The tax transnational firms are paying in Ireland is not the problem, it is the tax they are not paying
BEFORE WE become hysterical about wicked Europeans bullying us over corporation tax, let’s remember three things.
First, there is something pathetic about a country that chooses as the ultimate test of its sovereignty its ability to let giant corporations minimise their tax bills. Second, no open economy can sustain over the long term a policy of attracting investment by beggaring its trading partners. Third, no one actually believes that a rise of a couple of percentage points in our 12.5 per cent corporate tax rate would create any serious problem for transnational companies operating here.
Moreover, having grasped these points, we need to qualify them in two important ways. The first is that French president Nicolas Sarkozy in particular is being staggeringly hypocritical. The effective rate of tax on corporate profits here (what companies actually pay as opposed to the theoretical rate) is almost 12 per cent. In France, it is 8.2 per cent. The cynicism of using us as the whipping boy while France runs an even lighter-touch regime is breathtaking. The second qualification is that obsession with corporate tax rates misses the big picture – corporations paying virtually no tax at all.
If we’re to avoid a sterile stand-off on this issue, Ireland has to stop making a fetish of the 12.5 per cent rate. Europe has to stop using Ireland as the scapegoat for popular resentment at the power of corporations to avoid responsibility to pay reasonable taxes. And everyone has to pay attention to the real issue – the need for co-ordinated global action to create justice in corporate taxation.
Would it be the end of civilisation as we know it if the Irish rate was raised to, say, 15 per cent? Clearly not. Corporation tax is just one part of the tax burden for transnational firms and seldom the biggest, payroll and consumption levies are more significant. The total tax rate for corporations (including payroll and other taxes) in Ireland is extremely low – the third lowest in the EU, at 26 per cent, after Luxembourg and Cyprus. Italy, by comparison, is 69 per cent and France is 66 per cent.
It is also easy to comply with the tax regime in Ireland – another attraction that has nothing to do with the actual rate of tax.Moreover, there’s no evidence that a slightly higher rate would make Ireland uncompetitive. Low-tax Hong Kong, for example, has an effective corporation rate of 19 per cent.
If we end up having to trade some increase on the 12.5 per cent for serious renegotiation of the EU-IMF deal, we shouldn’t talk as if this is a national catastrophe. Ireland will still be a haven for the transnational corporations compared to other English-speaking developed economies. The effective rate in Australia is 26 per cent, New Zealand 30 per cent, the United Kingdom 23 per cent and the United States 28 per cent.
But our European masters shouldn’t pretend, either, that we’re being forced to do this in the name of global justice. The problem that demands a European response is the ability of vastly profitable companies to avoid paying any meaningful taxes at all. This is not a problem of tax rates, but of complex avoidance strategies. The UK, for example, has a theoretical corporation tax rate of 28 per cent. We learned a few weeks ago that Barclay’s Bank in 2009 paid £113 million (€130 million) in tax on profits of £11.6 billion – an actual rate of 1 per cent.
In this regard, the real question is not the tax that huge corporations are paying in Ireland but the tax they’re not paying. It is the problem of the so-called “double Irish” – the use of Irish tax law to avoid shelling out any significant sums anywhere.
The best-known example is Google, which manages to pay an overseas tax rate of just 2.4 per cent. It does this lawfully by using a double structure of licensing its intellectual property to its Irish-based subsidiary, Google Ireland Ltd, which accounted for $12.5 billion in worldwide sales in 2009. This keeps the profits away from US tax authorities. But Google Ireland Ltd then pays almost all of its profits in the form of a royalty to another company, Google Ireland Holdings, which is based in the tax haven of Bermuda. This keeps the profits away from the Irish authorities also. So Ireland doesn’t get 12.5 per cent of Google Ireland’s profits. It gets hardly anything.
If Sarkozy and German chancellor Angela Merkel are interested in tax justice, as opposed to attempting to mollify their own electorates by looking tough with Ireland, this is the stuff they should be taking seriously.
Bluster about Irish corporation tax rates is a way of avoiding the crucial but awkward question: how do contemporary states ensure that vastly profitable global companies make a fair contribution to society? If they ever do get round to asking, though, we need a decent Irish answer. It can’t just be that Ireland is willing to go to the wall for the rights of corporations to hang on to all their profits.