Get ready to be spun. The launch on Monday of the OECD review on how big multinationals pay tax – or rather avoid paying tax – will bring forth the familiar chest-beating, ducking and finger-pointing which this subject always creates.
The truth is that a few changes in international tax rules could ensure these companies pay more. The reality is that the big multinationals have played countries off against each other for years to make sure this does not happen – and succeeded because of the economic power they have, all related to their vast size. Apple’s annual revenues, for example, are about 80 per cent of Ireland’s GDP.
For years the status quo has suited everyone. The US gets to help its big companies and their shareholders. Countries around the world, including Ireland, get lots of investment. And the tax havens where multinational cash is parked tax-free get fleets of accountants and lawyers to boost their economies.
The revelations of recent years have changed the public mood, however. Big companies are going to end up paying more tax. How much – and on what terms – is the question, and this is the crunch issue for Ireland. Will this mean less inward investment? Or more tax? Or a bit of both? My guess is it will make it harder for us to construct a unique tax package to try to attract multinationals in future – as we did in the past. And that we will have to battle to hold on to the tax package we have.
Ireland, heavily reliant on big multinationals, is one of the countries in the tax spotlight, particularly as it is now likely that the European Commission will rule shortly that Ireland did illegal tax deals with Apple in the past. The money involved here could run in to telephone numbers; JP Morgan suggests that up to €19 billion could be in play in terms of tax due on money moved through one of Apple’s Irish companies. The final ruling from the EU - which if negative will be appealed by the Government – may be less dramatic in terms of numbers, but will still be a watershed.
So expect an aggressive response from Dublin to the OECD plan. The Government will say there is “no threat to our 12.5 per cent tax rate”, even though the actual rate is not at issue. The Government’s second line of defence – supported by the Ireland Inc brigade of lobbyists, accountants and lawyers – will be that our tax system is open and “transparent”. The message is that we are not a dodgy tax haven, but rather an upstanding member of the international tax community. This is fair enough – we are not the Cayman Islands – but it does not mean our tax structures will not come under pressure.
Economic crisis
The Apple ruling comes at an unfortunate time for Ireland, as the whole structure on which these big companies pay tax is under the microscope. These rules rest not on the certainty that applies to your tax bill and mine, but on rulings and interpretations of complex issues such as where profits are earned.
It would be an oversimplification to say it could all be sorted overnight, but not a huge one. Central to it all is a US tax rule which – within certain constraints – allows companies to avoid paying tax in the US on profits they earn elsewhere, provided those profits remain outside the US.
So the big players end up paying normal tax rates on their US profits and can often engineer paying very little on money earned outside the US and held offshore.This rule could be changed – and US presidents back to Kennedy have talked about doing so – but so far it remains.
The reason things are changing is the economic crisis. Revelations of Apple’s effective tax rate of 2 per cent on money moved through Ireland, or of tiny tax bills paid by other big players, were dynamite politically at a time when exchequers were short of cash and electorates were squeezed.
Still, the big bang solution of major co-ordinated international tax changes led by the US was not taken. The debate is now about the ground war of adjusting tax rules to try to do away with the more extreme abuses . This is what Monday’s OECD report is about, with the EU Commission likely to argue the OECD doesnot go far enough.
Public backlash
Another factor is also entering the equation: corporate reputation. Companies spend millions avoiding tax, but now realise there is a public backlash that can harm them. Though it has to be said that so far the bad PR does not seem to have harmed the likes of Apple and Google.
Battle will now commences on exactly how the rules will change. As a low corporation tax player, we will face further pressures. However, there may also be opportunities if US companies are forced – or choose – to avoid moving money through offshore tax havens and are looking for an alternative. Slowly but surely, it appears that the tax pitch will be levelled and our ability to offer something “special” will be eaten away. More and more transparency will help to level the pitch and the bigger countries will keep up the pressure on us.This is the new reality we have to adapt to.
And will the big companies pay more tax? Yes, a bit more would be my guess – as little as they can get away with, but more than they do now.
However, your small corner shop in Cashel or Coolock is still going to be paying more of its profits in tax than many of these vastly rich global players.