Department of Finance enters ‘profit-shifting’ debate

After decades of relative stability, the global tax system is in a state of flux at a time when Ireland would least like it to be so.

The foreign direct investment sector here is one of the few that has held up through both the domestic and the international economic slumps, with the technology sector, in particular, continuing to create new, high-end jobs right through the crisis.

But it is this same sector that has served to cause a lot of reputational damage to Ireland's global brand, because of recurring headlines about the amount of corporation tax being paid by digital giants such as Apple, Google and Microsoft.

These companies and others have significant headquarter and operational activities here, with revenues from sales in Europe and further afield flowing to Dublin. However, by using other Irish subsidiaries that hold licensing and IP rights to the products sold, and which are tax resident in locations such as the Cayman Islands and Bermuda, a large proportion of the profits from the sales can end up in offshore locations, because of the licence fees the headquarter companies pay to the entities tax resident offshore.

The end result leads to headlines that talk of Dublin-based companies with turnovers in the billions and tax payments in the single or double-digit millions. For instance, this newspaper reported last year that in 2012 Facebook Ireland had a turnover of €1.78 billion, but paid corporation tax of just €1.9 million.

At a time when governments on both sides of the Atlantic are squeezing their populations by way of cuts and new taxes, numbers such as those make people angry, and efforts by tax practitioners to explain the reasons why such scenarios are legal, cut no ice.

Real change

As Sorley McCaughey of Christian Aid, which has been campaigning about the effects of global tax rules on developing nations, told an

Oireachtas

Joint Sub-committee on Global Taxation on Tuesday, Ireland has a reputational problem and is already considered internationally to be a “conduit country” for money heading offshore.

In response to global political pressures, the G20 asked the Organisation for Economic Cooperation and Development to look at what the Paris-based organisation has dubbed "base erosion and profit shifting" (Beps).

At least part of the reason why this process is likely to bring about real change is that countries such as Italy and France were getting so annoyed, they were contemplating introducing new laws, such as the so-called “Google tax”, that ran contrary to the theoretical underpinnings of the global tax rules that currently apply. Just about everybody recognised that an outbreak of unilateral actions would be bad for all.

Proposals under a number of headings are due to be presented to a meeting of G20 finance ministers in September, with a further number of headings to addressed at a meeting in September 2015. The proposals will be just that, proposals, but there is no doubting the political momentum that is behind the process, or the unusual speed at which it is progressing given the issues involved.

New ways of dealing with transfer pricing – the way in which companies within a multinational group deal with intra-group sales – are among the topics to be addressed. Intra-group sales may sound pretty boring as a topic, but they reflect a massive proportion of world trade, and how they are accounted for greatly influences where companies end up paying their taxes.

Other topics being examined are the criteria that dictate where a company is tax resident, how interest payments are used to reduce tax bills, profit-shifting by way of the movement of intellectual property within group companies, and how risk is managed.

At a recent Beps meeting in Paris, a representative of the tax authority of one of the EU's largest countries told The Irish Times the debate was complicated by the fact that so many countries had measures that were designed to attract particular types of FDI. "We are all tax havens in some way," the delegate said.

Another delegate, from France, observed that the countries of the developed world were working to change the global tax system, so as to accommodate the tax system of one country – the United States.

Aspects of the US tax regime put in place by President John F Kennedy, in order to assist US corporations grow their businesses globally, contribute substantially to many of the problems being addressed by the Beps project.

Reputation protected

For example, the system that allows companies such as Facebook and Google to use Ireland as a conduit for money that is going to end up on deposit offshore, only works because the US system makes it possible for US corporations to leave foreign profits lying untaxed in foreign bank accounts under certain conditions.

Those conditions may well change over the coming few years, as the US political system responds to the same pressures that are driving the Beps process.

It is in the context of this scenario of change on a number of fronts that the Department of Finance on Tuesday announced its public consultation process on "Beps in an Irish context". Minister for Finance Michael Noonan, as part of his preparation for Budget 2015, "is examining ways in which the competitiveness of Ireland's regime can be enhanced and our reputation protected".

On Wednesday, the European Commission published a report drafted by a team of experts who had been commissioned to examine the issue of taxation and the digital economy.

"The EU must throw its full collective weight behind international efforts to clamp down on tax avoidance," EU tax commissioner, Algirdas Semeta, said at the report's launch. "Member states must speak with one voice, reflecting shared priorities," when dealing with Beps, he said.

A commission source said that one of the effects of the Beps project, which is due to be completed at the end of next year, has been to park the contentious debate within the EU as to whether to lean towards tax harmonisation or tax competition. Once the OECD’s work is completed, that debate will be set to resume.

The Department of Finance, when seeking to steer policy on a matter that is of such importance to the Irish economy, has to keep its eye on a number of moving, and interacting, targets. It is a big ask for a relatively small administration. Hence this week’s call for public consultation, or help from all quarters.