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Patrick Honohan: Ireland’s tax system might have been inspired by Alice Through the Looking Glass

What may have seemed a pragmatic way of simplifying tax assessment for Apple in the early days was leveraged into a huge tax-avoidance scheme

Illustration: Paul Scott
Apple tax: everything has a moral if only you can find it. Illustration: Paul Scott
Patrick Honohan
Sun Sept 22 2024 - 07:00

Irony and paradox are to the fore as the outcome of the Apple billions saga reopens old questions about fiscal policy.

For years multinationals – mainly American – have sought to route as much as possible of their global profits through an Irish subsidiary. This was to ensure that they could pay at Ireland’s 12.5 per cent profits tax rate, lower than rates in other countries where they operated. What started as an incentive to encourage the firms to set up operations here became a more and more vital source of tax revenue as their accountants figured out more ways of exploiting it. The result has been an enormous and – to date – ever-growing flow of tax revenue from these firms. Just a week before the European Court of Justice decision, the Department of Finance reported corporation tax receipts for the first eight months of this year of €16 billion – more than the Apple billions that will now also be paid over.

In addition, though, Ireland has been in the firing line because its tax system was being used, along with that of other countries, in accounting devices designed to reduce the tax bill of some multinationals well below the statutory rate – often almost to zero. Admittedly, Ireland has eventually participated in international agreements on anti-avoidance measures. But corporation tax is a Looking Glass world. The first big wave of these international reforms a decade ago did shut off some accounting manoeuvres, but mainly ones that had been used in other jurisdictions. The firms just moved on (as at the Mad Hatter’s tea party) from jurisdictions more affected by the tighter rules to the next best location for tax avoidance. This turned out to be Ireland. Thus, an international tightening of anti-avoidance rules had the counterintuitive and unanticipated effect of greatly increasing the tax paid by these companies to Ireland since 2015.

The odd thing is that, contrariwise (and unlike the usual way of benefiting from Ireland’s low corporation tax rate), Apple’s accounting was not designed to book the largest share of its global profits in Ireland. Instead, using exotic legal constructs, Apple had long been lowballing its Irish taxable income. And this was the last straw for the European Commission.

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Rivalling Humpty Dumpty’s scornful remark, for a quarter of a century Apple was in effect able to state that its taxable profits in Ireland were just what it chose them to be, thereby avoiding tax on much of their global profits.

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At the centre of the story were Apple-owned establishments in Cork, whose head offices had no employees and were not located in any jurisdiction. They were like the grin of the invisible Cheshire cat. No cat: no taxable profits. In the end, the court has found that these operations should have been taxable, in part because the Cork firms really did sufficiently control the use of Apple’s intellectual property from which the profits derived. The Irish operation was a real live cat, after all, and not just a grin.

Everything has a moral if only you can find it. What may have seemed as a reasonable and pragmatic way of simplifying tax assessment for Apple in the early days was leveraged into a huge tax avoidance scheme sheltering a substantial slice of its global profits. It must have been clear to specialists that the arrangement could be vulnerable to legal challenge, and that it was damaging Ireland’s reputation. Nobody should have been surprised that such vast oddities would eventually fail, even if harmonisation of corporation tax is not part of the European Union’s acquis. Yet Official Ireland was caught off-guard by the court’s final decision.

Yes, it would have been nice if the money had come into the exchequer in 2010 when we really needed it. But Apple would never have arranged its affairs to have such huge amounts of global profit flow through Ireland had it not secured agreements with the Revenue Commissioners that ensured they would not be taxed. If understood to be taxable, the profits would never have been assigned to Ireland. As Alice would have said, curiouser and curiouser.

That the Apple money will not be spent all at once may come as a disappointment. Is there a budgetary White Queen proclaiming the rule “jam tomorrow and jam yesterday – but never jam today”?

For a pre-election budget, quick-disbursing tax cuts have an obvious political attraction; the long lead-time required to put infrastructure in place, less so

Budgets are, or should be, guided by a hierarchy of needs. Maintaining creditworthiness is only one of these needs, albeit a fundamental one. After the financial crisis, as the State rebuilt its creditworthiness, most people recognised that government spending was constrained by overindebtedness. Now, though, after a decade of super-high corporation tax receipts, on to which the Apple billions come as the icing, and with inflation eroding its real value, Government’s debt ratio has fallen to about 72 per cent, less than half where it was a decade ago. (The Apple money is equivalent to about five percentage points.)

With creditworthiness thus secure, attention shifts up the hierarchy to ensuring that the budget does not overheat the economy, driving up prices (though there’s no risk of a spiral, since we use the euro).

Even so, there is plenty of scope for political judgment between tax and spending. Tax reductions can also generate overheating, therefore they limit the scope for spending increases. For a pre-election budget, quick-disbursing tax cuts have an obvious political attraction; the long lead-time required to put infrastructure in place, less so.

It would be a pity if the Government were to succumb to such short-termism (and indeed they have said they will not). An economy with adequate housing and a more effective infrastructure is not only what the vast majority of people want, but also one which will in the future be able to generate more revenue at lower tax rates, without increasing inequality.

The most challenging task for Government now is to drive an effective multiyear climate-friendly spending programme, choosing priorities on a rational basis, and ensuring that costs are kept under better control than has recently been the case.

Patrick Honohan was governor of the Central Bank of Ireland from 2009 to 2015