TY - JOUR
AU - Ní Chasaide,, Nessa
AB - Abstract The phenomenon of financialization has given rise to new modes of corporate profit accumulation. This includes the creation of global channels for corporate tax avoidance that are embedded in the operations of global firms. Due to a lack of transparency by multinational companies (MNCs), these channels, and their tax implications, are not easily identified or understood. This article sets out the workings of the ‘global tax games’ which operate via intracompany financial transactions alongside the reorganization of the functions of MNCs. The article highlights the consequences for communities of corporate tax avoidance, whereby corporate shareholders and tax haven states profit at the expense of other states and communities. Thus, people living in tax havens, often unknowingly, benefit from tax revenues that should have been paid elsewhere. It offers a case study of Ireland, an understudied case, but which is repeatedly identified as a key node in the global network of corporate tax avoidance. It emphasizes that, in the case of Ireland, a precursor to a potential alternative development path is the acknowledgement of its problematic role. Introduction Since at least the 1990s, tax avoidance1 among non-financial multinational corporations2 (MNCs) has increased and become more aggressive (Saez and Zucman, 2019). ‘Aggressive tax planning’ (ATP) has been defined by the European Commission as ‘taking advantage of the technicalities of a tax system or of mismatches between two or more tax systems for the purpose of reducing tax liability’ (EC, 2012). ATP results in artificially engineered profits, or ‘paper profits’, being declared in low tax jurisdictions, subject to no, or low, levels of tax (Tørsløv and Zucman, 2018). These under-taxed profits are then shared via dividends among a relatively small group of corporate shareholders. The effect is artificially high profits for corporate shareholders, a reduction in the tax revenues of many nation states around the world, and an artificial inflation of the revenues of a small number of tax havens. Corporate tax avoidance thus raises important concerns of distributive justice (Gamage, 2014). This is because what is lost is the potential use of unpaid tax revenue to serve some communities for the public good. At the same time, people living in tax havens, often unknowingly, benefit from tax revenues that should have been paid elsewhere. The scale of tax avoidance is contested. It is difficult to measure due to the lack of publicly available corporate financial data. However, credible estimates of lost tax revenue stand between US$500 and US$600 billion per year to governments globally (Cobham and Janský, 2018). That is at least US$70 per person on the planet per year. The first section of the paper outlines the concept of ‘game-playing’ in tax and the key channels of global corporate tax avoidance, or what I call the ‘global tax games’. The second section provides a case study example of Ireland. Ireland is an understudied case, but a jurisdiction that is repeatedly identified as a key node in the global tax games. The final section discusses some implications from Ireland’s tax model. Financialization and ‘game playing’ in corporate tax Greta Krippner describes financialization as ‘a pattern of accumulation in which profits accrue primarily through financial channels rather than through trade and commodity production’. For Krippner, ‘financial’ refers to activities relating to the ‘provision (or transfer) of liquid capital in expectation of future interest, dividends or capital gains’ (Krippner, 2005, pp. 174–5). This focus on financial channels is helpful in examining some of the tax avoidance mechanisms used by MNCs. Legal scholar, Sol Picciotto (2007, p.14), describes methods of aggressive corporate tax avoidance as ‘game playing’. He describes ‘game playing’ as the pursuit of tax minimization through ‘creative compliance’ with tax law. By this, he means ‘complying with the letter while avoiding the spirit or policy of the law’, resulting in ‘contrived complexity’ in corporate tax practice. Kamin et al. (2018, p.1442) refer to ‘tax gaming’. They use the term to refer to ‘both legal tax avoidance and illegal tax evasion, as well as to the large grey area of tax planning transactions that are neither clearly legal nor clearly illegal’. This article focuses on this ‘grey area’, i.e. tax configurations which, as a result of their core features, have the scope to achieve aggressive tax deductions. Those shaping the ‘grey area’ are accounting and legal firms, especially the so-called ‘Big 4’ firms (PwC, Deloitte, EY and KPMG). As Sikka and Hampton (2005, p.339) point out, the crisis of corporate tax avoidance has been accelerated by such firms shifting from offering traditional one-to-one tax advice to ‘designing and mass marketing tax shelter products’ with questionable chances of being deemed legal in courts of law. The widespread use of such products reflects the rise in private legal advice in influencing both the tax strategies of MNCs, and the tax policies of certain nation states (Pistor, 2019; Ajdacic et al., 2020). Aggressive tax avoidance structures operate via intracompany financial transactions and the reorganization of corporate functions within the same parent firm (Beer et al., 2020). These transactions are often complex, can be used separately or in tandem, vary by sector and firm type and are not declared publicly. As a result, the practices underlying the structures are difficult to describe definitively. However, studies in this area tend to identify two dominant areas of practice. Firstly, that of ‘profit shifting’. Profit shifting takes place between subsidiaries of the same MNC group and aims to increase profits booked in low tax jurisdictions to reduce tax payments. A key strategy here includes the mispricing of activities, termed ‘transfer mispricing’. ‘Transfer pricing’ is a normal practice in intracompany trade whereby subsidiaries of the same parent group must set the price of goods or services being traded between them at ‘arms-length’, i.e. at a fair market rate, as if they are trading with a separate, unrelated entity. Transfer mispricing, however, involves profits being moved between subsidiaries of the same parent group to different tax jurisdictions using price manipulation. This is deemed an illegal practice by taxing authorities, though there are huge difficulties in enforcing adherence to the rules (Picciotto, 1992). Tracking the accuracy of a transfer price is increasingly difficult given the growing importance of intangible products. For example, intellectual property (e.g. a company brand) is particularly difficult to price because such products are inherently unique (Lips, 2019). Political frustration with the low effective tax rates being paid by large digital companies (on average, only 9.5 percent compared with 23.2 percent for traditional business models (EC, 2018)) has resulted in pressure from certain governments to increase taxation on digital firms. This is happening alongside counter measures in lower tax states to entice such firms to do business in their jurisdictions through the provision of tax reliefs such as capital allowances and tax deductions on research and development (R&D) (OECD, 2018). Other, linked, profit shifting strategies include the strategic geographical placement of risk or debt and the changing of company functions within the global MNC group to serve these transactions. For example, in the aviation finance and aircraft leasing industry, determining the arm’s length interest rate on intragroup loans is dependent on a number of intangible organizational judgements (Perry, 2018). The second dominant practice is the exploitation of ‘mismatches’ between tax codes. This happens by exploiting differences in legal definitions between states. These mismatches can enable ‘hybrid transfers’ whereby the same asset is treated as debt (with tax deductible interest) in one jurisdiction, and equity (non-taxable income) in another, resulting in no taxation in either jurisdiction, i.e. ‘double non-taxation’. Mismatches can also enable the exploitation of tax residency rules whereby MNCs exploit the regulatory gaps between different jurisdictions. Both of these strategies, of profit shifting and exploiting tax code mismatches, result in the artificial placing of activities in low tax jurisdictions as a method of aggressive tax avoidance (IMF, 2009; Dharmapala, 2014; Johansson et al., 2017). Ireland’s tax games A number of studies focusing on global financial flows identify Ireland as a key node in the global network of states enabling corporate tax avoidance. They find Ireland to be active across a significant portion of the ‘suite’ of global tax games. For example, Ireland is identified as a centre for ‘strategic’ transfer pricing, debt shifting, net royalty payments, the placement of IP, financial leasing and as a location for head offices or holding companies (EC, 2017; Garcia-Bernardo et al., 2017). Reurink and Garcia-Bernardo (2020) further find that offshore centres can be split between 'profit centres' (largely in the Caribbean) and 'co-ordination centres' (namely 6 countries—Ireland, Netherlands, Luxembourg, UK, Singapore and Switzerland). They show that ‘co-ordination centres’ tend to be richer states, low tax, function as conduits to profit centres, host regional MNC management and host high value adding operations. Given this context, the question arises, what are the ‘real-life’ structures of corporate tax avoidance in Ireland over time and what are the institutional arrangements that enable them? Corporate tax avoidance strategies are complex and vary according to sector and firm (Stewart, 2018a). Broadly, there appears to be four dominant tax configurations that provide scope for aggressive avoidance, at least those that are publicly known (summarized as ‘types’ in Table 1). The timeframes of their use can be difficult to identify and some configurations can be used as complements or substitutes to other configurations, although this can also be difficult to identify in practice (Beer et al., 2020). The configurations are compiled by reviewing academic scholarship, literature from the Irish Central Statistics Office, the Central Bank of Ireland and other public authorities, civil society literature and media leaks and coverage. Table 1 Ireland’s tax games: summarised ‘types’ Open in new tab Table 1 Ireland’s tax games: summarised ‘types’ Open in new tab Ireland’s tax-free exporting zone and state grants Ireland’s shift away from industrial protectionism in the late 1950s was characterized by the establishment of an Export Profits Tax Relief, also called the Export Sales Relief (ESR) along with a nation-wide industrial grants scheme (Barry and O’Mahony, 2017). The ESR offered a 100 percent tax relief on export sales of manufactured goods made in Ireland. It was open to all companies but was mostly used by exporting MNCs and became a key factor in attracting FDI into the country (Killian, 2013a). This was ultimately phased out (by 1990) due to pressure from the European Economic Community (EEC). A customs free area at Shannon Airport in the West of Ireland was also established with additional customs duty reliefs for goods made for export. It was the first export free zone in the world (Killian, 2013a). Barry and O’Mahony (2017, p.14) find that state grants had been awarded to 359 foreign-owned manufacturing plants between 1955 and 1972. Manufacturing of products In the Finance Act 1980, a 10 percent corporation tax on profits from sales of goods from manufacturing was introduced. As the term ‘manufacture’ was not defined in legislation, it led to tax abuse (Killian, 2011). The rate was accompanied by a range of tax expenditures, notably a system of accelerated capital allowances on plant and machinery which increased from a 20 percent rate at its introduction in 1956 to 100 percent by 1972 (Coffey, 2017, p.14). The interactions of these tax deductions created ‘tax-based financing and tax-based leasing’ incentives (Coffey, 2017, p.16). This involved Irish financial institutions purchasing plant and machinery, claiming accelerated capital allowances along with state grants and providing cheap loans to recipients of the ESR relief, to lease the machinery, that were tax free for both the lender and the borrower (Killian, 2013b; Coffey, 2017). A number of studies in the 1980s and 1990s find indications that MNCs were engaged in profit shifting as a result of the manufacturing relief (for example see Stewart, 1989). A 1982 report commissioned by the National Economic and Social Council (NESC) indicated that 80 percent of FDI firms surveyed for the report were in Ireland ‘primarily because it provided a tax shelter for penetrating the EEC’ (NESC, 1982, p. 21). Conroy et al. (1998, p. 5) identify four sub-sectors of manufacturing, which had unusually high profits in Ireland. These included speciality chemicals, software reproduction, computers and certain food products, ‘specifically the production of cola concentrate’. They highlight that these sectors have an ‘extremely high net output per employee – over £1 million in 1994 for the cola concentrate companies, with lesser but still very high figures in the other two’. They also note that Ireland was attracting the leaders in these subsectors in Ireland including Coca Cola, Pepsi Cola, Microsoft and Lotus, among others. In 1999, in light of the ending of the manufacturing relief, which became ultimately seen by the EEC as a form of state aid, the Finance Act scheduled the incremental introduction of a single 12.5 percent corporation tax rate on trading income to commence in 2003. This was introduced alongside a 25 percent tax rate on passive income (unearned income such as interest and dividends) and is still the case today. While the rate was viewed as too low by some on the state-appointed advisory group, it was introduced nevertheless (Sweeney, 2018). The 12.5 percent rate is one of the lowest in Europe (on a par with Cyprus and higher only than Hungry and Bulgaria) (EC, 2019, p.41). Financial services An International Financial Services Centre (IFSC) was established in Ireland in 1987. It introduced a tax regime offering a 10 percent corporate tax rate on profits from internationally traded services, which was later aligned with the 12.5 percent rate. Since its establishment, Ireland has become one of the leading centres globally for ‘market-based finance’ (meaning where equity and debt are raised through financial markets rather than through the banking system). Ireland is dominant globally as a host for investment funds and special purpose entities (SPEs) (Lane and Moloney, 2018). Investment Funds and SPEs engage in a diverse, and often opaque, set of activities in Ireland.3 This section focuses on some of the non-financial corporations’ use of the tax regime laid out in Section 110 of the 1997 Taxes Consolidation Act. Special Purpose Entities: SPEs are described by the Central Bank of Ireland as legal entities, with little or no physical presence and narrow, specific, and/or ring-fenced, objectives, such as the segregation of risks, assets and/or liabilities, or as a cash conduit. The directors of an SPE typically have limited or no discretionary powers; rather activities are strictly defined by the terms of the SPE contract or arrangement. An SPE is often, though not exclusively, a satellite company of another financial entity and forms an ancillary part of the associate entity’s business by warehousing particular assets or risks. (Golden and Hughes, 2018 p.3–4). Because of this ‘warehousing’ function, SPEs are often known as ‘brass plate’ or ‘shell’ companies. The Central Bank estimates that about 2265 SPEs avail of Section 110 (Central Bank of Ireland, 2020). These are a subset of a larger number of SPEs in Ireland. These SPEs are further sub-divided, by Irish Central Bank definitions, into financial vehicle corporations (FVCs) and special purpose vehicles (SPVs). FVCs are ‘securitisation vehicles’, effectively dealing with the repackaging of assets as new forms of transferable securities. SPVs (termed ‘other SPEs’ by the Irish Central Bank) are understood to be linked to non-financial MNCs engaged in, among other activities, intragroup financing (see next section), external financing, and companies involved in aircraft leasing (Golden and Hughes, 2018; Cima et al., 2019). The Irish Central Bank indicates that large MNCs in this grouping of ‘other SPEs’ have their headquarters in Ireland (Golden and Hughes, 2018 p.14). It is possible that they are ‘inverted’ holding companies (see section on `inversions'), i.e. that they may hold the majority of assets of the MNC group while de facto being directed from abroad yet benefit from the host tax environment. Doyle and Stewart (2020 p.6) highlight that Section 110 firms can achieve a ‘tax neutral’ position by eliminating taxable profits through deducting expenses as if they are trading companies. There is also no withholding tax, and interest payments are deemed as ‘distributions’ already subject to tax, ‘giving rise to the possibility of double-non taxation’. The Section 110 firms also do not require special tax rulings or other authorization (Stewart and Doyle, 2017). The Section 110 reliefs are significantly availed of by the aircraft leasing industry, one of Ireland’s largest industries. The Finance Act 2011 designated aircrafts and aircraft engines as qualifying assets and allows tax treatment as a trading entity, ‘creating a new class of aircraft financing structures’ (Osborne-Kinch et al., 2017). Before the COVID 19 pandemic, 60 percent of the world’s aircraft were leased through Ireland (IFS, 2018), though this does not mean the aircraft ever physically passed through the country. Along with the Section 110 advantages, Ireland offers a specific aircraft leasing tax regime, including generous reliefs on withholding taxes, stamp duty or transfer taxes, the use of the depreciation regime and the entitlement to VAT refunds on its purchases (Greene and Cosgrove, 2017). The advantage to Ireland is a relatively small number of jobs (1482) for such a significant investment (CSO, 2017a). The Irish Revenue authority report that Section 110 companies paid €62 million overall in tax in 2019, a tiny fraction of the billions of euro that pass through them. Debt shifting via intra-company loans A significant part of the logic behind the establishment of the OECD Base Erosion and Profit Shifting (BEPS) global reform initiative was the desire to tackle the problem of ‘hybrid mismatches’ which often involves strategic ‘debt shifting’. The European Commission (EC) (2015, p.38) indicates that debt shifting is likely to be happening through Ireland via a tax structure relating to the provision of interest free intra-company loans. The EC describes the scope of the structure as potentially involving four jurisdictions. The parent MNC places equity in a subsidiary in a low tax jurisdiction like Ireland. The Irish MNC extends an interest free loan to a subsidiary in a third jurisdiction. This third jurisdiction assumes an arms-length interest payment was made by the subsidiary there and deducts tax accordingly. This subsidiary (in the third jurisdiction) then on-loans the funds to a subsidiary in a fourth jurisdiction, with interest charged. This fourth jurisdiction deducts tax on interest payments made on the loan. The subsidiary in the third jurisdiction (that extended the second loan) has the interest payments received offset against the deemed interest paid on the first loan. A profit has thus been created in the third jurisdiction and it is returned to the parent as a dividend. The IMF also indicate that ‘hybrids feature heavily in US tax structures involving Irish operations, particularly as a result of those structures’ reliance on ``check-the-box''4 planning’ (IMF, 2019 p.36). Hybrid arrangements featured significantly in the so called ‘Luxleaks’. This was a leak of a large volume of confidential tax rulings by the Luxembourg tax authorities, drafted by the auditing company PWC. Irish MNCs were identified among the leaked documents. Even a cursory examination indicates incidences of intra-company financing involving Ireland.5 The Irish Times (6 November 2014) reports an example involving Ireland from the Luxleaks relating to the media company, Northern and Shell. It was reported to operate as follows. A subsidiary of Northern and Shell in Luxembourg loaned funds to a subsidiary in Ireland. The Irish subsidiary then paid the money back to the subsidiary in Luxembourg after 4 years. The funds were then re-classified as non-Luxembourg resident and therefore not subject to a Luxembourg wealth tax. Overall, the ‘financial services tax games’ appear to be very significant in the Irish tax games. Galstyan (2019) estimates that, in addition to IP transfer and inversions (see next section), aircraft leasing, investment funds and SPEs form the dominant basis for distortions in Ireland’s FDI. Corporate location Re-domiciled firms (or ‘inversions’) This configuration involves the relocation of group headquarters to Ireland by US MNCs. Inversions are carried out by a US parent company acquiring (or merging with) an Irish subsidiary. The parent company then moves its place of incorporation to the Irish company while maintaining majority ownership in the US, i.e. it effectively ‘inverts’ its legal status, making the Irish firm the parent company and the US firm its subsidiary. The US Congressional Budget Office (CBO) explains, ‘after an inversion, a multinational can effectively eliminate any U.S. taxes on its foreign income’ (CBO, 2017, p.1). The tax results can be mixed though, as inversions can trigger other tax liabilities in the US. However, the US CBO estimates that out of inversions by US companies carried out from 1994 to 2014, the worldwide corporate tax expense reported on their financial reports fell, on average, by US$45 million in the financial year after the inversion (CBO, 2017). The CBO also highlight that inversions have likely been used as a springboard to shift debt within the MNC group for tax purposes and avoid US restrictions on this practice (see also section above). The Irish Central Statistics Office (CSO, 2017b) describes inverted firms as engaging in ‘little or no real activity in Ireland’ and holding substantial investments overseas. The CSO points out that by locating their headquarters in Ireland, their profits are paid there ‘even though under double taxation agreements their tax liability arises in other jurisdictions’. The CSO show a massive growth in the net income of re-domiciled firms in Ireland, growing from €292 million in 2008 to €5786 million in 2016. Bloomberg compiled a list of 16 US firms which reorganized their legal status in this way into Ireland since 1997.6 They are largely pharmaceutical companies. Most were described as inversions. Some were described as former divisions of the group that became independent entity ‘spin offs’ or US firms with Irish addresses resulting from leveraged buyouts or ‘other ownership changes’ (Bloomberg, 1 March 2017). Interjurisdictional advantages ‘Double Irish-Dutch Sandwich’ and ‘Single Malt’: In 2010, financial journalist Jesse Drucker published an exposé on Google’s use of the so called ‘Double Irish-Dutch Sandwich’ tax structure, claiming it reduced Google’s tax bill by US$3 billion over 3 years. The crux of the scheme is based on the Irish tax code definition of tax residence (since changed in 2015, see below). This definition allowed a company to be incorporated in Ireland without actually being tax resident if its ‘effective management’ was elsewhere. The Double Irish-Dutch Sandwich structure operates via a US parent company setting up two subsidiaries in Ireland. One subsidiary is a holding company, incorporated in Ireland but tax resident in a zero tax jurisdiction, often in Bermuda. The second subsidiary is controlled by the Irish holding company and is economically operational and tax resident in Ireland. The US parent licenses non-US IP to the Irish holding company. The Irish holding company then licenses the operational Irish company to make a product. Because it is renting IP, the operational company owes royalty payments to the Irish holding company. However, instead of paying the Irish holding company directly, it pays the ‘Irish’ company that is tax resident in Bermuda, thus availing of lower tax rates. The parent company further reduces its global tax payments by routing the royalty payments to Bermuda through the Netherlands to avoid Irish withholding taxes. This is because the EU Interest and Royalties Directive waives withholding taxes on cross border interest and royalty payments in many cases. Non-US sales are also booked by the operational company. Profits from sales are subject to tax in Ireland, but the company’s tax base is close to zero due to the high royalty payments it is making. The US parent company views these three firms as one company due to the ‘check-the-box’ election system in the US tax code. The ‘check-the-box’ option allows firms to be viewed as one entity and so ignores any intrafirm transactions. The effect is that taxable income in Ireland is reduced and increased in the lower tax location (Drucker, 2010; Killian, 2011; Fuest et al., 2013). In 2014, the Finance Minister announced the closure of the ‘Double Irish’ whereby an Irish registered company could be non-Irish tax resident as long as another company in the group carried out economic activities in Ireland. When closing the scheme, the Minister, strikingly, allowed companies that were in existence before then to continue to benefit from the structure until the end of 2020. After this announcement, the structure remained open for new entrants for a further two months. The new company tax residency rules introduced in 2015 also indicate that the new rules will not apply if a firm is ‘treated as a tax resident company in another country under a Double Taxation Agreement’ (Revenue Commissioners, 2017). This allowance has given rise to what the NGO, Christian Aid Ireland, termed the ‘Single Malt’ tax avoidance structure.7 The ‘Single Malt’ structure is a simplified version of the Double Irish-Dutch Sandwich which replaces the Bermuda and Netherlands subsidiaries with one in Malta. In 2018, the Minister for Finance announced an end to the ‘Single Malt’ through a new agreement between Ireland and Malta (Irish Times, 27 November 2018). Statelessness Perhaps, the most well-known tax avoidance scheme is that used by Apple Inc., deemed a form of illegal state aid by the European Commission (EC, 2016), a decision since overturned by the General Court of the EU (2020). The EC decided that Ireland provided undue tax benefits to Apple via two tax rulings in 1991 and 2007, respectively. All products sold in Europe were contractually sold by an Irish incorporated company, owned by Apple Inc., Apple Sales International (ASI). This means that all European sales and related profits were booked in Ireland. Apple was allowed to then split its profits between the Irish branch of ASI and a ‘head office’ which had no physical presence or employees anywhere, but merely consisted of occasional board meetings. In 2011 alone, the Irish branch recorded €50 million in taxable income and the ‘head office’ recorded €15.95 billion in taxable income which was not taxed anywhere. Another Irish incorporated company owned by the Apple parent, Apple Operations Europe (AOE), also declared profits relating to the manufacture of a particular line of computers to a non-existent ‘head office’. The public backlash against profits that could be booked nowhere on earth caused the then Minister for Finance to announce that ‘Irish registered companies cannot be “stateless” in terms of their place of tax residency’ (Department of Finance, 2013). ASI and AOE also made annual payments to the Apple parent in the US for R&D (over US$2 billion was paid in 2011), which funded more than half of Apple’s research for its entire worldwide IP. These expenses were then legally deducted from profits (EC, 2016, p.38). The EC deemed the loss of tax revenue to Ireland (and potentially to other states who may wish to query Apple’s practice) to be worth up to a sensational €13 billion (excluding interest penalties). This was because, by a method of exclusion, the EC deemed the substantive control of Apple’s IP (and therefore, its call over the profits from sales) to be in Ireland, i.e. if management and control cannot be ‘nowhere’, it must be in Ireland. The EU General Court ruled that the EC had not proven this and took the view that the IP is controlled in the United States and thus that the tax is due there. This is what Apple and successive Irish and US Governments had argued that the unpaid taxes would ultimately be paid through the process of tax repatriation that was part of the US tax code at the time (Coffey, 2018; Daly, 2020).8 Many concerns remain, however (though at time of writing, it is not known whether the EC will appeal the ruling). The concerns relate to a lack of clear paperwork outlining the basis of the Irish Revenue decision-making on the tax rulings; the length of time the rulings lasted without review; and concerns that Irish Revenue acted outside of its powers as the basis for the rulings initially appeared to include non-tax-related considerations such as job creation (Daly, 2020; Donohue, 2020; Mason, 2020). And finally, while US MNCs deferring tax payments from the United State were fully lawful, MNCs have used the deferral mechanism to defer tax payments at length (CBO, 2013). It is thought that US tax deferral has led to increases in aggressive tax avoidance, especially before anticipated tax rate changes in the United States (Avi-Yonah, 2016; Beer et al., 2020). Apple is the only ‘stateless’ case connected to Ireland that has been so extensively documented. However, in a radio interview the ex-CEO of Pepsi and of Apple, John Sculley, implied that Pepsi received approval from the Irish State for a similar structure. He indicated, We never looked at it [the Apple tax arrangement] as a sweetheart deal. We looked at it as a deal that had a lot of precedent. I knew the precedent because I’d been there when we negotiated the deal decades earlier with Pepsi (RTE interview, 23 April 2018). On-shoring of assets Apple reorganized its tax structure subsequent to the decision by the Irish Government to outlaw the corporate option of ‘statelessness’. The company relocated its non-US sales and IP from ‘nowhere’ to Ireland and its undistributed cash from its Irish subsidiaries to Jersey where there would be no tax due as long as profits are not repatriated to the United States. In order to finance the purchase of the IP, loans were then extended from the Jersey subsidiaries back to Ireland, where interest payments are tax deductible (Stewart, 2018b). Indeed, the Irish national accounts show a massive increase in incoming loans to the tune of €250 billion in the first quarter of 2015 (Coffey, 2018). This contributed to an unprecedented 26.3 percent rise in Ireland’s real GDP in 2015 (OECD, 2016). Apple would have benefited from a 100 percent Irish capital allowance for depreciation of the intangible assets, introduced by the Government in 2015, coinciding with Apple’s restructuring of its ‘stateless’ arrangement. The Government subsequently reduced this allowance back to the pre-2009 level of 80 percent, but that change would not have affected Apple, as its assets were brought onshore from 2015 to 2017 (Clancy and Christensen, 2018; IMF, 2019). There was a massive spike in capital allowances on intangible assets for that year—an increase from €2.7 billion in 2014 to €28.9 billion in 2015 (Revenue Commissioners, 2018). Apple also has a contract manufacturing agreement with a company in China whereby the products manufactured in China are owned by the Irish subsidiary although never physically present in Ireland. The 2017 Irish Balance of Payments show a very significant ‘change of ownership adjustment’ to Ireland’s export figures worth €17 billion (CSO, 2018). It is possible that this is a fee for manufacturing and for the purchase of goods in other countries by Apple’s Irish subsidiaries and sent on to China (Coffey, 2018). This is because contract manufacturing involves the contracting subsidiary in Ireland retaining ownership over the inputs and end product by simply paying a fee for production work (Department of Finance, 2019). Some implications of Ireland’s tax games The Irish tax games reflect the importance of Ireland as an offshore site for US MNCs. The previous system of tax deferral in the US incentivized US MNCs to avail of the Irish low tax rate, its tax residency rules and its array of tax expenditures. These tax strategies can then be pushed to their limits alongside other complementary offerings in other low tax jurisdictions to provide greater scope for tax avoidance. The corporate presence in Ireland in 2019 raised a staggering €10.8 billion in corporate tax receipts (Revenue Commissioners, 2020) (more than doubling in scale over the previous four year period). This is equivalent to about 12.5 percent of the €86 billion9 of gross public spending for Ireland for that year. While little employment is generated from the Irish tax games, the games are tagged onto substantive, productive investment by many of the MNCs involved. Due to the highly successful attraction of FDI by the Irish state (Ó Riain, 2014), these US firms provide 229,057 jobs (IDA, 2019), the equivalent of about one in ten jobs in Ireland.10 The model is not without its hazards for the Irish economy. Ireland’s corporate tax receipts are concentrated among a small number of large MNCs and this dependence is viewed as risky by the Irish State. Employment benefits are uneven, concentrated in cities and largely shared among highly paid workers in the tech industry (Regan and Brazys, 2017). And, Ireland is criticized internationally as a tax haven or a ‘tax pirate’ (Irish Examiner, 26 February 2018). However, these are risks that have not, thus far, negatively affected the large scale of corporate tax revenue accumulated by the Irish state. Corporate tax revenue is consistently rising. Those losing revenue from Ireland’s model are states where MNC economic activity is taking place, the profits from which are being artificially booked in Ireland. Without greater public transparency from MNCs, it is not fully clear where these profits should rightfully be declared. A number of studies provide a partial picture. Tørsløv and Zucman (2018, p.22) find that higher tax EU states are the main losers of profit shifting globally (losing up to 20 percent of profits). They find that, globally, Ireland is the top location for US companies shifting profits. Specifically, they find that out of US$600 billion shifted out of the United States in 2015, Ireland alone accounts for US$100 billion. Other studies find Ireland to be a conduit for financial flows from a range of other OECD states (for example, Garcia-Bernardo et al., 2017). Research by NGOs have also shown Global South countries to be negatively affected by the Irish model due to poor regulation at the IFSC, MNC exploitation of Ireland’s tax treaty system (Action Aid, 2016) and aggressive tax treaty negotiation by Ireland (Christian Aid, 2019). This is hardly an international role that Ireland can be proud of. The consequence of the high tax revenues and job creation has been a political adherence to the low tax model in Ireland. The low corporate tax rate is frequently described as a ‘cornerstone’ of Ireland’s industrial policy. It has cross political party support coupled with vocal support from the corporate sector. As seen with the case of Apple, with the exception of a small number of civil society organizations and academics, even those groups in Ireland that wish to see increased tax payments from MNCs tend to call for increased payments to be made to Ireland and not to the countries where the economic activity which produced such profits occurred.11 This presents a challenge to building solidarity for tax justice between communities in high and low tax states. Conclusion Coe et al. (2014) point to the importance of identifying the institutional landscape of global tax avoidance. A deeper study than is presented here is required to identify the institutional drivers of Ireland’s tax games. However, the partial picture presented shows an increasingly aggressive corporate tax haven model over time, featuring structures that support aggressive tax avoidance. The recent major reforms—whether stemming from the OECD or the US—while kick-starting certain pressures for change, have not deterred the overall model. The tax games may merely change to new forms. However, the current interstate proposals—for a new formula to ensure MNCs pay tax where economic activity occurs, and for an effective minimum corporate tax rate (OECD, 2020)—signal a real challenge to Ireland’s tax games. New ‘cornerstones’ for Ireland’s industrial policy are needed. To build commitment to a path-changing national development project, a recognition of the problematic nature of Ireland’s tax games is required. These games unfairly take revenue from communities in other states. An acknowledgement of this reality would be a good basis for work on such a national project to begin. Acknowledgements This paper benefitted from feedback from a number of people: Patrick Gallagher, Sheila Killian, Seán Ó Riain, Jim Stewart, Andy Storey, Paul Sweeney and the editors of this volume. It also benefitted from discussion at the New Political Economy of Europe Winter School, University College Dublin in January 2020. Any errors are of course my own. This article forms part of PhD research which is supported by the Irish Research Council Government of Ireland Postgraduate Scholarship (Project ID: GOIPG/2019/2110). Footnotes 1 The minimization of tax payments within the law. 2 Firms that produce goods and non-financial services. 3 Some of these activities, as in a Doyle and Stewart (2020) study of some Russian firms using Irish SPEs as financial conduits, raise serious questions about potential improper financial activity. 4 The ‘check the box’ system is explained in Section 4.2. 5 For example, Vermillion oil and gas company is shown raising finance for investment in extraction of gas in the Corrib Gas field. The funding operation involves subsidiaries in Hungary; an Irish incorporated and Cayman Island resident subsidiary and a Barbados company ‘to the Lux branch’: https://www.irishtimes.com/polopoly_fs/1.1974196.1414058725!/menu/standard/file/ITS_UMBRELLA_K_VERMILION_25112009.pdf 6 Actavis; Allegion; Mallinckrodt; Perrigo; Eaton Corp; Jazz Pharmaceuticals; Pentair; Alkermes; Covidien; Global Indemnity; Cooper Industries; Weatherford International; Accenture; Ingersoll-Rand; Seagate Technology; Tyco International. 7 Christian Aid Ireland report that US tax advisors were pointing clients to this scheme since the phase out of the Double Irish in 2014 (Christian Aid, 2017). 8 The Tax Policy Centre in the United States neatly explains the US deferral system and changes since the 2017 Tax Cuts and Jobs Act: ‘Before the 2017 Tax Cuts and Jobs Act (TCJA), the United States generally taxed its corporations and residents on their worldwide income. However, a US corporation could defer foreign income by retaining earnings indefinitely through a foreign subsidiary. The US corporation would pay US tax on the foreign earnings only when they were repatriated (by a dividend from the foreign subsidiary, for example). Upon repatriation, the earnings would be subject to US taxation at a rate up to 35 percent, with a credit for foreign taxes paid. The repatriation typically resulted in a net US tax obligation because the US tax rate was usually higher than the foreign tax rate. As of 2015, US corporations accumulated more than US$2.6 trillion of earnings in foreign subsidiaries, according to the Joint Committee on Taxation. Pursuant to the TCJA, the United States now generally exempts the earnings of a US firm from active businesses of foreign subsidiaries, even if the earnings are repatriated (i.e. there now is a 100 percent dividend-received deduction). But, as a transition to the new system and to avoid a potential windfall for corporations that had accumulated unrepatriated earnings abroad, the new law taxes these earnings as if they were repatriated but at preferred lower rates’. Tax Policy Centre, May 2020, accessed at: https://www.taxpolicycenter.org/briefing-book/what-tcja-repatriation-tax-and-how-does-it-work (18 September 2020). 9 Fiscal Advisory Council Data Pack May 2020 Figure 3.10: General government revenue and expenditure. 10 There may also be significant multiplier effects form this FDI through job creation in domestic firms. A recent study estimated that three jobs are created in a county for every state supported FDI job in the same county (Brady, 2019). 11 For example: Irish Examiner, 1 September 2016, 'Snow White' to deliver Apple tax open letter signed by over 10,000, accessed at https://www.irishexaminer.com/news/arid-30752615.html (18 September, 2020). 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TI - Ireland’s tax games: the challenge of tackling corporate tax avoidance
JF - Community Development Journal
DO - 10.1093/cdj/bsaa054
DA - 2021-01-16
UR - https://www.deepdyve.com/lp/oxford-university-press/ireland-s-tax-games-the-challenge-of-tackling-corporate-tax-avoidance-OTuG9G988T
SP - 39
EP - 58
VL - 56
IS - 1
DP - DeepDyve
ER -