Cliff Taylor: Noonan and Donohoe rule-switching could cost €1bn next year

Change in tax treatment of intellectual property and subsequent and reversal hard to fathom

Ireland has always tended to give the benefit of the doubt to multinationals when it comes to tax matters. The challenge in recent years has been trying to balance the goal of attracting investment here with international demands to tighten up the rules.

Pretty much every country has been caught up doing the same thing – but we are in the spotlight because of the huge size of the multinational base here and the small size of our economy.

To illustrate this, it is worth looking at a tax change introduced by then finance minister Michael Noonan in the 2015 budget and how this was reversed by his successor, Paschal Donohoe, in last month's package.

It concerns the rules under which companies write off investments in what are called intangible assets. In the case of big multinationals, this mainly concerns intellectual property (IP) – the copyrights, patents and licences and trademarks related to the design, development and marketing of their products.

Ireland introduced a regime for writing down investment in intangible assets in 2009. Up to the end of 2014, companies could shelter a maximum of 80 per cent of the profits which resulted from the use of the intangible asset in any one year, using the capital allowances. So at least 20 per cent of the profit would be subject to tax.

Under pressure after revelations of how little tax Apple paid on its international profits – and the role of Irish subsidiaries in this – Michael Noonan announced key changes in 2013 and 2014. He first ruled that a company incorporated in Ireland must – from the start of 2015 – have a tax residency, in response to Apple's infamous use of a subsidiary which was tax-resident nowhere.

Double Irish

Then, in the 2015 budget, presented in October 2014, he ended the controversial double Irish tax scheme, though companies already using it can continue to do so until the end of 2020. However, in tandem with doing this, Noonan made a concession. He abolished the 80 per cent rule, meaning that companies could now claim tax relief on up to 100 per cent of the profits arising from their IP investment. In layperson’s terms, this means they could write off their investment more quickly.

Fast forward a few years and in Budget 2018, Paschal Donohoe – following a recommendation from economist Séamus Coffey in a report on corporation tax – reinstated the 80 per cent limit. However, crucially, he only did so for investments undertaken after budget day. This meant that previous investments could still qualify for the 100 per cent relief.

We now know from the Paradise Papers, published this week, that Apple restructured its operations during 2014. A new subsidiary in Jersey was central to this. What I believe happened is that the IP was owned by one of the companies moved to Jersey and it was then sold back to an Irish subsidiary. This investment in Ireland then qualified for a significant tax write-off – and Apple had a new route to shelter profits from tax. If this sequence is correct, then Apple would appears to have been a beneficiary of the Noonan rule change, along with other companies who relocated big IP investments here in recent years.

Two questions arise. Why did Noonan change the rules in the first place? And why did Donohoe decide that the change back to the 80 per cent rule should only apply to new investments?

Large multinationals

On the face of it, we appear to be talking about tweaks in rules. But here we come back to the big impact which large multinationals can have on a small economy. Coffey has run the numbers and looked at the massive inflow of IP assets to Ireland in 2015 – the bit that caused the “leprechaun economics” jump in 2015 gross domestic product – and trends since then. He reckons the exchequer could have collected €700 million-plus in 2015, if the rules had not been changed by Noonan. This could have risen to €1 billion more next year, had Donohoe opted to reinstate the 80 per cent rule on IP already here, he says. Coffey does caution that this is an estimate as we do not know the impact of the rule changes on the decisions taken by companies on where to locate their IP.

Ireland will still probably collect the revenue over the years – the key concession here is on timing. However, Coffey does point out that there is no absolute guarantee of getting the revenue. Companies’ circumstances could change, as could US tax law, or the profitability of the IP.

He also points out that Ireland does face a price, as moving IP here increases our national income and this pushes up our contribution to the EU budget – by as much as €2 billion over the next decade, or €200 million a year, given the big value of the recent moves.

We know that there were consultations with the tech industry before the Budget 2018 changes. Sources say most companies did not appear to object to the cap being reimposed, but we can only assume there was some opposition to the 80 per cent rule being reapplied on IP that was already here . Otherwise, as Coffey asks in his blog, “why are we waiting when those taxpayers may be willing to pay the money now?”