Tax avoidance is no laughing matter

IRELAND’S UNUSUALLY low corporation tax rate kept cropping up this week when financial advisers were asked about the ongoing controversy in the UK over tax avoidance.IRELAND’S UNUSUALLY low corporation tax rate kept cropping up this week when financial advisers were asked about the ongoing controversy in the UK over tax avoidance.

The huge gap between the tax on corporate profits of 12.5 per cent and the more than 50 per cent that can be levied on income is the main driver of avoidance measures in Ireland today, according to a number of experts in the area.

“The whole problem in Ireland is the disjuncture between the corporate tax rate and the personal tax rate,” said one financial adviser. “It’s not rocket science. If you want to avoid tax, form a company.”

The London Times revealed last week that comedian Jimmy Carr had reduced his income tax bill to about 2 per cent by using a Jersey company to invoice for his services and DVD sales, and then getting loans from that company. Disclosure of the scheme, called K2, prompted UK prime minister David Cameron to say such aggressive avoidance measures were “morally wrong”.

All the Irish advisers we spoke to this week were of the view an aggressive tax scheme such as that used by Carr would not be illegal here. Carr was reportedly one of thousands of high net worth individuals who had collectively invested up to £168 million (€209 million) in the Jersey-based scheme.

While the UK revenue service said it was investigating whether the scheme was legal, Carr told the media he had been advised the K2 scheme was legal and had been fully disclosed to the UK Inland Revenue.

He apologised for his use of the scheme and said he had now withdrawn from it.

Further media reports in the UK drew attention to other aggressive tax avoidance schemes being used by celebrities, including one being availed of by singer Gary Barlow, an associate of Cameron, and some other members of the band Take That.

The use of film productions to assist high net worth people in avoiding billions of pounds in income tax was another scheme highlighted. The Guardian newspaper carried a column saying the scale and generosity of the tax breaks that could be achieved by investing in film productions explained why so many bad films had been produced in the UK in recent years.

Danny Alexander, a Liberal Democrat MP and chief secretary to the Treasury, told the BBC the use of aggressive tax schemes by the wealthy meant people on lower, more typical incomes ended up paying higher rates of tax.

A spokeswoman for the Irish Revenue Commissioners said it was not aware of cases of the K2 scheme used by Carr being used in Ireland.

Irish tax advisers who spoke to The Irish Times on a background basis all agreed that most ways for individuals to shelter income from tax had disappeared or become highly restricted in recent years. However, they said demand for tax avoidance services had risen as a direct result of increases in the top income-tax rate and in the capital gains tax (CGT) rate in recent years.

The top rate of income tax is now 41 per cent. Income is also subject to the universal social charge (USC), which is 7 per cent on income above €16,000, making for a combined marginal charge of 48 per cent.

The CGT rate is now 30 per cent, having been increased from 20 per cent since the onset of the financial crisis.

However, successive governments have battled hard to maintain Ireland’s corporation tax rate of 12.5 per cent, which is seen as key to Ireland’s ability to attract foreign direct investment.

“There is very little scope any more for sheltering your income, so the best thing to do, if you can, is to incorporate your business,” said one tax adviser.

To do this the person concerned has to be selling services to more than one client, meaning the process is not available for most employees.

A person who sells services to a number of clients can set up a company that then invoices the clients for these services.

If the person was earning €1 million a year, he or she might pay themselves €100,000 per year on which they would pay income tax and USC – leaving the rest of the income in the company where it would be taxed at 12.5 per cent.

In 10 years the company would have accumulated €7.87 million in after-tax profits. (Interest on this money can be ignored for the purposes of this example, which is the work of this reporter and not any of the tax advisers spoken to.)

If the person was paying income tax and USC on the €900,000 and saving the accumulated after-tax earnings, the accumulated amount would be approximately €4.68 million.

To get at the accumulated profits in the company, the owner might liquidate it. This would produce a CGT bill of 30 per cent, leaving €5.5 million.

While this is a considerable amount greater than that achieved by the person who did not incorporate, the tax advisers who spoke to The Irish Times said there were a number of strategies that were entirely legal and through which money could be extracted from companies without incurring any CGT.

If this was done the person in the example could increase his or her after-tax earnings by about €3.2 million – the equivalent of more than three years’ gross earnings.

“There are at least 20 legal ways of getting at the whole pot without paying any tax,” said one adviser. “But I’m not telling you all my tricks.”

All the advisers said people who would be willing to move abroad for a number of years could liquidate their companies and avoid paying CGT.

A mandatory disclosure scheme was introduced here last year which requires people and firms marketing certain tax avoidance schemes to notify the Revenue.

“To date, eight mandatory disclosures have been made by promoters,” the Revenue spokeswoman said.

“Each disclosure is currently being reviewed by Revenue and, where tax avoidance arrangements are identified from those disclosures, they will recommend appropriate legislative amendments to the Department of Finance for consideration. The mandatory disclosures made to date do not relate to the K2 scheme.”

The Revenue’s anti-avoidance unit deals with the identification and challenging of aggressive tax-avoidance schemes and unintended use of legislation that threatens tax yields and the perceived fairness of the tax system. In its annual report for 2011, the Revenue said the unit was inquiring into the following transactions:

Financial transactions that give rise to a potential loss of CGT of circa €110 million;

Other financial transactions using a different scheme that give rise to potential tax losses in CGT of circa €13.4 million;

A series of transactions involving the extraction of funds from a company using discretionary trusts that give rise to potential loss of income tax of €2.4 million.

The advisers spoken to did not believe setting up a company through which a person would charge for their services was aggressive tax avoidance.

One of the advisers said he had recently been contacted by an accountant based in the Isle of Man who suggested they might set up what he called a sub-contractor scheme.

This would involve Irish people using Isle of Man companies to invoice for their services and the company ultimately being liquidated to release the funds in a tax-free manner. Leaving the money in an Isle of Man trust, for instance, could help the Irish person avoid CGT, the adviser said.

“You probably could get away with it. But these sort of things tend to sound good at the outset, but then get messy as the years pass. I decided I wouldn’t opt for such a scheme. I think it’s unethical. However, it’s obvious that this sort of thing happens and that’s why I was contacted.”

All the advisers contacted by The Irish Times thought the use of companies was the best way for high net worth individuals to avoid income tax.

This is of relevance because the debate over who pays tax in Ireland has often focused on Revenue statistics which show the percentage of all income tax paid by the different income bands of taxpayers (€10,000-€20,000, €20,000-€30,000 and so on up the scale). These statistics show quite a high proportion of all income tax is paid by a relatively small percentage of income earners.

It is often said that this in turn indicates that a relatively large percentage of all income is earned by a relatively small percentage of the population.

However, if a large number of high net worth individuals are channelling their earnings through companies, the real amount of income being earned by the wealthier section of the population is even greater than the Revenue statistics would indicate.

IRELAND'S CORPORATION TAX: MULTINATIONAL AVOIDANCE SCHEME IRKS GOVERNMENTS

DEBATE HERE, sparked by the controversy in the UK over tax avoidance, has included mention of the fact that a large part of the Irish economy is based on the provision of tax avoidance assistance to multinationals.

Apple, Google, Facebook and other global brands have contrived to locate a large part of their non-US profits in Ireland so as to avail of our unusually low corporation tax rate.

Furthermore, aspects of Irish law on issues such as how multinational profits are assessed, have facilitated the use of Ireland in conjunction with more fully fledged tax havens such as the Cayman Islands so multinationals can avoid Irish corporation tax on their non-US earnings.

The use of Ireland by multinationals has created concern in the US because of the loss of tax revenue. The Obama regime is looking at creating new laws which would have the effect of making US multinationals subject to higher corporation tax charges even if they locate their non-US profits here.

Ireland’s role in facilitating tax avoidance by multinationals has also annoyed officials and politicians in Paris and Berlin. They take a dim view of how Ireland’s low tax rate attracts multinational profits here at the expense of revenue collection in larger EU states such as France and Germany.

The role played by Ireland in the tax affairs of multinationals was highlighted recently in a lengthy article in the New York Times. The report told of how schools in California were laying off teachers for lack of funding. These included schools that were educating the children of employees of the most successful technology companies in the world – companies that had gone to great lengths to avoid paying taxes in California and the US generally.