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Saturday, September 14, 2013

Irish tax haven red herring and massive profit shifting

Feargal O'Rourke, head of tax at the Irish unit of PricewaterhouseCoopers (PwC), the Big 4 accounting firm, writes in The Irish Times that "we need to be a lot less supine in our defence of the Irish tax system so that the next time the 'tax haven' story rears its head, we’re much quicker to shoot it down."

He of course is in tune with the official line: the tax system is transparent and he does not acknowledge that there is any profit shifting. The data suggests that it's on a massive scale.

This year Microsoft was declared Ireland's biggest exporter with an annual jump of 37% in revenues -- this of course did not reflect activity in Ireland because when a resident of Madrid or Athens buys a Microsoft product, it's booked in Dublin as an Irish sale.

The issue of whether or not Ireland is a tax haven or not in accordance with a particular definition, is a red herring. Only a fool would argue that there is no evidence that Ireland or for example Switzerland, do not engage in tax haven activities.

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This is my comment on The Irish Times website:

This is the certitude of a man with a strong professional interest to defend his biggest clients but who appears to be oblivious to the shifting sands under his feet.

The arcane debate on the definition of 'tax haven' enables the defenders of the status quo to avoid dealing with the truth.

All the developed countries are members of the OECD and among them, neither Ireland, Netherlands, Luxembourg, Switzerland, the UK (with responsibility for 10 island tax havens, known as Crown Dependencies and Overseas Territories) and the US (in Delaware it’s easy to set up shell companies with no questions asked and 1209 N. Orange Street, Wilmington, Delaware is the legal address of companies such as Apple, Bank of America, General Electric, Google, among up about 285,000 other corporations), meet their definition of tax haven -- and for good reason.

All view it as a pejorative term and in 2009 when President Obama termed the Netherlands a tax haven, the Dutch government protested and the Treasury Department adjusted documentation to please them.

Bloomberg reported last January that multinational companies routed €10.2tn in 2010 through 14,300 Dutch “special financial units,” according to the Dutch Central Bank. Such units often only exist on paper, as is allowed by law.

The Dutch foreign direct investment flows make Cyprus look like the corner shop and in recent weeks, the Dutch government announced measures to combat tax haven activities including the use of letterbox companies by overseas tax residents.

The Financial Times reported last April:

The Netherlands has 23,000 such letterbox companies, managed by 176 licensed trust firms. These companies attract huge flows of money, making €8tn worth of transactions in 2011 – 13 times the country’s gross domestic product.

It is not just financial letterbox companies that realise the tax benefits of the Netherlands. The Rolling Stones and U2 both have companies in the same 17th-century Amsterdam canal house, which they list as the owners of their intellectual property, taking advantage of the lack of Dutch withholding taxes on royalties."

So the Netherlands isn't a tax haven?

Last May after the US Senate's report on Apple's use of what were termed 'stateless' Irish companies, Ambassador Michael Collins sent a letter to Capitol Hill on behalf of the Irish government, stating that Ireland wasn't a tax haven.

Senator Carl Levin and Senator John McCain, responded to the Irish letter:

Most reasonable people would agree that negotiating special tax arrangements that allow companies to pay little or no income tax meets a common-sense definition of a tax haven."

So the key focus should be on tax haven activities and all but fools and the self-interested would deny that for example Switzerland is in this boat.

The OECD in 1998 defined the following features of tax havens: no or low taxes, lack of effective exchange of information, lack of transparency, and no requirement of substantial activity ('Harmful Tax Competition: An Emerging Global Issue').

However, Dutch letter box companies can operate within this definition and the Eaton Corporation with over 100,000 staff, can move its headquarters from the US to Ireland to avail of the low tax rate, and effectively become an Irish company but with no substantial activity in Ireland.

The taoiseach and ministers have been using the term 'transparent' about the tax system in recent months but the claim is false.

Following a Wall Street Journal report in 2005 that two of Ireland's biggest companies by revenues were virtual companies operating from the office of a Dublin law firm, their owner Microsoft was advised to convert them to unlimited status to avoid filing accounts with the Irish Companies Office. Apple took the same route and the 2003/2004 financials were the last that were publicly available; Intel Ireland is a branch of a Cayman Island letterbox company and its Irish accounts are kept secret. Pfizer Ireland is a branch of a Dutch partnership and its Irish financials are not publicly available.

Feargal O'Rourke says:

What can be said with absolute certainty is that every company within the charge to Irish tax pays tax at 12.5% on their activities."

This is not the reality.

When Google books almost half its global revenues in Ireland, it uses intercompany charges to minimise net income before tax.  In 2010, Google Ireland's net income before tax as a ratio of revenues was 0.18% down from 0.60% in 2009.  In 2011, revenues were at €12.4bn and net income before tax was €24m. Tax on trading activities was €3m.

Google Inc.'s net income before tax ratio of revenues in 2009, 2010, 2011 was 36%, 37% and 31%.

In Microsoft's case, 1,914 employees in Ireland, Singapore and Puerto Rico from Microsoft’s total head count of 90,000, were responsible for 55% of 2011 profit before tax.

Microsoft’s Irish operating centres account for roughly 30% of the company’s global revenue, so the Irish entities contribute 30% of the cost of research and development to the global cost share pool. However, Microsoft Ireland Research (MIR) in Dublin only accounts for less than 1% of the company’s total R&D.

Feargal O'Rourke knows well that the Revenue is much more likely to audit a local firm compared with  the likes of Microsoft - - until this year the Revenue was unable to say if even one R&D tax credit claim was rejected in a decade.

US Bureau of Economic Analysis (BEA) data shows that in 2010, 98,500 Irish workers accounted for more sales than 598,000 in Germany ($324bn compared with $316bn) and German majority affiliates of US firms could only manage a net income/revenue ratio of 3% compared with 30% in Ireland.

The UK's 1.2m in US affiliates produced revenues of $682bn and net income of $87bn. Profitability per Irish worker was $970,300 and $72,500 in the UK.

Net income in Ireland jumped by 37%.

What profit shifting? What crisis?

...and Feargal O'Rourke puts his faith in transfer pricing rules! Perish the thought as our merchandise trade surplus vapourises! In services, intercompany charges are used to wipe out the surplus.