Noonan signals intention to take a small bite from Apple’s favourable tax status

Michael Noonan has declared that the Government will eliminate a dubious legal scheme used by Apple and other firms to save tax. Both the timing and manner of the move are intriguing.

For one thing, it marks an exceedingly rare case of the munificent Irish corporate tax regime being pared back a little. As such, it is a departure from relentless expansion. Loopholes have been closed off before, but usually in a quieter fashion. This came in the Dáil on budget day with the world watching as Ireland readies its exit from the bailout.

For another, it comes only four months after Taoiseach Enda Kenny said no country could act unilaterally in the drive to extract more tax from global commerce. That, of course, is exactly what happened here. So what is going on?

While a number of discrete forces are at work, this boils down to a response of sorts to international pressure against questionable tax policies practised in Ireland by certain multinationals.

Having resolutely held the line for years that no move was warranted because the Irish system was entirely transparent and statute-based, this move by the Government marks a change of pitch, if not of substance in any fundamental sense. Yet questions are inevitably raised as to whether pressure within the EU, in Germany particularly, and at the level of the Group of Eight, leads down the line to further change from Ireland.

This is highly sensitive politically, given the totemic status of the 12.5 per cent corporate tax rate and its associated trappings and the pressing need to create more and more jobs. It is all the more so with concessions being held out in coalition talks in Germany as the price for any further Irish aid.

The first point to be made is that the decision made on Tuesday is quite narrow: it will prevent Apple and a small number of other firms from making Irish-registered subsidiaries "stateless" in terms of their tax residency to radically cut their tax burden.

Not pretty
The basic accusation against this particular scheme is that it provides legal cover for hugely profitable businesses such as Apple to minimise their tax exposure to the point that they pay only negligible amounts. Apple makes sleek, feelgood products but this kind of thing looks truly dreadful. The fact that it has carried on within the precise letter of the law for many years does not make it appear any better.

Elimination will take effect only in 2015. Irish officials expect it will be revenue-neutral from an exchequer perspective, but that is not really the point. This is more about Ireland’s standing in the international scene and the need to protect an economic model which has foreign direct investment at its very core.

"We know that Irish corporate tax law came under scrutiny in a number of inquiries quite recently," Noonan told reporters in the wake of the budget. "We don't want to incur any reputational damage. We don't think we have done so yet but we don't want to encourage reputational damage."

Damage done
If sustained criticism of Ireland's system in the US, Germany and France is anything to go by, the damage is already being done. Although others would dispute this, Noonan insisted the capacity to claim stateless status under Irish law was the "one weakness" in the regime.

He also implied that the development might not have come as news to the firms in question. “We understand from our sources in the system that it won’t lead to any diminution in foreign direct investment flows into Ireland because it’s something to protect our reputation,” he said.

“We think it will be an additional bulwark to the reputation which is so important when companies set up here.”

It would appear that all parties resolved that the public and highly politicised disclosure of the “stateless” ploy by a subcommittee of the US Senate now necessitates a row-back.

If it can be stated with some certainty that the Government would rather if it did not find itself in this space, it still felt compelled to move. The criticism stung and a response was required.

This is all the more striking given Dublin's preference for cordoning off discussion of international corporate tax matters within the Organisation for Economic Co-operation and Development, a relatively sedate arena.

Double Irish Dutch Sandwich
The message here was always that Ireland might move if everyone else was moving too. It was all the more relevant in a scenario in which countries such as the Netherlands, Luxembourg and Slovakia are known as shrewd strategists in the international tax game. If Google's use of the infamous "Double Irish Dutch Sandwich" trick exploits both Irish and Dutch tax law, the attitude is that Dublin could hardly be expected to move if The Hague does not.

It was not for nothing, therefore, that Noonan’s first response to the Apple tax disclosures was to say that Ireland would not allow itself to become a “whipping boy” for the US. Still, this invites the obvious observation that the Franco-German assault on Ireland’s corporate tax system at the outset of the bailout made whipping boys of Noonan, Kenny and every other Irish notable.

If exit from that very bailout in December will be heralded as the moment at which Ireland’s economic sovereignty is finally reclaimed, the net point must be that there are always limits to such sovereignty. Pressure on corporate tax is not going to go away.