Ireland and the multinationals

By added on 03/09/2010

Ireland may not be a tax haven but it’s increasingly being seen as a safe place for multinational firms seeking to trim their tax bills and maximise their profits, reports the Irish Times.

President Barack Obama’s promised crackdown on offshore tax havens has created a wave of uncertainty among US firms that have benefited from generous tax regimes in places like Bermuda and the Cayman Islands.

In addition, plans to take similar measures in the UK have meant multinationals there have been looking outside of traditional tax havens for safer tax regimes.

Tax advisers have for some time been selling the idea of moving corporate headquarters for multinational firms to Ireland for a number of reasons.

For one, our low corporation tax rates are a long established feature of the tax landscape. Our favourable tax treaties with other countries and our relatively settled political system also give a degree of certainty over the tax treatment of profits.

That’s not all. While some countries seek to attribute worldwide profits to holdings companies for tax purposes, Ireland only taxes the dividends received by the holding company – a significantly smaller sum.

We have a generous regime for the headquarters of multinationals which means that any gains made on selling off subsidiaries are not liable to tax.

Ireland is also a plausible home for genuine investment because it is a place where dozens of major multinational corporations have built and staffed offices and plants. Something that can’t really be said about the Caymans, Bermuda, Jersey other other jurisdictions.

From the State’s point of view, this is a good thing, right?

Not necessarily. On the plus side, it is bringing badly needed jobs and investment to Ireland at a time when we need it most. Some companies who have moved here have set up major distribution or production operations. Microsoft, for example, has been able to cut millions of dollars from its annual tax bill by putting a small subsidiary in Dublin in charge of billions of dollars of assets. This, arguably, has also led to the firm employing more than 1,000 people here.

But for all this genuine investment, there is evidence that many firms have been moving here in more recent times to use Ireland as a kind of flag of convenience, without investing or creating any meaningful employment.

The Revenue Commissioners are aware of around 20 such firms which have relocated here – or are considering doing so – over the past year or so who pay “little or no tax here”. Any firm which fits this category doesn’t have a base here worth speaking of.

Tax avoidance is a grey area. And exploiting the cracks in the system isn’t a crime. But the damage in terms of our reputation abroad as a kind of “Wild West” for multinationals could be considerable.

That’s if we have any reputation left to protect. We’ve done a good job on our own in bringing our the Irish banking system to near collapse. German taxpayers, who are bailing out Hypo Real Estate following its purchase of Depfa, a German bank which was headquartered in the IFSC, have also been quick to pin much of the blame on Ireland’s light-touch regulation.

There are also dangers that Ireland will be next in the sights of the US and other governments who are trying to stem the flow of tax revenues departing their shores. Just last year Ireland was named in a report by the investigative arm of the US Congress as one of four “low tax” jurisdictions, along with Netherlands, the Cayman Islands and Bermuda.

The report called for an end to the system whereby companies investing in an unnamed country with a 12.5 per cent tax rate were able to offset the cost of building that facility against their tax at home. No prizes for guessing which country they were talking about.

The irony is that, given the high concentration of firms based here due our generous tax regime, any sudden move by the US government to clamp down on this area could make us much more vulnerable than we ever realised. We can’t say we haven’t been warned.