Preserving Ireland’s corporation tax regime is a professed priority of every party that seeks realistically to serve in Government.
It is opposed only by the parties of the radical left and some Independents, none of whom are serious contenders for government in the foreseeable future.
One of the characteristics of the Irish system of politics and government is a high degree of policy continuity despite frequent changes of Government. Nothing illustrates it quite so vividly as the elevation of our laws governing corporation tax to the status of Holy Writ.
But Holy Writ is not what it once was. The banking crash, the recession and the consequent years of austerity, as battered national treasuries taxed their citizens more and paid them less, combined with the increasing ability of multinational companies to avoid national taxes, have changed the international context.
Taxing multinationals is on the agenda of many governments. Last year's Apple ruling, which found the technology giant had been unfairly undertaxed in Ireland and owed €13 billion in back taxes, put Ireland again under an unwelcome spotlight.
The Irish Government did what it always does – it aggressively defended Ireland's corporation tax regime, indignantly announcing that it would appeal the European Commission's judgment. But this time the enemies were domestic as well as foreign. Independent members of the Government – previously outside the economic consensus of the governing class – were queasy about the affair, and initially declined to agree to an appeal. Why shouldn't Apple pay the money, some of them thought?
The facts of life
Michael Noonan got them into a room and explained the economic facts of life, as he saw them. Foreign investment sustains hundreds of thousands of jobs here. Corporation tax is a pillar of our economic model; pull it away and the whole lot could collapse. And Ireland was facing enough challenges to its tax regime from jealous foreigners – the last thing the country needed was to be undermined from within.
The Independents accepted the arguments. But if they were going to climb down off their high horses, they needed some political cover. So the Cabinet agreed to have a review of Ireland’s corporate tax.
The Independents claimed a great victory. "It will assess what tax multinationals do pay and what they should pay," Minister of State John Halligan said.
Minister for Transport Shane Ross said the agreement he and the other independents had made with the Taoiseach and the Minister for Finance was "remarkable".
The Independent Alliance, he said, could guarantee that multinational companies would “pay a fair rate of tax from now on”.
Even by the standards of guff that the Independents have sometimes employed in these situations, this was pretty far out there. It is fair to say that Noonan had a different conception of what the report was for.
Reviewing the review
In any event, the report, compiled by economist Séamus Coffey, was published on Tuesday. It is a detailed, thorough work by one of the country's top economists. The current Minister for Finance, Paschal Donohoe, greeted it somberly.
Having done the review on the thing he didn’t really want to review, he lately considered what he should do now. And he decided: let’s have a review of the review.
“I will be commencing a review of the recommendations that are contained in this report on budget day,” Donohoe announced.
That review will entail a "consultative process" involving all the relevant stakeholders. It may take, as you can imagine, some time. As an exercise in bureaucratic long-fingering, this is of Yes Minister standards.
Despite their common insistence that Ireland's corporation tax rate will never be under threat, politicians seem to spend an awful lot of time defending it. Of course, they know what has led to the international pressure – especially from some EU countries – is not the 12.5 per cent rate, but the use of Ireland's corporation tax laws by some multinational companies to pay much, much less than 12.5 per cent on the profits earned across Europe that are booked by Irish subsidiaries.
And while the Coffey report will not, as the Independents boasted, ensure that multinationals will “pay a fair rate of tax”, it does shed light on how Ireland’s system actually works.
For one thing, the extraordinary amount of profits booked in Ireland by the European headquarters of major multinationals is underlined. But only a portion of this income is taxable in Ireland, as the big players use allowances to reduce their liability to Irish tax.
The amount of reported profit – and the use of these allowances – jumped in 2015, the year when Irish GDP rose by an extraordinary 26 per cent, as the factors distorting our national economic figures were also reflected in the level of reported corporate profits.
The gross profits reported by companies rose from €72.7 billion in 2011 to €144.1 billion in 2015 – with a particularly sharp jump up from €95.6 million in 2014.
However, the amount of this profit that is taxable in Ireland is sharply reduced by a range of allowances – and the gap between total profit reported here and what is liable for tax also rose sharply in 2015, with more than €144 billion of gross profit reduced to just over €65 billion of taxable income. That’s a whopping difference.
Intellectual property
There are a variety of tax allowances used by companies to reduce their level of taxable profit; three in particular are highlighted in the report. These are allowances relating to losses carried forward from previous years; some specific allowances for trade charges; and so-called capital allowances, which are write-offs companies get to recognise investments they have made.
Many companies, notably banks, lost huge amounts during the crash and can write this off against future profits. As the report says, this allowance should become less significant in future years, as the crash era losses get used up. However, the big jump in 2015 was in the use of capital allowances, which jumped from €18.6 billion in 2014 to €46.1 billion in 2015. This was one key factor reducing the amount of corporate profits liable to Irish tax in that year.
So what was happening? During 2015 some intellectual property assets were moved to Ireland. This means that big companies, one of which is believed to have been Apple, moved the ownership of their intellectual property to Irish tax-resident subsidiaries. Intellectual property relates to all the work that went into developing, designing and marketing products and the associated patents and copyrights.
This move of intellectual-property assets here was part of a cleaning-up of their own corporate structures, as intellectual-property rights had typically been held in tax havens or, in Apple’s case for many years, in a company that did not have a tax residency anywhere. In 2015 alone, we are probably talking about assets worth more than €250 billion being relocated here – a huge figure.
Boosting tax receipts
Moving the intellectual property onshore to Ireland appears to have been one factor boosting our own corporate tax receipts, which jumped from €4.93 billion in 2014 to €6.25 billion in 2015. But the bulk of the profits relating to the use of intellectual property were not taxed here due to the use of capital allowances, which operate here much the same as in other jurisdictions. So everybody won – Ireland got a huge increase in corporation tax receipts, but the multinationals still managed to avoid tax on most of their profits thanks to the allowances.
There are opportunities and dangers here for Ireland. The opportunity is that the more assets big companies move to Ireland, the more they are embedded here and the more tax they pay, even accounting for the write-offs.
The danger is the ongoing focus on how these big companies can still arrange their affairs to pay relatively little tax on profits earned outside the US, and Ireland’s part in this chain. Over the past few years, the curtain has been pulled back from Ireland’s corporation tax magic. There will be more formidable opponents in the future than the Independent Alliance.
