Government winces as ‘tax haven’ charge begins to stick

Banking report by EU-funded think tank the latest to describe Ireland as a tax haven

The IFSC in Dublin, from which about half of all the world’s aircraft are leased, according to TCD finance professor Jim Stewart. Photograph: Bryan O’Brien

The IFSC in Dublin, from which about half of all the world’s aircraft are leased, according to TCD finance professor Jim Stewart. Photograph: Bryan O’Brien

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About three years before Ireland was decried as a “tax haven” at a 2013 US Senate hearing about Apple, the technology giant’s exotic tax structures were first picked apart by Marty Sullivan, a Harvard-educated former US treasury economist-turned lecturer and commentator.

He is the respected chief economist of Tax Analysts, which publishes US industry bible Tax Notes, and an acknowledged authority on the corporate tax gymnastics in which Apple and other multinationals have engaged in this State. Sullivan, as his name suggests, is also part Irish through his father’s ancestors.

“I was visiting Cork once and I met a guy on the street. He asked me my name and I told him Sullivan. He said your whole family lives down the street. I love Ireland, I love its people. But. . .” He trails off. Despite his affection for his ancestral homeland, Sullivan is adamant that it really is a tax haven.

The label is seen as pejorative, inaccurate and damaging by the Government and its supporters in the multinational sector, as the Republic fights to keep its 12.5 per cent corporate rate under enormous international political pressure. But Ireland was this week yet again accused of being a tax haven, this time in a banking report by the European Union Tax Observatory think tank in Paris.

“My definition of a tax haven is a jurisdiction with low rates and extra-large amounts of corporate profit that are disproportionate with regard to the jurisdiction’s economic activity,” says Sullivan.

He recalls the first time he looked at Irish data, with the huge profitability of US companies here so much larger than in other countries such as Germany and France. It helped to convince him that Ireland is a haven.

“You can see it in every data set. Ireland says its workers are just very productive, but the statistics are bloated with all the profits of US companies. We love you guys, but you can’t possibly be that productive. That is my view.”

Ireland is clearly a tax haven and it has to be said, according to Sullivan, even if the Government doesn’t want to hear it: “The intellectual in me bristles at the necessity to not call a spade a spade.”

The Government and big accounting firms such as Deloitte and PricewaterhouseCoopers may reject the notion that Ireland is a tax haven, based on a 23-year-old definition used by the Organisation for Economic Co-Operation and Development (OECD). It uses four criteria to determine tax haven status: nominal or zero taxes (and offering non-residents tax-avoidance opportunities); lack of transparency; an unwillingness to exchange information with OECD states’ tax authorities; and no requirement for substantial business activity.

But the tax-haven label has stuck and its incessant use to describe this State abroad is increasingly turning the screw on the Government as the world’s biggest nations prepare to finalise a deal to curb global tax avoidance at a G20 meeting in Rome next month.

Harsh critic

The EU Tax Observatory said this week that the main European banks book €20 billion of profits each year in 17 tax havens, including Ireland. None of the Irish banks is named but the European banks make almost four times as much profit per employee in Ireland – about €250,000 – as they do in non-havens. This, along with the fact the Irish tax rate is less than 15 per cent, makes Ireland a haven, it said.

The director of the observatory is French economist Gabriel Zucman, a globally-renowned academic expert on corporate tax avoidance and a harsh critic of the Irish regime. If his fellow Gallic academic Thomas Piketty is seen as the global rock star of economics, then Zucman, who did his PhD under Piketty and frequently collaborates with him, is one of his backing singers.

Zucman’s academic output is rarely music to Irish government ears. Three years ago he co-produced a landmark report that concluded the State was the “biggest tax haven in the world”. It estimated that multinationals shifted $106 billion (€89.7 billion) of profits here in 2015, more than all the Caribbean island tax havens combined.

The Government rejected the report as “misleading” and trotted out its OECD definition defence mantra. It said many loopholes have been closed. More, such as the infamous Double Irish tax structure, have been shut since.

Definition

In correspondence with The Irish Times this week following the release of the observatory’s report, Zucman acknowledged that there are “many” definitions of a tax haven but he insisted that the one in the banking report – a tax rate less than 15 per cent and abnormally high profits per employee – “has the merit of being data-based, clear and objective”.

Pointedly, the Department of Finance this week responded: “Measured by any objective international criterion, Ireland cannot be defined as a tax haven.”

The observatory is funded by the EU, which has crossed swords for years with Ireland on tax. But the think tank operates independently.

The tax haven “cat call”, as one Irish tax sector executive put it this week, was also fired at Ireland in July by the New York Times in an article about the refusal of the Government and Minister for Finance Paschal Donohoe to sign up to the US-driven OECD agreement that sets new tax rules and imposes a global minimum corporate rate of 15 per cent, the sticking point for the State.

To the consternation of State officials, the newspaper described the Government’s attitude to queries on the issue as “grudging” and said “the optics are not good” on its refusal to sign up to the deal. Donohoe argues the OECD deal would cost Ireland more than €2 billion per year and erodes sovereignty.

The New York Times concluded “Ireland’s days as a tax haven may be ending”.

Some Irish observers report that the Government is waiting for US congressional approval of the OECD deal, which is not a given, before inevitably committing to change.

Growing pressure

The pressure has been growing steadily on the State since those US Senate hearings on Apple eight years ago, when senator Carl Levin stunned Ireland by calling it a haven in front of the entire world. But the label as applied to Ireland goes back much further.

The New York Times often called Ireland a tax haven as far back as the 1970s, but only in relation to the regime for artists. The term appears to have been publicly applied to Ireland in a corporate context for the first time by the US house ways and means committee in 1974. The label appeared subsequently in a landmark report by US tax authorities in 1981.

By the following year, the Wall Street Journal was regularly describing Ireland as a haven, soon followed by the Washington Post. In 1988, highbrow UK magazine the Economist called plans for the International Financial Services Centre (IFSC) in Dublin “a tax haven for foreigners”, with its proposed 10 per cent rate.

It also sneered that the IFSC probably wouldn’t “bring any tangible benefits” to Ireland.

By the 1990s, US fiscal academics were taking serious note of Irish attempts to woo foreign investment with tax competition they said was depriving the US treasury of funds. Prominent US tax experts James Hines and Eric Rice compiled one of the first exhaustive academic lists of tax havens in 1994. Ireland was among the 41 countries named on the seminal list that is still a benchmark today.

It was also tagged as one of only seven “major” tax havens. The State now regularly features on such academic lists.

European opposition

European opposition to the Irish corporate tax rate began to surface during the Celtic Tiger years and opposition to mass corporate profit-shifting here peaked after the crash, but the European Commission has never formally accused the State of being a “tax haven”.

However, Pierre Moscovici, a former French finance minister and then the EU’s economic affairs commissioner, in 2018 called Ireland a “tax black hole”, which somehow sounded even worse.

Even Brazil formally listed Ireland as a tax haven in 2016, adding extra levies to Irish funds that made returns from Brazilian assets. The move caused chaos in Brazil’s aviation industry, which leased 60 per cent of its aircraft from entities registered in Ireland for tax purposes.

The Irish defence to the charge of being a tax haven appears to be wearing thin abroad, as consensus congeals around a perception of this State’s practices.

On the OECD criteria, Ireland is clearly not considered a tax haven and it is behind this definition the Government habitually retreats whenever the debate arises. All the major accounting firms that work for multinationals also use the OECD definition, set down in 1998, as cover.

Apple case

Karen Frawley is an international tax partner with Deloitte. On Thursday, she was elected to the role of president of the Irish Tax Institute. She backs the Government’s rejection of the “tax haven label” and suggested the definition used in the EU Tax Observatory report is too “wide”. She says the “most broadly used” definition is the more benign OECD one.

“A lot of the sentiment towards Ireland goes back to the Apple tax case,” she says. In 2016, the European Commission accused the State of giving the US company a sweetheart deal and ordered Apple to cough up more than €13 billion in back taxes. Ireland and the tech firm both rejected this, and Apple won an appeal against the commission in Europe’s second-highest court last year.

The case may go all the way to the bloc’s highest court. In the meantime, in the minds of many people, the saga confirmed that Ireland does act like a tax haven.

“There was reputational damage to Ireland in the reporting of the Apple case and the perceptions that flowed from that. It caused more pressure on Ireland from certain non-governmental organisations, and it also increased pressure from a political standpoint,” says Frawley.

The impact has, so far, been much less damaging to Irish foreign direct investment, Frawley argues. Irish corporation tax receipts were €800 million ahead of profile last month, she notes, as tech giants cashed in some of their lockdown- and pandemic-driven gains.

She accepts that once the perception arises that Ireland does special corporate tax deals, it is “hard to remove”. In her acceptance speech to the institute yesterday, she argued that Ireland needs to reduce its tax reliance on multinationals as the global landscape changes with the proposed OECD deal.

Jim Stewart, a finance professor with Trinity College and a noted domestic expert on corporate tax, says the IFSC alone “would be put on any list of tax havens” while the State, overall, “has many features” of a haven.

“The numbers employed in the IFSC are small relative to the size of the assets, and the tax take from it is also small relative to asset size. Something like 50 per cent of all the world’s aircraft are leased from there. A lot of the goings on in the IFSC tick all the boxes for a tax haven,” he says.

The Department of Finance argues that many tax loopholes continue to be closed. Stewart says most of the tightening of rules has come outside the financial sector. The tech sector has perhaps been most affected. In its Double Irish swansong before that device was banned at the end of 2019, Google shifted $75.4 billion out of Ireland to Bermuda.

But Stewart says new corporate tax loopholes have opened up, such as huge intellectual property tax write-offs.

Still, he argues the OECD deal has changed the game, especially if the new tax deal is approved by US politicians. “I think he game is up for Ireland,” he says.

He accepts, however, that the accusation of being a “tax haven” is also a political charge as much as a financial one. “Not a single government would ever put its hand up and say it is a tax haven. In that sense, it is a political term,” he says.

Profit-shifting

Marty Sullivan also says that, if he was a member of the Irish Government, he would continue to deny the haven label. The State’s OECD defence “is exactly what I’d do too”, he says.

“Ireland is on a spectrum of what I’d call tax havens. By far, it is not the worst offender. The problem is the US tax code can’t stop the profit-shifting. That isn’t Ireland’s fault,” he says. “But the reality is that there is a tremendous shift of profits to Ireland at the expense of the US treasury. The numbers are disproportionate.

“Ireland can make arguments about its sovereignty [over the OECD deal] but the hard politics is that, if Ireland does not co-operate, it might be officially labelled a haven.

“Ireland has everything to lose. Other countries have tried everything else to get it to change and now they will act in their own interests,” Sullivan warns.

The OECD deal looks set to be finalised in Rome at Halloween. If the US congress subsequently backs all of President Joe Biden’s plans for change, Ireland’s “tax haven” perception might turn into a horror show for this State, unless it eventually comes to heel.

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