apple Sales International) had no employees, but had income of $22 billion in 2011 and paid $10 million in tax. This compares with income before tax for the group as a whole of $34 billion for 2011 and cash tax payments of $3.3 billion. The U.S. Senate Report groups Ireland along with Bermuda and the Cayman Islands as a tax haven (p. 3) and states (p. 21) that “Ireland has essentially functioned as a tax haven for Apple, providing it with minimal income tax rates approaching zero”.
The low tax rate for ASI may be explained by a tax strategy of:-
(1) Switching profits to Ireland via transfer pricing in particular in relation to intellectual property (PSI, p. 5, p. 8);
(2) Key subsidiaries of Apple had “no declared tax residency anywhere in the world” and consequently paid no corporate tax (PSI, 2013, p. 4). In response to a question as to where a subsidiary of Apple was managed and controlled, Apple replied “Apple has not made a determination regarding the location of AOI”s central management and control. Rather Apple has determined that AOI is not managed and controlled in Ireland” (PSI 2013, p. 23, footnote 93).
Table (4) shows data of profits and the P and L tax charge Apple Sales International for the period 2004-2011.
Table (4)
Profits and Taxes Paid for Apple Sales International (ASI) 2004-2011
Pre-Tax Profits 2004 2005 2006 2007 2008 2009 2010 2011
Pre-Tax profits
$ billions $0.268 $0.725 $1.18 $1.844 $3.127 $4.794 $12.0 $22.0
Tax charge in $millions $2.1 $3.9 $6.5 $8.9 $14.9 $3.653 $7.0 $10.0
Effective Tax Rate 0.78% 0.54% O.55% 0.482% 0.476% 0.08% 0.06% 0.05%
Source: – PSI, (2013), p. 21, and Apple Sales International Accounts filed with the Australian Securities and Investment Commission.
The Apple subsidiaries in Ireland are important in explaining the tax rate for the Apple as a whole.
Apple (Form 10K 2013, p. 34) states:-
“The Company”s effective tax rates for all periods differ from the statutory federal income tax rate of 35% due primarily to certain undistributed foreign earnings, a substantial portion of which was generated by subsidiaries organized in Ireland, for which no U.S. taxes are provided because such earnings are intended to be indefinitely reinvested outside the U.S.”
For 2011 the tax savings on the Irish subsidiary at $7700 million are larger than reported tax savings fo either the year 2011 or 2012 . Table (5) shows that while Apple pays tax, although not at the US nominal rate of 35%, very little corporation tax is paid outside the US. A similar pattern exists for other US MNC.
Table (5)
Tax Payments and Tax Rates for Apple ($million)
Group Pre-tax profits Tax shown in the P and L Cash Tax Payments Foreign Tax Savings ETR1
% ETR
% ETR3
% ETR4
% ETR%
2013 50155 13118 9128 4614 26.2 18.2 16.0 3.7 1.8
2012 55763 14030 7682 5895 25.2 13.8 13.0 1.9 1.3
2011 34205 8283 3338 3898 24.2 9.8 9.3 2.5 1.2
2010 18540 4527 2697 2125 24.4 14.5 13.8 -0.7
2009 12066 3831 2997 647 31.8 24.8 15.4 4.7
2008 8947 2828 1267 500 32 14.2 13.4 4.3
2007 5008 1512 863 297 32 17.2 16.2 4.0
2006 2818 829 194 224 29 6.9 6.4 5.6
Source: Form 10K for various years.
Definitions of effective tax rate (ETR)
ETR1 = Tax rate as shown in company accounts
ETR2 = Tax rate defined as cash tax payments /pre tax profits
ETR 3 = Cash tax payment/ (accounting depreciation + pre-tax profit
ETR 4 = Current tax charge on non US profits/ Non us profits
ETR 5 = Tax rate on unremitted profits.
Case Study (2): Google
Ireland is equally important in the operations of Google. Evidence presented to the U.K. Public Accounts Committee showed that Google has substantial operations in the U.K., employing 1500 (Public Accounts Committee, 2012, Q461) and generated $18 billion in sales (13% of global sales) in the period 2006-2011 (Q201, 2013). Yet just $16 million was paid in UK corporation taxes in this period. The Public Acccounts Committee concluded (2013, p. 5):-
“Google defends its tax position by claiming that its sales of advertising space to UK clients take place in Ireland—an argument which we find deeply unconvincing on the basis of evidence that, despite sales being billed from Ireland, most sales revenue is generated by staff in the UK. It is quite clear to us that sales to UK clients are the primary purpose, responsibility and result of its UK operation, and that the processing of sales through Google Ireland has no purpose other than to avoid UK corporation tax”.
Other countries such as France and Germany face similar issues in relation to Google (Fouquet and Mawed, 2012).
A Google subsidiary in Ireland (Google Ireland Ltd.) accounts for 92% of Google sales outside the U.S. Google Ireland sales amounted to €15.023 and €12.457 billion for 2012 and 2011 respectively, but resulted in a pre-tax profit of €153 million for 2012 and €24 million for 2011, largely due to unexplained payments referred to as “administrative expenses” of €10.9 and €9.02 billion. This is likely to be royalty payments paid to its parent, Google Ireland Holdings, which is registered in Ireland but “administered from Bermuda” (Public Accounts Committee, 2012, Q475) . Google operations in Ireland are central to Google”s non-U.S. operations and to its tax strategy.
Note foreign withholding tax is shown as Euro €17.4 million for 2012 and €12.3 million for 2011
What is effective tax rate €33.653/€153.891=21.86%
Or €33.653/€11047.506 = 0.30%
Effective tax rates are largely determined by the definition of “administration expenses”. Are they in effect a distribution of profits? The bulk of these are likely to be royalty payments transferred to Google Ireland parent company Google Ireland Holdings. This is an unlimited company hence no financial information is disclosed. This company is regarded as being resident for corporation tax purposes in Bermuda and pays no corporation tax. This is an example of the “Double Irish” or what can be described as a bi-located company, registered in Ireland, but regarded as being resident for corporate tax purposes in Bermuda.
Given that Google locates most of its non-US income in Ireland. What are the implications for group tax payments?
Google (Form 10K December, 2013, p. 81) states:-
“Although we file U.S. federal, U.S. state, and foreign tax returns, our two major tax jurisdictions are the U.S. and Ireland” and “Substantially all of the income from foreign operations was earned by an Irish subsidiary” (Google Form 10K, 2013, p. 81).
Table (6)
Profits Tax and Effective Tax Rates (ETR) for Google ($ million)
Group pre-tax profits Tax shown as paid in the P and L. Cash
Tax
Paid Foreign Tax Savings ETR (1)
% ETR (2)
%
ETR (3)
% ETR (4)
%
2013 14496 2282 1932 2282 15.7 13.3 10.5 8.6
2012 13386 2598 2034 2598 2.2 15.2 12.4 4.4
2011 12326 2589 1471 2589 21.2 11.9 10.4 3.2
2010 10796 2291 2175 2291 21 20.1 17.8 2.9
2009 8381 1861 1896 1861 22.2 22.6 19.1 3.1
2008 5853 1626 1224 1626 27.8 20.9 16.6 2.4
2007 5674 1470 882.7 1470 25.9 15.6 13.3 2.1
2006 4011 933 537.7 933 23.3 13.4 11.7 2.2
Source: SEC Filings, Form 10K various years.
As in the Apple case Table (6) shows:-
(1).Google pays corporation tax on group profits but pays very little tax on foreign earnings. Hence the vast bulk of corporation tax payments are in the U.S.
(2) Effective tax rates are far below the US statutory rate of 35%. A major reason for this is the low tax rate on earnings of the Irish subsidiaries.
Table (7) shows similar data for 30 US MNC”s with subsidiaries in Ireland. While all firms have references to Ireland, as in the Apple and Google cases, several firms identify Ireland together with the US as the main tax jurisdictions:-
Adobe Systems states (Form 10K, November, 2013, p. 84):-
“Our major tax jurisdictions are the U.S., Ireland and California”.
Symantec (Form 10K for 2013, p. 93) states:-
“Our most significant tax jurisdictions are the U.S., Ireland and Singapore”.
Synopsys (Form 10K for 2013, p. 6) states:-
” Our foreign headquarters for financial and tax purposes is located in Dublin, Ireland”.
Table (5)
Tax Payments, Tax savings and Tax rates for U.S. MNC”s with subsidiaries in Ireland ($million)
Year N Group Profits Tax
shown in P and L Cash
Tax
Paid Foreign Tax Savings ETR1 %
Mean Median ETR2 %
Mean Median ETR3 %
Mean Median ETR4 %
Mean Median
2013 25 198603 42939 35998 24544 18.8 20.4 27.3 19.6 13.5 13.2 3.4 10.0
2012 25 204880 45520 34759 24793 27.8 22.8 19.7 17.8 14.0 12.8 12.7 8.2
2011 29 185639 43558 29403 20800 25.5 23.8 16.7 15.7 11.5 10.5 10.1 8.9
2010 28 165910 45420 40830 17538 18.6 20.6 23.7 20.6 17.0 14.8 5.8 7.7
2009 27 132954 31864 22395 14513 23.5 22.0 19.9 17.7 12.5 13.9 14.1 11.0
2008 24 120124 29768 2716 14239 34.8 22.5 24.4 22.0 16.4 15.6 12.8 9.4
2007 27 117273 28997 27440 11677 27.3 25.9 23.9 20.0 17.2 16.2 16.3 10.9
2006 25 98557 24920 22017 8616 26.7 26.9 23.2 19.5 15.5 16.7 13.3 12.5
Source: Form 10K various years. Firms reporting losses are omitted.
The key issue in explaining low tax rates for both Apple and Google is the tax regime in Ireland rather than the tax rate.
3. Evidence for the Double Irish
It is not known how many companies incorporated in Ireland, are as in the Apple case, not resident for corporate tax purposes in any country. The minister for Finance stated in response to a Dail question that “owing to the obligation of the Revenue Commissioners in relation to confidentiality of taxpayer information (!) and the small number of companies involved, .. .. .. they are precluded from providing the information” (Written Parliamentary answers 25Th June 2013, reference no. 30290/13).
In answer to a Parliamentary Question (30th May 2013) the Minister for Finance stated in relation to companies that are registered in Ireland but not resident for corporate tax purposes, that the Revenue Commissioners would “seek confirmation from a company as to how it is structured and would verify that all relevant corporation tax rules have been correctly applied”. Hence it is surprising that the Minister for Finance stated two days earlier (May 28th) that the numbers of companies registered in Ireland but not resident for corporate tax purposes and their names “are not available as they are not separately compiled” (Minister for Finance written answers 28th May 2013).
From an examination of files in Company House Dublin, 18 subsidiaries were identifies as having a “double Irish” structure of which 14 were subsidiaries of firms in the study. Several more had similar organisational features (unlimited with a connection such as the location of a company secretary in a tax haven) but could not positively be identified. Many other firms may use such a structure but cannot be verified because of the use of unlimited companies.
Table (6)
Some Features of subsidiaries that are Bi-located companies1
Location for corporate tax purposes Location of Secretary
and other information Additional stated Location of accounting records Other tax
payments Employees
Abbott Laboratories Vascular
Enterprises Ltd. Bermuda Illinois, U.S. Abbot Park, Illinois, U.S.A. Refers to VAT payments;
Refers to social welfare costs 228
Abbott Mature Products International Ltd.2 Bermuda Bermuda Abbot Park, Illinois, U.S.A. 0
Adobe Software
Trading
Company Ltd. Not
disclosed5 City West Business
Campus. Accounts say “Adobe Software Trading Company is not subject to Irish Corporation Tax”6. Refers to Irish VAT
Refers to social welfare costs not
disclosed
BMC Software European Holdings Cayman
Islands N. Gray, Cayman Islands 2101, City West Boulevard, Houston, Texas Refers to social welfare costs for 2010
Gilead BioPharmaceuticals Ireland Ltd12 Bermuda Castro Valley, California Gilead Sciences, Lakeside Drive, Foster City, California 0
Google Ireland Holdings Bermuda 1395, Marinovitch Way,
Los Altos, California No accounts published not
disclosed
Overture Search Services Holco Ltd. Cayman
Islands N. Gray, Cayman Islands, Intertrust Trustees,
Cayman Islands3. Pinacle 1, Block B8, East
Point Business Park,
Dublin, 3. 0
Kijiji International
Ltd4 Luxembourg San Jose california Atrium Buildings
Blancharstown 0
Linkedin Technology Ltd.10 Isle of Man Isle of Man 0
McAfee Ireland Holdings Ltd Bermuda Goodbody Secretarial, Dublin Accounts state “Turnover excludes VAT” Not
disclosed
Medtronic Vascular Connaught8 Cayman Islands Barbara Padega, West Bay, Grand Cayman, Cayman Islands Medtronic Cardio Vascular, 3576 Unocal Place, Santa Rosa, Ca. 0
Medtronic Vascular Holdings Ltd9 Cayman Islands Barbara Padega, West Bay, Grand Cayman, Cayman Islands Medtronic Cardio Vascular, 3576 Unocal Place, Santa Rosa, Ca. Not
disclosed
Novell Software International Cayman
Islands Avalon Management Ltd, Grand Cayman, Cayman Islands 1800, South Noveil Place,
Utah, U.S. 0
SFDC International Isle of Man Ramsey, Isle of Man. Accounts for year ending Jan. 2012 Footnote (6) state “profits arising in the company for the year of assessment 2012 will be subject to tax at the Isle of Man standard rate of 0%> Accounts for Jan 2012 state (p. 5):- “Books and accounting records are maintained at the salesforce.com EMEA, Sarl, Lake Geneva Centre, Building A, Route de la Longerale 9, Morges Switzerland” Not
disclosed
Symantec
Holdings Ltd Jersey Ogier Corporate Services (Jersey) Ltd4. Company Hq, 350 Ellis St., Mountain View, California, 94043, U.S.A 0
Synopsys
Ireland Ltd. Bermuda Company accounts states it “operates from its
Business address
Clarendon House, 2
Church St. Bermuda”2 2, Church St. Hamilton Bermuda. “Supplemental records” are kept at 800, East Middlefield Road, Mountain View California Refers to “social welfare” costs. 0
VMWare
Bermuda Ltd7 Bermuda D. Smith, 17
Mountainwood Court, Hillsborough, California. 3401 Hillview Avenue, Palo
Alto, Calif. US and company address at Parnell House Ballincollig,
Co. cork Not
disclosed
Yelp Ireland Holding
Co. Ltd11 Isle of Man Laurence Wilson,Oakland, California
Notes to Table (6)
(1). Table reproduced from Stewart 2013 b. Data Source: filings at Companies Registration Office. All companies are incorporated in Ireland and hence the company auditor is located in Ireland. All companies are registered in Ireland, hence books of account must be maintained in Ireland.
(2). Annual Report and accounts December 2011, footnote 7.
(2). This is the address of Conyers, Dill and Pearman a law firm, who provide company administration and other services.
(3). The web site of this firm states “Intertrust Cayman, the largest trust and corporate services provider in Cayman, offers a full range of corporate, fiduciary, fund administration and company secretarial services”.
(4) The accounts for 31 December 2011, footnote 8, “The company is tax resident in Luxembourg”. Over 80 % of income consistd of “royalty revenue”.
(4). The web site of this firms states “The Ogier Group provides legal, trust, fund and corporate administration services across the world”s major independent financial centres.
(5) Adobe Software Trading company moved ts registered office from Barbados to Bermuda and then to Dublin in 2007.
(6) In 2006 the registered office was given as Ram Re House, Hamilton, Bermuda. A footnote to the accounts (footnote, 7) states that the Adobe Software Trading Company is not subject to Irish corporate tax. According to filings at Companies Registration Office the new address from 16th June 2008 is Citywest Business Park.
(7). This firm is a subsidiary of EMC. Footnote (6), Annual report and accounts for Dec. 2012 state that “Profits are not within the charge to Irish tax”, The address of the solicitor is given as Appleby Services (Bermuda) Ltd. Canon”s Court 22 Victoria St. Hamilton, Bermuda
(8) Accounts for year ending April 2012, corporation tax is zero and footnote (5) state “The company is not subject to corporation tax in its country of residence”
(9) Accounts for year ending April 2012, corporation tax is zero and footnote (8) state “The company is not subject to corporation tax in its country of residence”
(10) Accounts for December 2011, footnote 3, state “as the company is an Isle of Man resident, no corporation tax is chargeable”.
(11) Annual Report and Accounts 2012, Footnote 3,
(12) Footnote (5) of accounts for 2012 states “”The Company is tax resident in Bahamas”.
The total pre-tax profits of 14 bi-located subsidiaries plus Apple Sales International amounted to €32.6 billion for 2011. The tax rate on these profits is not 12.5% but zero for several subsidiaries and slightly above zero for the remainder. Irish revenue statistics omit these profits from the tax base of 61.5 billion (before deductions and charges). Thus any estimate of effective tax rates based on published aggregate data is misleading.
4. Other Effects of Low Corporate Tax and other Tax Incentives
One effect of industrial policy based on fiscal and other incentives is that it encourages the growth of the tax avoidance industry (Stewart 2013b). Tax legislation is complex. Introducing tax concessions aimed at one sector while attempting to preserve the existing tax base adds to this complexity. Firms wishing to avail of fiscal incentives must necessarily use the services of skilled professionals. Firms providing such services have grown large and powerful, in both lobbying for and influencing changes in the tax code. The UK Committee of Public Accounts (2013) states “the large accountancy firms sit on tax advisory panels and also second staff to government to provide technical advice when tax legislation is amended or created” (Public Accounts Committee, 2013, p. 9). The Public Accounts Committee expressed concern on “the way that the four firms appear to use their insider knowledge of legislation to sell clients advice on how to use those rules to pay less tax” (p. 9).
Table (1) shows that global tax advice revenues for the big four accounting firms for 2008-12, are large and have remained largely unaffected by the global financial crisis.
Table (1)
Revenues from Tax Practice for Big Four Accounting Firms
$ Million
Global Revenue PwC 1 Deloitte2 Ernst & Young3 KPMG4 Total
2012 7944 5900 6370 4860 24715
2011 7600 5600 6011 4690 24012
2010 7100 5400 5671 4150 22321
2009 6900 5700 5822 4090 22512
2008 7500 6000 6142 4730 24372
Notes
(1) Refers to year end 30th June; PWC Global Pressroom
(2) Refers to year end of May, Source and Deloitte Press Releases and Deloitte 2010 Annual Review.
(3) Refers to June each year. Source Ernst and Young Press Releases
(4) Refers to September each year. Source: KPMG press releases.
5. Some Comments on BEPS and the Irish Tax Regime
There has been considerable public and government concern with the tax avoidance strategies of MNC”s. The OECD/G20 BEPS proposals aim to reform the taxation of the international tax system in particular as it affects companies. The executive summary of these proposals states that the challenge of the digital economy is :- “To ensure that profits are taxed in the jurisdiction where economic activities generating the profits are performed and where value is created” (OECD, 2014, p. 17). The explanatory statement states the OECD/G20 BEPS project “has reinvigorated the fight against harmful tax practices” and this work focuses on “reducing the distortionary influence of taxation on the location of mobile financial and service activities, thereby encouraging an environment in which free and fair tax competition can take place” (OECD, 2014a, p. 6).
Significant progress is reported on “improving transparency on rulings and of consideration of intellectual property (IP) preferential regimes and methodologies to assess substantial activity in these regimes and others” (OECD, 2014a, p. 6).
Significant progress is also stated as having been made in addressing the serious concern raised by the separation of the location of the return on intangible property and the location where economic activities take place and value is created (OECD, 2014a. p.7).
One problem that arises is in the detail on how to value intangibles (action 8)? The Explanatory Statement states (OECD/G20, 2014a, p. 3): “abuse of transfer pricing rules in the key area of intangibles will be greatly minimised” but also notes (p. 8) “the work on the transfer pricing aspects of intangibles includes sections still bracketed as they cannot be finalised before Actions 9 [transference of risk and capital] and 10 [allocation of profit in a global value chain, and allocation of management fees and head office expenses] are delivered”.
In OECD/G20, 2014b, p. 16 it is stated that “In specific situations the functional analysis may show that the use of profit split methods or valuation techniques (e.g. discounted cash flow method) is appropriate. However the value of IP may arise wholly or largely from organisational capability in particular the creation of organization specific competencies, and secondly market structure – the ability to dominate a market. Firm specific competencies may in turn lead to market dominance. This is what gives value to IP. Thus the problem of valuing IP may not be the undervaluation of an asset at the time of transfer as stated by the OECD/G20 (2014b, p. 103), but rather the exercise of monopoly power as in the Google case ( Barker, 2014). The use of organisation competencies (including IP) raises issues as to where “value is created”. Is it the market that is exploited or where those organisational competencies are exercised? It is thus not surprising that the OECD/G20 decided that ” Because the interactions between work on ownership of intangibles, hard to value intangibles, risk and recharacterisation are particularly pronounced, a decision has been made not to finalise the work on some sections of this document at this time” (OECD/G20, 2014 e , p. 10).
This is likely to prove contentious and allow further loopholes to develop. The OECD BEPS project recognises that “preferential regimes” will continue to exist, but seeks to ensure that such activities are “substantial”. For many firms especially those operating in the digital economy the value of IP is substantial and is the basis for switching profits to Ireland in the case of Apple. Thus the possibility arises that increasing the value of IP will result in satisfying the requirement of “substantial activity”.
A major focus of BEPS project is on Treaty change (OECD/G20, 2014d) to prevent harmful tax practices. At the same time it is recognised that the model treaty need to “adapted to the adapted to the specificities of individual states”, because of constitutional requirements, EU restrictions or court interpretations. Such differences could give rise to tax planning. In addition all of the countries where Irish incorporated companies claim to be resident for corporate tax purposes have no tax treraty with Ireland (Bermuda, Cayman Islands, Isle of Man, Jersey). It is difficult to predict how treaty change will affect bi-location tax strategies.
Elsewhere particularly for Action (5) Countering Harmful Tax Practices, there are several references to “progress” being made. However very little “actual progress” has been made in removing harmful tax practices since the OECD Global Forum on harmful tax practices was established and published its first report in 1998. Revamping and changing the remit of this Forum (OECD/G20, 2014c, p. 18) may similarly prove difficult.
However what is useful is the emphasis on tax regimes and that rulings should be transparent. Some of the most attrative features of the Corporate tax regime in Ireland are not based on legislation, or court decisions but rather on rulings by the Revenue Commissioners for example rulings allowing firms not to located for corporate tax purposes in Ireland and more recently ruling on removing withholding tax on R and D payments from Ireland.
6. Conclusion
Tax incentives erode the tax base in a number of ways (1) through direct tax loss which may or may not result in higher tax revenues; (2) through the use of tax incentives in unanticipated ways. This may be further exacerbated by lobbying by affected groups; (3) As a result tax incentives tend to diffuse both to other sectors and geographically. The net result is that the burden of taxation shifts to activities and individuals that are unable to avoid tax .
The main influence on investment decision making is the possibility of making a profit. A primary focus on tax strategy is a distraction, and according to survey and other evidence is not a major determinant of investment
A tax based industrial policy will not result in an innovative, research led economy. A tax based industrial policy leads to an emphasis on tax reduction. Those skilled in knowledge of the tax system become senior management. In turn their skills require constant updating and they become dependent on tax advisors. The dominance of accounting/taxation specialists in senior managerial positions is at the expense of those skilled in new product development, production expertise, logistics, and marketing. The tax avoidance industry and those firms skilled in understanding the tax system and selling tax services become large and powerful and may exert considerable influence in formulating tax policy and legislation.
Long run economic success will not follow from countries introducing tax haven type features of which a low corporate tax rate is an essential feature.
The BEPs project, if implemented, will result in substantial change to the tax regime for foreign direct investment in Ireland and other countries. These changes may in turn cause affected companies and their advisors, as well as some governments, to seek replacement incentives. Hence the proposals for country by country reporting may be the most significant reform in the long run, but to be really effective country by country reporting should be publicly available.
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