ROTTEN TO THE CORE
In recent weeks the ordinary Irish punter has received a crash course in corporate taxation courtesy of the European Commission and the Apple Corporation.
This lesson has underlined the reality that taxes, like death, may be inevitable, but who pays them and how much varies greatly. In Ireland, as in every country, a complicated structure of rates, allowances and exemptions provides lucrative careers for armies of accountants, tax specialists and lawyers employed expressly to minimise the amount of tax paid. And the general conclusion, here as elsewhere, is that the wealthier the client, the better help can be hired and the smaller the resultant tax bill.
There’s nothing fair or equitable about the Irish tax system, notwithstanding official claims that it is among the most “progressive” tax regimes in Europe. Possibly it is, in the narrow sense that once an individual’s income for tax purposes has been determined, taxation at a rapidly increasing rate is applied, so the more you “earn” the more you pay. The devil however is very much in the detail of determining just what you “earn” for tax purposes, with the legislation a mishmash covering personal and company tax law as it has evolved over the last century. The lines between tax avoidance – permissible – and tax evasion – illegal – can be blurred, and tax defaulters rarely if ever face jail, which hardly encourages compliance.
The elements parcelled together in Irish tax law reflect a mixture of government policy and the fruits of special interest lobbying over decades. Inter alia there are provisions governing non residence, policies of disregarding certain income entirely and others favouring certain groups of taxpayers. Much of the legislation and provisions (or exemptions!) were drafted initially in tandem with and with an eye on other government laws and policy objectives.
The result, on the personal tax side, has been something to annoy everybody. Why should certain people receive a $50,000 plus exemption on income received for writing a book or selling a painting? Why should people receiving one payment from the state pay tax on it while people receiving a different payment do not? Why should some people charge the cost for travelling to work while others cannot? Why should those caught in the PAYE net alone have tax deducted right away? And why should persons – invariably wealthy – pay no tax in Ireland if they are deemed “non-resident for tax purposes” which is liberally interpreted to apply to anyone not proven to reside here for 184 days in any one year?
One question rarely asked is about Ireland’s low rate of corporation tax. At 12.5% – much lower than that on individuals – the CPT rate has become one of Ireland’s sacred cows, to be defended as fiercely as the level of the Old Age Pension. The reason is simple. That low rate has been identified as one of the major factors in successfully attracting and keeping foreign industrial investment here. And, while other factors making Ireland attractive can be cited, few doubt the importance of the low tax rate. It had its origins half a century ago when Ireland was struggling to establish a manufacturing export oriented industrial base and was attempting to attract inward industrial investment.
We have come a long way since then but the tax rate continues to matter. Any doubts on that score can be dispelled quickly by viewing the various attempts and pressures put on Ireland by the Commission and individual EU states to force a change. Under sustained pressure from the Commission the Government increased the rate to 12.5% some decades ago amid allegations from several EU states that Ireland was poaching jobs and investment. When we were on our uppers several years ago, requiring a bail out from Europe, concerted and determined pressure to change was again exerted by the Commission and several member States, including France. We held firm on the grounds that national taxation was a matter for member states and not within Commission competency.
We were supported back then by several smaller member states which themselves were applying low rates, again to encourage inward investment. I recall in 2002 Estonian Prime Minister Kallas discussing Estonia’s low tax rate and asking me, rhetorically, what else a small country on Europe’s periphery had to offer. Indeed. The peripherality argument is one that has never been teased out fully within the EU, where there are massive cost savings and advantages to companies (and countries) close to the EU’s centre. And, very importantly, one of the EU’s heavy hitters, Britain, was firmly and resolutely opposed to any encroachment by the Commission into the area of national taxation.
Cue August 30, Apple, and the European Commission, which found under the EU’s “state aid” rules, that Apple, one of the world’s major corporations, had paid little or no tax on billions of earnings through channelling huge sums in complicated fashion through Ireland. There is no doubt that this took place and the Commission called the Irish government complicit in facilitating Apple’s arrangements, instructing it to claw back €13 billion plus interest in taxes dodged by Apple since 2003. The government is appealing the ruling and the matter is likely to drag on for several years.
There are a number of dogs in this particular complicated fight. There is the multi- layered issue of EU – US trade relations, affecting both sides, and involving the relationships between both tax systems and multinational companies, with agreement for once between the USA and Europe that the multinationals need to have their wings clipped – and their profits taxed. There is, internally in Europe, the complicated issue of what constitutes state aids. There is the separate issue of whether the Commission is trying by subterfuge to extend its competence into national tax policy. Despite Commission denials, given the history on this one, there cannot but be suspicions that this ruling, if left unchallenged, could prove to be the thin end of a long term wedge.
Then there is the domestic Irish dimension. For decades the long suffering Irish taxpayer has put up with a Faustian –type pact under which it was accepted that multinationals paid less tax in exchange for bringing the jobs, and certainly they have. But this episode has revealed that Apple – and probably other multinationals – has been paying substantially less than the accepted 12.5% rate; indeed creative accounting on a worldwide basis has involved Apple “paying” at less than 1%. The Irish left has been shouting for years that something like this was the case and has constructed marvellous economic plans factoring in missing billions which they allege should be due.
For a cash-strapped economy and taxpayers punch drunk after years of austerity, the prospect of a windfall infusion of up to €19 billion with interest, was, briefly, tempting. But enthusiasm faded quickly as it became clear that other countries could well demand a share. And who, after all, would want to rock the boat of Ireland’s relationship with the multinational sector? Factor in that this could well have been a glowing and gilded Trojan Horse planted by the Commission and surely the government was right to reject the money and appeal. “Timeo Daneos” indeed.