Scrutiny of Ireland begins to bite in Apple tax inquiry

The tax inquiry by a powerful US Senate subcommittee into computer giant Apple and the financial advantages it enjoys in Ireland comes as bad news indeed for Dublin. Although the low corporate tax rate and associated trappings are central to the Government's economic strategy, the regime is under international scrutiny as never before.

The appearance before the subcommittee yesterday of Apple chief Tim Cook follows scathing criticism in Britain of aggressive tax avoidance by big-name multinationals and comes not long after a strident assault on Ireland's business tax regime by Germany and France.

While successive Irish administrations have clung rigidly to the line that there is nothing improper about the policy, the increasing global scrutiny puts the Government in a defensive posture when it would much rather stay out of the debate. The development also comes amid growing moves at European and G8 levels to stamp out tax fraud and evasion.

The challenges are clear, all the more so as Taoiseach Enda Kenny and his administration come under pressure to make inroads into the 14 per cent unemployment rate. In addition, the Government is still trying to persuade a reluctant Germany and its equally reluctant allies to bear some of the cost of rescuing Bank of Ireland and Allied Irish Banks. Moreover, the affair comes as the Government imposes practically the entire burden of tax hikes and spending cutbacks on individual taxpayers and workers.

Trouble mounting rapidly
If the basic game plan is for Dublin to continue doing quietly what it has always done in the business tax sphere, trouble is mounting rapidly. The Apple revelations suggest a system the Government does its utmost to protect provides crucial legal cover for international businesses to minimise their tax exposure to the point that they pay only negligible amounts.

Even if everything is carried on within the exacting letter of the law, it does not look good when a company’s operations here make vast profit and it pays next to nothing in tax. To say as much is not to diminish the importance of the multinational sector when it comes to the creation and protection of employment.

Perception is crucial in the international arena, particularly as the Coalition seeks to rebuild the State’s reputation in the wake of the EU-IMF bailout. It cannot be in the Government’s interest to have Ireland portrayed as a soft touch, open to exploitation by companies seeking to shelter their income from the tax authorities in places such as Washington. This is all the more so as governments around the world seek to rebuild their battered finances in the wake of the financial crisis.

The spotlight on Ireland and other low-tax jurisdictions might yet make it more difficult to attract big firms into the State with investment and jobs. While Irish law facilitates big companies in their efforts to keep their financial accounts away from prying eyes, the US subcommittee’s attention on Apple follows an earlier examination into Microsoft’s tax affairs which cast light on Ireland’s central role.

Other groups may yet come under pressure, raising tricky questions for them. Even though companies tend not to look beyond the gaze of their shareholders, the reputational damage from un- flattering tax scrutiny could be unhelpful from a business perspective if consumers decided to spend their money elsewhere.

Furthermore, other governments might feel compelled to rework their tax law to make it less attractive for firms to locate activities in countries such as Ireland. In US president Barack Obama’s first term, he mounted an immediate drive to take more tax from big business by making it more difficult for them to use tax havens. This led, ironically, to an increase in US companies moving operations here, thanks in large part to Dublin’s successful campaign to keep Ireland off of the official list of havens.

Then, as now, the official line was that there was nothing secretive about the Irish rules and that they were transparent and fully in line with international rules. The case is also made that the Government fully supports the drive against evasion and fraud.

Still, the possibility remains that Berlin and Paris might use the Apple revelations to strike again for Irish tax concessions as the price of any further aid to ease the cost of the bank bailout.

As the global debate intensifies, it could well provide a lever to German chancellor Angela Merkel as she resists pressure for direct bank recapitalisation. After all, she remains to be convinced of the need for further aid to Ireland. Although French president François Hollande is generally more favourable to Ireland on the banking front, the basic sense of anxiety in Paris over the Irish tax regime did not fade when Nicolas Sarkozy lost power.

Ireland, of course, is but one among many EU countries to offer generous tax advantages to big business. The Netherlands springs to mind, as do Luxembourg and Slovakia. At the same time, spin-off benefits in high-tax jurisdictions such as France serve to reduce appreciably the effective rate of tax companies pay there.

The continual improvement of the tax terms Dublin offers investors has fostered a huge increase in the amount of business funnelled through the Irish operations of multinational companies. The headline tax rate was reduced to 12.5 per cent in 2003 from 38 per cent in 1997, when the combined net profit of US corporations in Ireland stood at $8.58 billion. By 2005, this had risen to $48 billion. This was the period in which Dublin landed a string of big-ticket successes as nascent titans such as Google, Facebook and Amazon followed established investors such as Intel, Microsoft and Apple into Ireland.

As domestic employment went into freefall in the economic crash, this was and remains a crucial buffer for Ireland. That is the basic principle that underpins the Government's position, even if the force of international pressure is to make it extract significantly more corporate tax from business giants.

Arthur Beesley is Political News Editor