When Taoiseach Enda Kenny was grilled over Ireland’s low tax regime for multinationals on a visit to Paris last week, he fell back on a familiar defence. By now it’s a regular refrain – Ireland’s corporate taxes are crystal clear and transparent.
Ours, he added, is a statute-based system which levies a 12.5 per cent tax rate which complies fully with global norms and EU laws.
And he's right. But nebulous tax-avoidance measures both in Ireland and abroad mean that effective tax rates paid by some multinationals have often been as clear as mud.
The Taoiseach, along with numerous Government Ministers, has recently been referencing a report issued by PricewaterhouseCoopers and the World Bank last November, entitled Paying Taxes 2014 – the Global Picture.
This report maintains that, despite our reputation in some circles as tax haven in all but name, Ireland has an effective corporate tax rate of 12.3 per cent. This, the study points out, compares to an EU average of 12.9 per cent and 16.1 per cent globally.
But an analysis of Ireland's corporation tax suggests effective rates for US multinationals based here may be as low as 2.2 per cent.
Loophole use
A research paper by Jim Stewart, associate professor in finance at Trinity College Dublin, points out that the PwC-World Bank study is based on a hypothetical company which bears little resemblance to the biggest beneficiaries of tax loopholes.
This company is assumed to be small, domestically owned and producing and selling ceramic flower pots. It has no imports or exports. As a result, this automatically rules out the sort of tax planning widely used by subsidiaries of multinationals.
“It is surprising that this study is frequently cited by Irish Government sources to the effect that effective tax rates in Ireland are not that different or even higher than in other EU countries,” Prof Stewart’s research paper states.
Publicly available data which shows corporate tax payments and profits on a consistent basis across countries is not widely available, according to the paper. However, one such data source is the US Bureau of Economic Analysis which, Prof Stewart maintains, provides a more accurate estimate of effective tax rates for US subsidiaries .
This indicates that effective tax rates for US subsidiaries in Ireland fell from 5.5 per cent in 2006 to 2.2 per cent in 2011.
This reduction is likely to be linked to wider use of tax write-offs – such as tax credits for research and development activity – and profit-shifting measures such as the "double Irish".
Case of Google
Google is one of the most high-profile beneficiaries. Latest figures indicate that its Irish operation had revenues of €15.5 billion during 2012. However, it ended up paying Irish corporation taxes of just €17 million.
That's because it charged "administrative expenses" of almost €11 billion to other Google entities abroad, some of which are ultimately controlled from tax havens such as Bermuda.
Ireland wasn't alone in offering competitive rates to US firms. Competitor countries such as the Netherlands (3.4 per cent) and Luxembourg (2.4 per cent ) also had low effective rates in 2011.
By contrast, effective rates were many times higher for US firms in the UK (18.5 per cent), Germany (20 per cent) and France (35.9 per cent).
Despite our insistence that Ireland’s tax regime is clear and transparent, we are increasingly in the spotlight for our role in helping multinational companies avoid taxes around the world.
These issues are now being addressed through bodies such as the Organisation for Economic Co-operation and Development, which is seeking to close corporate tax loopholes through its “Base erosion and profit shifting” (Beps) project.
Whatever the outcome, the stakes are high: not just for US firms which are benefiting, but for Ireland where these firms employ more than 100,000 people.
