Tax avoidance by multinationals contributes to inequality and is in political firing line

The debate over Apple's taxation liabilities in Ireland must be put in a worldwide context of growing social inequality and the revolt against it, if it is to make sense here.

Ireland is caught in the middle of these trends as a corporate tax haven, in addition to being a relatively weak player in the transatlantic row over the European Commission’s treatment of US multinationals. A smart response to the commission’s ruling should acknowledge both these changing international political realities.

The scale of the problem posed by tax havens is revealed in research that finds that 20 per cent of the profits of US companies – 55 per cent of its overseas ones – are shifted offshore, depriving its government of a third of tax revenues.

That reduced the effective corporate tax rate from 30 per cent in the 1980s to 15 per cent now. Most of that money accrues to individual shareholders, who have benefited from the shift, reinforcing the trends driving increased inequality there and in most developed states.

On this reckoning, by young French economist Gabriel Zucman in his recent book The Hidden Wealth of Nations: The Scourge of Tax Havens, $7.6 trillion – or at least 8 per cent of world personal wealth – is held in tax havens.

Were it to be properly taxed an extra $200 billion a year would be released to governments. If avoided corporate tax was added to that sum, the picture of world indebtedness would also change radically. China could no longer be dubbed the victor, Europe would become a net creditor and US would be halved.

The societal effects of these worldwide trends are the same in most developed states. Higher taxes are paid by individuals, competition is distorted in favour of the bigger firms able to go offshore and overall social inequalities are increased as tax bases are eroded and middle and lower incomes stagnate.

Growing revolt

The last couple of years have seen a growing revolt against these conditions by populist movements of the right and left in Europe and the US.

Analysts discern a common pattern whereby those who have lost out in this game of capital globalisation demand the restoration of national controls, lost income and welfare and the closure of borders to immigration.

Those who say that cosmopolitan and liberal values of civility, progress and enlightenment are best protected by cooperation and supranational integration must show that these conditions can be tackled effectively at that level.

The revolt has reinforced efforts by the OECD to negotiate a new agreement on base erosion and profit shifting (Beps) and by the European Union to grapple with the creation of a common corporate consolidated tax base (CCCTB). Zucman says the Beps plans are not sufficiently transparent and supports a global financial register of where profits are made.

National sales

They should then be taxed based on their consolidated global profits subdivided into where they are made. Sales is a good indicator of that, as is used in the US.

Thus Apple's global profits of $50 billion in 2014 would be taxed according to national sales, with tax revenues accruing to governments. That would eliminate the practice the commission ruled was an illegal state aid to Apple in Ireland and see the €13 billion redistributed to where profits were made in Europe, the Middle East and Africa.

Ireland participates in the OECD initiative and opposes the EU one. Pre-emptive moves last year to phase out the “double Irish” tax dodge used by many multinationals are a clear gesture towards the shift in international sentiment.

But the instinctively defensive reaction by official Ireland to the Apple ruling reveals a mindset still locked into the tax competition model which surged in the 1990s as US companies sought a cheap base in the European single market and came to Ireland. It is surely time to review it comprehensively. This affair provides a fine opportunity to do so in a setting of informed public debate, sorely lacking until now.

Ireland’s low tax on multinationals is matched by relatively low national taxes on wealth and by low company social insurance contributions compared to most EU states.

We too have our revolts against inequality. The international moves against tax avoidance are indeed politically driven, making defensive protection of the legally dubious national avoidance/evasion mechanisms a weak protection against these trends.

Rather than leaning on a national sovereignty increasingly vulnerable to global rules, a better response would be to retune the development model in line with the international music. pegillespie@gmail.com