There is an irony in the boost to our corporate tax bill over the last few years. Ireland, one of the countries in the firing line in terms of international tax avoidance by major companies, has actually benefited hugely from the reforms being put in place to address this very issue.
Significant profits previously declared for tax in offshore havens are now being booked in Ireland. There is a risk for us here, as other exchequers jealously look at our soaring corporate revenues. The European Commission is looking at reforming the decision making process on taxation and moving away from the need for unanimity. It is just one sign of how things are changing.
Caught between a crackdown on the use of tax havens and new US tax laws, the big firms have to pay more tax somewhere and Ireland is getting more than its fair share. This requires Ireland to walk a delicate line – as illustrated in a tale of two bills, one issued to Apple and the other to pharma giant Perrigo.
One was issued under protest, you might say, after the European Commission’s finding that Ireland offered illegal state aid to Apple, requiring them to pay over €14 billion. The second, as revealed this week, was issued by the Revenue to pharma giant Perrigo for €1.64 billion.
They are the two highest tax demands in Irish history. Yet in one case, the Irish Government will fight, along with the company, through the European courts to try to avoid taking the cash from Apple.
In the other, Perrigo will have to fight its own battles. The company came to be based in Ireland as part of what is called a tax inversion, a corporate restructuring in which it moved its headquarters to Ireland from the US.
This happened following its acquisition of Irish company, Elan. Perrigo told investors at the time that the redomiciling in Ireland – possible even though most of its business is in the US – would lead to a very sharp cut in its tax bill.
An unfavourable verdict on Apple could encourage further cases against Ireland
Corporate inversions were a particularly aggressive form of tax avoidance, which was common a few years ago. They were controversial – clearly moving tax dollars out of the US to other jurisdictions. Ireland did not actively tried to attract these deals, for the simple reason that they do not lead to a big increase in economic activity or a lot of jobs. And so there will be limited sympathy for Perrigo in Government circles here.
Accumulated losses
There is something of an irony, after Perrigo’s tax-saving move to Ireland, that the Revenue have to serve a tax demand on it related to a deal which was completed before it bought Elan.
This was when Elan sold its remaining interest in a major multiple sclerosis drug to another firm, Biogen. Elan declared the cash it received as part of its trading income, while the Revenue now insists it was a once-off windfall on which capital gains tax of 33 per cent was payable.
In the kind of manoeuvre which irritates ordinary taxpayers, Elan used accumulated losses to avoid paying corporate profit taxes on the cash it received from Biogen in the first place. This is one reason the tax bill is now so big – the company did not pay tax on the deal in the first place. And the accumulated losses cannot be written off against a capital gains tax bill.
The Apple case is different. The company has a huge operation here, employing 5,000 people and looks set to expand in future years. The tax ruling, damagingly, came from Europe and alleged a conscious effort to provide illegal state-aid to the company. And an unfavourable verdict could encourage further cases against Ireland and uncertainty about our tax regime, unlike the Perrigo case which is more a contained issue.
The Government will fight with Apple, but Perrigo will battle on its own.This is the realpolitik of the situation. As ever the reality is more complex.
It is clear Apple paid a ridiculously low amount of tax on its international earnings for many years and that Ireland was a key link in the chain allowing it to do this.
What is not clear is whether Apple – or Ireland – did anything legally wrong. Or that if the company was, indeed, legally – as opposed to morally – obliged to pay more tax, that this money is actually due to the Irish exchequer.
A common sense point of view would suggest that it might more likely be owed in the US, but common sense doesn’t count for much in a court of law when complex tax decisions are debated.
The final irony is that Apple is one of the companies which has moved its intellectual property assets to Ireland and is likely to be one of the contributors to our soaring tax revenues. A weakness in Ireland’s case in the international tax debate in the future is that while companies like Apple have a huge presence in Ireland, the profit-creating power of locating its intellectual property here is not really linked to what it does in Ireland. And so other countries are trying to get these firms to pay tax on a different basis and while movement here is slow, it still looks like change is coming.
Meanwhile, changes in the fortunes of the big firms reponsible for paying such a large amount of tax are also a long-term strategic risk, even if the short-term outlook is good.
For Ireland this means caution in using the soaring revenues, particularly to support sharp rises in day-to-day spending. And it means taking a strategic approach to the reform drive in the EU and OECD. The days of just saying “no” and hoping it would all go away are slowly – but surely coming to an end.