Multinationals are preoccupied with lowering tax bills, basing many decisions around that, writes Colm Keena

THE DEBATE on Ireland’s low corporation tax rate is part of a global debate on a highly political question.

With 60 per cent of world trade now taking place within multinationals, how they are taxed has implications not just for how such companies are structured, but also for the distribution of wealth around the globe.

A business empire created more than a century ago by Liverpool brothers William and Edmund Vestey raised the question of where profits arise. While working in Chicago in the late 19th century, the brothers cottoned on to using refrigeration so they could ship cheap meat cuts from the US for sale in the UK. The Vesteys quickly became the largest wholesale and retail meat traders in Britain.

Their business boomed. They bought ranches and abattoirs in South America, New Zealand and Australia, established their own shipping lines and began importing millions of cheap eggs from Russia and China into Britain.

The integrated multinational business raised questions as to how and where it should be taxed and the extent to which Britain should tax the two deeply tax-adverse brothers on their worldwide income.

William gave evidence to a Royal Commission in 1920.

“In a business of this nature, you cannot tell how much is made in one country and how much is made in another. You kill an animal and the product of that animal is sold in 50 different countries. You cannot say how much is made in England and how much is made abroad.”

When the brothers lost their bid for tax exemption in the UK, they set up a trust that took the British revenue almost 70 years to crack. It was established by a law firm in Paris.

In 1980, a Sunday Timesreport revealed that the Dewhurst butchers chain, owned by the Vestey family, paid £10 tax on a profit of more than £2.3 million. Edmund Vestey, grandson of the founder of the same name, said: "Let's face it. Nobody pays more tax than they have to. We're all tax dodgers, aren't we?"

Lowering their tax bill continues to be a preoccupation of modern multinationals and one they address through decisions such as where to locate and how to maximise the amount of profit that arises in low-tax jurisdictions such as Ireland.

Ireland has been hugely successful at luring mobile capital. It is not so easy for jurisdictions such as Britain, Germany and France to do this because they have large domestic corporate sectors. If they slash corporate tax rates, they lose a lot of the revenue they raise from domestic companies. The additional revenue from foreign companies they might attract would be unlikely to compensate.

According to Prof Michael Devereux, director of the Centre for Business Taxation at Oxford University, it can be extremely difficult to identify the contribution made by a particular jurisdiction to the profits of a multinational.

Joe Tynan, tax partner with PricewaterhouseCoopers in Dublin, doesn’t quite agree. “Clearly there is an element of subjectivity, but it can be sliced down. It is difficult but it is possible. Under the OECD rules, it is clearly documented.”

The fear that multinationals “shift” profits from around Europe to Ireland causes concern and resentment in some parts of Europe. However, the majority of the companies involved are from the US and might simply move outside the EU if conditions in Ireland change.

One of the outcomes of the growth of multinationals as a proportion of global trade, while tax systems remain national, is that the power of business as against politics has been increased. Jurisdictions that are attractive to mobile capital put pressure on other jurisdictions to compete.

Any effort to realign that balance needs to be worked through the Paris-based OECD, which sets the global rules, if the danger of protectionism is to be avoided, says Tynan.

“There is a solution that is there at the moment. It is called the OECD. If you don’t like the rules you can ask that they be changed.”