Thursday, May 23, 2013

Schrödinger's Profits


Famine victims outside the IFSC

We are told that Ireland is not a tax haven. Nevertheless it is claimed that Apple pay a derisory rate of tax on vast profits, and that this is, in some way, facilitated by their locating in Ireland.

They do have thousands of real jobs located in Ireland and they do pay 12% tax on local profits, but the trick is, I gather, that their intellectual property profits are not considered located in the USA by the authorities there, nor in Ireland, by the authorites here. In other words the companies (or their subsidiaries) are tax resident in neither location. So from a tax point of view these profits don't exist. At least for as long as they stay where they aren't.

I did a post on my Irish language blog almost seven years ago to the day, in which I argued that Ireland was prostituting its sovereignty in helping USA multinationals avoid taxes. I pointed out that we were stealing from our fellow EU members tax bases and I also drew attention to a plea from Christian Aid to abandon these gimmicks as they were also robbing developing countries of much needed revenue and development.

At the time I was just thinking of the nominal tax rates, and I was aware that the effective tax rate in some of our EU neighbours was well below their nominal rates. But the stark case of Apple above, raised in a USA Senate Committee hearing, has alerted me to a much deeper issue, intellectual property profits. This is much more complex than the simple nominal tax rate competition and it does appear to put us in the same basket as the tax havens, whatever we choose to call ourselves.

Having said that, I find it almost impossible at the moment to get a proper fix on what is going on and on how important the incorporation in Ireland of a foreign multinational or its subsidiary is to its ability to minimise its tax liability worldwide.

Professor John FitzGerald, of the ESRI, has made the point that many major USA multinationals, located in Ireland, have real economic activity located here and the economy, and in particular employment, is highly dependent on these real, tax-paying, activities.

He fears that reaction to what is perceived as the trickier end of our package, the facilitation of "tax invisible" profits, could lead to a sweeping away of the genuine economic activity located here. And that would be a disaster.

Over to you Enda.


3 comments:

irishwaterwayshistory.com said...

I think that Michael Hennigan of Finfacts makes sense on this topic (as on others): see http://www.finfacts.ie/irishfinancenews/article_1026027.shtml

On "prostituting its sovereignty", I fear that the concept is, as it has always been, a pipe-dream. No man is an island and nor is any state.

bjg

Viv said...

Profits on intellectual property can be considerable. Take the iPhone as an example. It contains perhaps 60 dollars worth of materials. The real value - the intellectual property - consists of the way in which the individual components are developed, optimised and combined to execute the range of functions that the phone is capable of.

However, those components, or many of them, can be adapted and optimised to become part of other products. For example, touch-screen technology is used in phones and many other products such as the iPad and laptop computers.

This means that the value of the intellectual property incorporated in each individual mass-produced product is vanishingly small. Yet these products sell for several multiples of the value of the materials they are made from. This is one way how profit on intellectual property is created. Another way is the sale of intellectual property to other companies.

How to tax intellectual property? Not easy, but one way might be to tax it in the country in which the products incorporating it are manufactured. Or, in the case of sale of intellectual property, to tax it in the country where the sale contract is signed.

Póló said...

@Brian

Thanks for that piece by Michael Hennigan. Scare the shit out of you.

Is it possible that Government are not up to speed on this stuff? That would be really frightening.

As to sovereignty, my point was not about complete independence but that because our "sovereignty" was recognised by others, we could use it to confer competitive advantages on multinationals, which is clearly what we have been blatantly doing for years.

At EU Finance Ministers' lunches over many long years, the Irish Minister was often placed between the Germans and the French, so that these Ministers could scream at him about this very issue. So neither it, nor their anger, is new. But patience now seems to be running out all round and to the extent the USA rejig the system at their end, we will be in trouble. The present situation also clearly affects EU MS willingless to help with our banking/public finances crises beyond whatever might be needed to protect the Euro. And this for how long?

@Viv

Thanks for that elucidation.