Thursday, April 08, 2021

Ireland among 7 big tax havens as US seeks global minimum corporate tax of 21%

Share of US Multinational Corporation Income in Seven Big Havens, 2000-2019

In a stunning challenge to Ireland's low corporate tax regime which began in 1956, President Joe Biden and the United States Treasury on Wednesday announced that the US would seek a global minimum corporate tax rate of 21% in respect of the foreign profits of large American companies.

Ireland's current headline corporation tax rate is 12.5%. — the average rate in Europe (39 countries) was 19.99% in 2020 and 24.61% when weighted by GDP. The World rate was 23.85% and 25.85% (177 countries) according to the Tax Foundation. Check the trends since 1980.

The Treasury named Bermuda, the Caymans, Ireland, Luxembourg, the Netherlands, Singapore, and Switzerland as the top 7 corporate tax havens. Their share of US multinational corporation foreign profits has risen from almost 30% in 2000 to over 60% in 2019.

Also Wednesday the Biden administration proposed a new system for taxing multinational corporations, calling for the world’s biggest businesses to pay levies to national governments based on their sales in each country as part of a deal on a global minimum tax.

The Financial Times says that in documents sent to the 135 countries negotiating international business taxation at the OECD in Paris, the US Treasury laid out its plan that would apply to the global profits of the very largest companies, including big US technology groups, regardless of their physical presence in a given country.

President Biden said at the White House on Wednesday, "I’ve also proposed a global minimum tax, which is being proposed around the world for US corporations, of 21%. Let me tell you that means. It means that companies aren’t going to be able to hide their income in places like the Cayman Islands and Bermuda, in tax havens. We’re going to also eliminate deductions used by corporations for offshoring jobs and shifting assets overseas. They offshore the jobs, shift the assets overseas, and then don’t have to pay taxes on all they make there."

The administration is seeking to raise the headline federal corporate tax rate from 21 to 28% as part of the plan to raise $2.5tn over 15 years to help finance an infrastructure proposal.

The Made in America Tax Plan

The Treasury Department said domestically it would impose a 15% minimum tax on the profits big firms report to investors. This would affect about 45 companies as the threshold would be earnings of $2bn or more per year.

Last week ITEP, a US think-tank, reported that 55 of America's biggest companies that earned $40bn in profits in 2020 paid $0 in corporate income taxes.

Paschal Donohoe, Ireland’s finance minister and Eurogroup president, is of course not a fan of the proposals and in a Bloomberg TV interview on April 7, he said "I believe we’re entering into a period of change that may well include a debate and there may be a decision on minimum effective tax rates across the world, but we do need to be conscious that it’s not just very big economies that have a need and a desire to be competitive and to grow their economies.”

However, he has little leverage as it is the G-20 of 19 advanced and emerging economies in coordination with the Organisation for Economic Cooperation and Development (OECD) which are crucial for progress. There is a total framework group of about 135 countries.

Ireland's inevitable tax challenge

Nothing lasts forever and while Denmark developed a strong indigenous sector the ready-made jobs from American firms were a godsend for Irish politicians and the big professional firms.

From 1989 when Intel announced that it would open a chip plant in Ireland and several other big American firms followed.

In 2001 Matheson, a Dublin law firm, registered two Irish shell companies, Round Island One and Flat Island Company for Microsoft with addresses in Bermuda.

Thus began the Double Irish where profits shifted to Ireland would be routed tax-free via the Netherlands to shell/ letterbox companies in Bermuda and the Cayman Islands.

The funds would typically be kept in US banks or invested in US Treasuries even though they would be classified as being overseas and not subject to US tax unless repatriated.

Apple avoided the Double Irish but it also uses Irish shell companies.

With an underperforming indigenous exporting sector, after over 60 years of attracting inward investment, Ireland has a limited innovation base.

Tax Incentives

In 1956 John A. Costello, the taoiseach/ prime minister, overruled his finance minister and the long opposition of the Department of Finance to using tax as an incentive for exporters.

The Export Profits Tax Relief (EPTR) became law in late 1956 and originally provided for a 50% tax reduction on profits from increased export sales. In 1957 the benefit was raised to 100%.

The proposal for export profits tax relief had first been suggested in 1945.

TK Whitaker, secretary of the Department of Finance, wrote in a note to his minister “I have always felt that it is production which should be aided rather than exports” and the proposal, if implemented, would further postpone the day “...when we can bring farming profits within the income tax net.”

In 2019 there were 235,000 full-time employees in Irish affiliates of foreign-owned exporters compared with 192,000 employed in Irish-owned exporting firms.

However, about half the Irish exporters just export to the UK while in 2019 exports to the 345m population Euro Area were only valued at €5.6bn.

According to Prof Frank Barry of Trinity College, manufactured exports, which had been flat for years, grew by 18% in 1957 and doubled between 1956 and 1960.

The EPTR was abolished in 1981 (with a grace period of up to 1990 for existing beneficiaries) and replaced with a 10% corporation tax on “manufacturing and internationally traded services.”

The standard corporation tax rate was 50% and the 10% rate was extended in 1989 to activities in the International Financial Services Centre (IFSC) in Dublin.

The current 12.5% rate was approved by the EU and applied to all companies from 2003 and by 2010 the grace period for the 10% rate ended.

It was only in 1963 that Ireland began cutting trade tariffs and in the same year John F Kennedy, the first Irish American and Catholic president visited Ireland at a time when his ancestral homeland wanted to attract a lot of US firms.

Fifty-eight years later, Joe Biden, the second, can't make an exception of Ireland.

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It's interesting that the big stories on tax avoidance have come from foreign sources:

1) 2004: the US tax newsletter Tax Notes published data that showed Ireland became the most profitable location for US companies overseas as profits doubled in 1999-2002;

2) 2005: The Wall Street Journal in a major report from Dublin discloses Microsoft's Double Irish tax scam;

3) 2010: Bloomberg reveals how Google saves billions in taxes through the Double Irish scheme;

4) 2013: Apple's use of 'stateless' Irish shell companies to channel huge profits from across the world through Irish shell companies is detailed by the US Senate's Permanent Subcommittee on Investigations.