Cantillon: OECD gives details of tax sandwich recipe

 Fergal O’Brien of Ibec says individual countries will have difficulties with some measures.

Fergal O’Brien of Ibec says individual countries will have difficulties with some measures.

 

It is not explicit, but the Organisation for Economic Co-operation and Development (OECD) report outlining how countries can extract more tax from multinationals appears to have structures such as the “double-Irish Dutch sandwich” in its sights when it highlights how companies can do business in one jurisdiction and pay tax in another.

The structure is simple: A multinational licenses its technology and intellectual property to a subsidiary managed from a tax haven such as Bermuda, but registered here.

That entity then licenses these rights on to a Dutch head office, which is essentially a brass-plate operation, which in turn licenses it back to a second Irish-registered company, which does the actual work and earns the profits.

It pays royalties to the Dutch company, which then channels those royalties back to the first entity, which is exempt from tax here as it is run from Bermuda.

From a tax planning point of view, it is a thing of beauty. It is also legal and in keeping with both EU and double-taxation treaties.

The OECD report, catchily titled Action Plan on Base Erosion and Profit Shifting, which has the backing of the world’s biggest economies through the G20, appears to mark the beginning of its end.

However, it might be a bit premature to write it off altogether. The OECD report repeatedly uses the phrase “develop recommendations” to deal with the tax structures that it sees as causing problems. Its spokeswoman says that that will take up to two years, after which it is up to individual countries, their governments and legislatures. The organisation’s role does not involve forcing anybody into doing anything.

Drawing up and implementing the recommendations will require co-operation across all OECD members and, when it comes to redesigning double-taxation treaties, between individual states.

That will take time and it is likely, as Ibec head of policy and chief economist Fergal O’Brien (pictured) says, that individual countries will have difficulty with some measures as everyone moves through the process.

There is every chance that recommendations will be diluted in some way as nations weigh up the benefits of getting more tax from multinationals against the the possible risks that this entails.

From the Republic’s standpoint, the Government has made it clear that this has to be multilateral. In other words, we all do it together, so no one steals an advantage from anyone else.

It also sends out a reassuring signal to the multinationals operating here that we are going to maintain the status quo for as long as possible.

They will be happy with that but, nonetheless, it is probably time the Government looked at other ways of bolstering the State’s attractiveness to external investors.