Monday, 29 March 2010

Lies, Damn Lies & Irish Economic Statistics - A Basic Lesson in Corporate Tax Planning

An Saoi: I have had enough of all of those stockbroker economists & politicians who lecture us incessantly that exports are the key to getting us out of their economic mess. I decided to put together this note on “Irish” exports, or more correctly Ireland’s role in worldwide tax planning. You will doubtless have heard that “Irish” exports have fallen very little through this depression. This post tries to explain why.

Please make the effort to read it all; I have tried my best to keep it as simple as possible.

The diagrams below show a basic simple structure used by many multi-nationals to avoid paying tax. Sales are booked through an Irish trading company for perhaps the whole of Europe, and the profits are quickly hoovered into another “Irish” company, but this one is actually in a tax haven. It is sometimes referred to as a “double Irish”.

Let us say a US multi-national wants to set up an Irish trading subsidiary or as they are normally described by the IDA a “European Headquarters”. Instead of setting up one company however it sets up two, a trading sub, which will carry out the activity and a holding company, which will move its centre of management and control to a tax haven, let us say the Bahamas, directly after formation. This company is Irish Registered and Non-Resident or an IRNR.

The IRNR will own the license or intellectual property required by the trading company and issues a sub-license to a Dutch BV.

The Dutch BV passes on a sub-license to the Irish trading company. This avoids the IRNR being deemed to be resident in Ireland and thus taxable in this State. It is the reason you interpose a Dutch BV, which acts as a conduit to get the profits tax free up to the IRNR.

The Irish trading company “sells” the license, goods or whatever the company makes or does throughout Europe, paying local subsidiaries a small commission to do the marketing. It passes most of the profit upwards in the form of a royalty payment. Instead of paying a tax rate of 12.5%, it actually has a tax rate of about 3% or even less.

The US accepts that companies are resident in the country where the company is resident, but Ireland looks at its so-called “centre of management and control”. The haven company therefore is Irish as far as the Yanks are concerned, but is not consider Irish by the Revenue Commissioners.

Fig. 1

Fig. 2

Kathleen Barrington of the Sunday Business Post described here how NCR washed most of its profits through Ireland and Simon Bowers writing in the Guardian showed how Google books all its sales through Google Ireland Ltd here.

Tax avoidance is a serious issue, which as an Oxfam publication issued in March 2009 showed costs lives. Ireland is a prime player in world tax avoidance because we happily co-operate with many of the largest multi-nationals, by not just allowing these types of structures, but actually marketing the country as the place to locate.

The accounts of the Irish trading entity would look something like this. This is not an extreme example, but should give a flavour of the type of “exports” we really produce.

(*I have assumed that Depreciation = Capital Allowances)


Billy said...

An Saoi,

your argument (correct or otherwise) appears to have nothing to do with disproving that "...exports are the key to getting us out of their economic mess."

You simply state that Ireland uses a low tax regime to attract a lot of paper-only business to our economy. (ie trade is booked through Ireland but as the items themselves are not manufactured here there is no trickle down to the Irish economy except for the tax take). Furthermore you state this is morally questionable as it denies this tax revenue to other states.

How any of this furthers the point you implicitly set out to make in your firtst paragraph ie that concentrating on increasing our exports will not get us out of our economic mess is beyond me.

Kevin Denny said...

Perhaps the implicit argument is that measured exports are a poor guide to "real" economic activity. So we could see exports rise but no recovery. Yes, but this does not indeed disprove the contention in question, namely that a rise in economic activity requires an increase in exports.

Seán said...

We got our fingers badly burned in the financial crisis ans the government's answer to get us out? More of the same.
Is turning us into the offshore capital of Europe going to solve the jobs crisis? No. Is it going to piss off our EU partners and hasten the introduction of a CCTB? Probably, particularly if in 18 months time they all have to "do a Greece" and loan us a shed load of cash. Particularly when one considers that if we weren't in the EU we'd have surely been blacklisted by the OECD for harmful tax practices at this stage.

Billy said...

My beef is not with the criticism of the government as such but with An Saoi's line of argument - or lack of more like.

It's an increasinly common rhetorical tactic - or else I've just noticed it more of late. David McWilliams is probably the worst for using this non-logic. His usual article is in the form of brief summary of some historical event. This is followed by his take on a tangentially related current day event. The backward looking introduction makes him look knowledgeable and add credence to his own analysis.

Anyway I presume An Saoi's beef with recovery through exports is that it entails real-devaluation of the Irish economy. Now that may or may not be so. But the fact that funnelling corporate profits via the lowest tax regime available is a financial three card trick and that does some 2nd or 3rd world economy out of revenue is irrelevant to proceedings no matter how interesting the mechanics of how it is done!

@Kevin Denny. When someone is arguing a point the should really do it explicitly rather that going of on (an interesting) tangent and getting us to figure out the implied arguemnt. Also I would think that a rise in economic activity in our open economy would be very hard w/o a rise in exports! We have a situation where we have a huge amount of unemployed. In order for them to get jobs they will have to get engaged in supplying good and services. And in our small, open economy most of those goods and services will inevitably have to be exported.

@Sean. I don't think the govt. want to turn us into a full-on corporate tax haven. But they certainly don't want to decrease our attractiveness in respect to corporate tax rate. In any case I don't know how hollow the HQ operations of some multi-nationals are. Google, mentioned in the article employ about 1000 here I beleive.

An Saoi said...

Billy, Apologies for not coming back to you earlier, unfortunately work issues intervened. I also had intended to develop the points you referred to in a second post, but again the dreaded day job!

Yes, we require real economic sustainable activity to get us out of the current mess, and I agree that real exports will be part of this change, but all of the policies currently being pursued are in relation to attracting more of this fly by night economic activity. I pointed in a previous post that the only serious suggestions that came from the Innovation Taskforce were further tax based scams.

By the way many of the staff employed in many of the companies attracted into Ireland are not Irish and stay only for comparatively brief periods of employment, adding very little to the local economy. I understand that in places like Google & E-Bay/Paypal the numbers of non Irish may be as high as 80%

Replacement of imported goods is as good a way of improving the local economy and creating sustainable long term employment. Ireland is huge importer of food products which we previously produced here.

The "export" figures produced by the CSO need of course to be deflated by net transfers. Dr. Antoin Murphy's black hole as he used to describe it. However there is a complete silence about such matters now

Foreign Direct Investment plays a role in most economies and the roles played by say IBM & Wyeth who both employ over 3,000 people here are well worth studying. Both have moved substantially up the chain without massive losses of workers.

However my core point is that we continue to fool ourselves if we look at the headline statistics, because they are completely unreal. We have wasted years chasing transfer pricing shadows rather than developing a real economy.