Thursday, 31 March 2016

Good News on Corporate Tax Avoidance

Paul Sweeney: The public anger at the low levels of corporation tax paid by multinationals has forced action by states and may be beginning to bring in some extra taxation to hard pressed governments. Public anger also forced governments to curb their ambiguous relationships with the corporate multinational world. 

Previously, governments have increasingly vied with each other in the zero sum game of Tax Wars (“tax competition”) for foreign direct investment. The G20 asked the OECD to work on avoidance and they came up with BEPS or Base Erosion and Profit Shifting. It seems to be working. 

Apple and Ireland

Many may have heard that the EU is also investigating whether Apple has done a special deal with the Irish Government. This may have allowed it to avoid tax in  other countries, by paying a reduced amount tax here. If there is a special deal, it will be seen as state aid. Apple warned its shareholders that it may have to pay a lot more tax here if it is found to be getting “state aid” under a special deal for Ireland. The EU competition Commissioner, Margrethe Vestager, is investigating the case and she is no pushover.

The Irish government denies any special treatment. If it is found to have done a special tax deal with Apple, it will mean that the rule of law, which should apply equally to all companies, has been breached. This is serious for our reputation, for our quality of governance and it would mean the rule of law has been undermined.

Minister for Finance Michael Noonan had said (IT 7 Nov 2014) that he expected the European Commission's investigation into Ireland's tax arrangement with the US multinational Apple will be dropped. 18 months later - it is still in progress. 

If the Commission finds a breach of the rules, “Apple could be forced to pay billions in euro in arrears taxes to the Irish state”, according to some reports. However, that is on the basis of tax at the full 12.5% over the years, which is highly unlikely. It would be more likely to be tens of millions in back tax. 

But it would do Ireland’s reputation no good if Apple is found to be getting state aid. Apple has been a substantial company here, since 1980 and it currently employs around 3,000.  Unusually for a tech company, it also recognises unions (though most pharma companies do so too). 

Apple: the worlds biggest and most profitable company
It is ironic that a cash-strapped nation like Ireland is accused of giving artificial “state aid” to the world’s largest corporation (by market capitalisation) and the most profitable company in the world. Apple recorded the biggest annual profit in corporate history, with record sales of the iPhone helping it to make $53.4bn in year end to 26 September, 2015. Its profits surpassed the previous corporate profit record of $45.2bn, made by ExxonMobil back in 2008.

The Company posted record quarterly revenue of $75.9 billion and record quarterly net profits of $18.4 billion in its first quarter to December 2015. It is so profitable that it has an enormous cash pile. “We returned $17 billion to our investors during the quarter through share repurchases and dividends, and we have now completed over $143 billion of our $200 billion capital return program”, it said in late 2015.

Apple has a staggering $215.7 billion in cash, cash equivalents and marketable securities on its balance sheet. In spite of this vast amount of cash, it will be borrowing more money. It already has $53bn in long term debt. This makes it one of the most borrowed companies in the world. 

Why is it borrowing more when it is the richest company with so much cash? 

To avoid paying US tax. By borrowing to pay dividends and buy back shares, it avoids having bring back profits and thus triggering  tax charges in the US.

More Corporate Taxes?
In addition to the Apple case, many more companies are now warning their investors that they may have to pay more tax now thanks to the BEPS initiative. The OECD estimated that up to $240bn in tax is lost to avoidance schemes such as booking profits in tax havens or the Double Irish and so on.

What is new and welcome is that corporate boards which have regarded paying tax as avoidable, as a choice, as a “burden”, are now changing course. Corporate social responsibility is not about giving a few bob to environmental charities but also paying tax to pay for public services. 

More than twice the number of US companies alerted investors to the risk of higher taxes in their 2015 accounts than a year earlier, according to the Financial Times.  

In Britain, £1bn a year will be cut from corporate profits as the government announced last month that tax breaks on interest costs would be cut. The UK also introduced a 25% “diverted profits tax” on “contrived arrangements.” The Financial Times (28th March 2016) said that “Other global anti-avoidance initiatives include a crackdown on the “double Irish” structures used to shift corporate profits from low-tax Ireland to a zero tax country such as Bermuda.”

Two Steps Forward and One Back?
The Irish government cut out the Double Irish, but it gave it five years to run and also introduced the Patent Box, where the maximum tax on these profits are half the normal - at just 6.25% maximum. And if there are no profits to be written off against patents then the company can even offset its employers PRSI and reclaim it. This money thus does not go to the Social Fund. This scheme was opposed by trade unions but nonetheless the last government went ahead with it.

The FT also said that “Under pressure from the OECD, Ireland has promised to scrap by 2021 the quirk in its tax rules that allowed companies to exploit the different definitions of residence in the US and Irish tax codes underpinning the double Irish.”

Thus it seems as that there is some progress on corporation tax internationally. The assertion that Ireland’s industrial policy is based on low corporation tax has always been wrong – the reality of our FDI success is more complex – and the sooner the policymakers and politicians recognise this, the better for more coherence and better strategy.

Paul Sweeney is Chair of TASC's Economists' Network.

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