The subject of this meeting is a review of global taxation and architecture in the context of base erosion and profit shifting. I welcome Professor Frank Barry, professor of international business and development at Trinity College Dublin. Professor Barry will make some opening remarks which will be followed by a question-and-answer session. I remind members, witnesses and those in the public gallery that all mobile phones must be switched off. I advise the witness that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If the witness is directed by the committee to cease giving evidence on a particular matter and he continues to so do, he is entitled thereafter only to qualified privilege in respect of his evidence. The witness is directed that only evidence connected with the subject matter of these proceedings is to be given, and he is asked to respect the parliamentary practice to the effect that, where possible, he should not criticise or make charges against any person or persons or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing ruling of the Chair to the effect that they should not comment on, criticise or make charges against a person outside the Houses or any official by name or in such a way as to make him or her identifiable. I invite Professor Barry to give his presentation.
Base Erosion and Profit Shifting: Discussion with Trinity College Dublin
Professor Frank Barry
I have been paying attention to this issue for about ten years but really started to research it in detail about six months ago. It was entirely fortuitous that by the time I had figured out what was going on, the Westminster committee and the US Senate sub-committee had released the results of their investigations. I presented a paper at the Institute of European Affairs about a month or six weeks ago to explain the fruits of my research. On foot of that, I was invited here to reprise that. As the committee knows, what we call aggressive tax planning by multinationals is in the news almost every day. In other words, it is entirely legal but it pushes the margins of legality to the limit in terms of trying to avoid global taxation.
Clearly, there is an important Irish dimension to this, because Ireland surfaced quite substantially in the Westminster and US Senate hearings. We have a very long history of using corporate taxation to attract foreign direct investment. The slide shows my iconic image of Irish industrialisation. I found it going through the files of The Cork Examiner. It is Fermoy in the mid-1950s. We are all familiar with Faber-Castell. I am sure we all chewed those pencils when we were kids in the classroom. This was one of the first foreign firms that came to Ireland in the mid-1950s. The second John A. Costello Government introduced export profits tax relief and that is the origin of our low corporation tax regime, so it has a very long history. Very generous tax allowances were given for corporate profits derived from new manufactured exports. The idea had been knocking around the bureaucracy for about ten years or so. It was originally thought to be a way of promoting indigenous exports in view of the dollar shortage after the SECOND WORLD WAR and so on.
This is the foundation of our low corporation tax regime today and on that foundation is built the entire infrastructure of drawing in foreign firms. Ireland is one of the most FDI-intensive economies in the world. The idea of exports profits tax relief was initially conceived as an incentive to indigenous exporters.
Is what is coming up here matching with what we received beforehand? Is it the same?
Professor Frank Barry
It should be. I do not know which documents were released to members.
Do you have that quote?
No conspiracy theories now, Deputy.
Professor Frank Barry
I throw that quote in there to make the point that it is the foundation stone of why we are so attractive to foreign direct investment. The entire infrastructure that makes us very successful at drawing in foreign industry has been built on that foundation. Initially, export profits tax relief was conceived as an incentive to indigenous firms to export. I was interviewed on National Public Radio in the US about this when the Senate sub-committee released its report. I had been researching where the ideas came from so the following irony amused the Americans to a great extent. It was a Marshall aid-funded consultancy study commissioned by the IDA that drew Ireland's attention to the case of Puerto Rico, which had developed very rapidly post-Second World War because, as a US protectorate, it had tariff-free access to the US market but had control over its own corporation tax because it was not a US state. The idea really stimulated the Irish bureaucracy into the notion that there is a valuable policy to be implemented here and that policy was eventually implemented in 1956.
To bring it up to today - this story is replete with ironies - members will see that the reason I use this quote will surface again and again in my presentation. Back in 2000, the EU complained that the use of Caribbean tax havens by US multinationals gave US firms a competitive advantage. That is important to bear in mind in view of the logjam that prevents the US from coming up with policies towards its own corporation tax that satisfy everybody. The use of Caribbean tax havens gives multinational firms an international advantage and it is primarily US firms that use the Caribbean tax havens.
I know that people from the OECD have appeared before the committee and have gone through the next couple of slides, but I want to present it from my perspective because it is an important part of the story. We know the US Senate sub-committee branded Ireland a tax haven. To me, that is Alice in Wonderland language, where words mean what one wants them to mean. I prefer to go with the OECD definition, under which Ireland is definitely not a tax haven. Initially, to define a region or jurisdiction as a tax haven, the OECD had four criteria. One of these is that the region must have no or very low taxes, but the OECD warns that this criterion is not sufficient. This point is really missed in most public debate. Different kinds of economy have different appropriate tax rates. It makes sense for big, centrally located and long-industrialised economies to have higher corporation tax rates for the reasons members see on this slide.
Economies with large GDPs, such as Germany, are attractive to particular kinds of foreign direct investment that want to locate in the markets to which they will sell. Ireland does not have that advantage. Centrality, which means closeness to purchasing power, is also attractive to particular foreign firms such as car manufacturing. We have no car manufacturing in Ireland because it is too expensive to ship cars out of Ireland. Belgium and the Netherlands are centrally located and not only are they rich themselves but also they are close to the rich regions of Germany and France. Unlike the periphery, central regions have an advantage in being able to attract foreign direct investment easily and, therefore, it makes sense for them to tax those firms at a high rate. Ireland does not have those advantages.
The next slide outlines effective corporation tax rates. The World Bank produced a report some time last year which suggested that France had a low rate of 4% or 5%. Irish politicians banged on about this in every possible forum. It is rubbish. The World Bank produced that study over the space of a few months. It was like a back of the envelope calculation. The table in the slide is derived from one of the two leading academic economists working on corporation tax issues, Mike Devereaux from Oxford University. He spent his life studying this subject so this table is much more sensible. Ireland has a rate of 11.1%, which is pretty close to the 12.5% rate. It is reduced by certain allowances for research and development. France is located near the bottom of the table with a rate of close to 30%. The US and Japan have rates that are above 30%. The logic of country ranking in the table replicates the preceding slide. The five countries with lower corporation tax rates are small and tend to be peripheral and recent industrialisers.
The second OECD criterion is lack of transparency. It is suggested this is the reason Brussels has announced that it will investigate the practices of Revenue. There is a notion that special deals might be made available to special multinationals. Revenue absolutely denied that notion but a misconception exists in this regard. The second big academic name in this area is a US economist, Jim Hines, who includes Ireland in his list of tax havens. His list was replicated in a statement from the Obama Administration in 2009. It appeared overnight and then Ireland and the Netherlands disappeared from it the following day after our Department of Finance and, presumably, the Dutch got in touch to argue it was wrong. The White House replicated Jim Hines's list of tax havens. I know Jim Hines and when I asked him why he included Ireland on his list he explained that Ireland gives tax holidays. I told him that was news to me and, as he discussed the matter further, it turned out he had misinterpreted what are called grandfathering clauses. In the late 1970s we transitioned from a zero rate on manufactured exports to a rate of 10% at the behest of the European Commission. Firms which had invested under the previous regime were given a grandfathering clause to allow them to transition to the new regime. Jim Hines misinterpreted that as a tax holiday. I suspect that the Apple testimony to the US Senate sub-committee may have been similarly misinterpreted in its suggestion that it was promised a special rate. The IDA has a different interpretation and I think it is a plausible explanation for why Apple indicated it had a special deal. It came to Ireland in 1979 or 1980, which is the period in which the grandfathering clause was put in place as we transitioned from one tax regime to another.
Ireland's low corporation tax regime has been in place for approximately 60 years. It has changed on only three occasions over that period. We moved from export profits tax relief to the 10% rate on manufacturing in the late 1970s and the 12.5% rate in the late 1990s. That incredible history of stability is also important in attracting multinationals.
There is a tendency for tax haven blacklists to become self-referential. The White House copied the Jim Hines tax list and Venezuelan officials copied the Mexican blacklist word for word, thereby ending up blacklisting themselves because Mexico had blacklisted Venezuela. That is the problem with a list that permeates through the system and is replicated everywhere.
The third OECD criterion for a country to be deemed a tax haven is the existence of secrecy laws. Even one of the international NGOs involved in the tax justice campaign, which criticises Ireland's regime, ranked Ireland favourably in terms of secrecy. If the first column in the secrecy ranking includes the traditional tax havens, such as Bermuda, the Dutch Antilles and Bahama, Ireland is at the bottom of the third column, as one of the least secretive jurisdictions. It is less secretive than the UK or the US. We do not meet that criterion, therefore.
The fourth criterion that the OECD initially proposed for a jurisdiction to be defined as a tax haven is that companies have no substantial activities there. That proposal was vetoed by the Americans. We know from rulings of the European Court of Justice that "no substantial activities" is a meaningful legal term. The Americans insisted that the term be removed, however, because it is in the interest of a particular part of the US establishment to allow its firms to use Caribbean tax havens. Ireland is caught up in this.
The US has been paralysed on corporation tax since the Kennedy Administration. The Democrats and Republicans have differing conceptions of what a fair corporation tax regime would entail. The Democrats want to raise as much tax revenue as they can. Typically the Republicans tend to be concerned about the international competitiveness of their multinationals. There is a paralysis within the US tax system because cross-party support is needed to introduce major change. It has been paralysed for more than 50 years. The compromise reached in 1962 under Kennedy was that US multinationals making profits overseas are ultimately liable to US taxes but only when those profits are repatriated. As long as they are kept offshore they avoid US taxes. It is like giving them an interest free loan for their residual tax liabilities. However, US taxes could not be deferred on royalties and patent payments. That is where the action is happening in the US Senate sub-committee. The intellectual property is located in the Caribbean and all the global revenue coming from US multinationals pass through the Caribbean in payment for that intellectual property. Previously that revenue was taxed by the US and there would be no point in holding it offshore because it would not be subject to deferred tax treatment.
The 1962 compromise was changed in 1997, which is when the story becomes more complicated. I have tried to simplify the story for public presentation to the extent that I am able. It is genuinely the most complex subject I have ever studied in my 30 years as an academic. It is spectacularly complicated, which is why the lawyers who are paid to exploit loopholes are the best paid lawyers in the world. In 1997 the US tax authorities introduced new regulations called check the box, thereby paving the way for creative tax accounting by multinationals. I will explain briefly how this works. It is fascinating to me because of its complexity and I hope members will appreciate some of the fascination. A US parent company may have subsidiaries all over the world. Check the box allows certain of those subsidiaries to be treated as a single entity for US tax purposes. I will set out an example that I will return to in the context of the Irish regime and how we fit into the geography of tax planning. A US corporation may set up a holding company in Ireland.
That holding company owns the corporation's operating company in Ireland, where the real work is done, for example in factories. Under the check-the-box regulations any moneys paid to the holding company, for example for intellectual property, are treated as though earned by the holding company, so subpart F is pushed aside. It becomes more complicated. It means two companies are established in Ireland which are subsidiaries of the same parent company. One company makes a payment, for example a royalty, to the other company. Formerly that would have been taxed by the US immediately, even before it had been repatriated. Under check-the-box the two companies can be regarded as a single entity and the royalties earned by the operating company in Ireland, the factory that does the real work, are treated the same as the patent payments and benefit from deferred US tax liability.
The Internal Revenue Service, IRS, introduced this by mistake, but this was the key element that the multinationals' lawyers started to exploit. The IRS very rapidly realised the multinationals were exploiting it. The state tried to row back but huge corporate lobbying pressures came to bear and, instead, it was written into law. In law check-the-box was called the "look-through" rule.
The slide I am showing is a screen shot of a memo written by US Senator Carl Levin, chairman of the Senate sub-committee that is calling Ireland a tax haven. In this memo he says check-the-box regulations issued by the US treasury department, and the look-through rule enacted by Congress, have reduced the effectiveness of the anti-deferral rules and have "further facilitated the increase in off-shore profit shifting". In this memo the look-through rule is referred to as a temporary measure, but it has been put through again and again and is now permanent. Among the legislators who voted for the look through rule were the two committee chairmen who call Ireland a tax haven. This is American politicians grandstanding. Is it not shocking? That is an interesting part of the story.
This is where Ireland comes into it. The multinationals' lawyers figured out they could establish corporate structures that minimise their global tax liabilities. These are called hybrid entities. This is where they exploit differences between US and Irish law. To return to my previous example, an American parent company establishes two subsidiary companies in Ireland, a holding company and an operating company, one owning the other. The two companies are treated as one by the US tax authorities. The holding company and the operating company are both incorporated in Ireland, and as US law says the country where companies are incorporated determines their nationality, these are regarded by US law as Irish companies and can be joined together in check-the-box tax returns to the US.
Irish law has a completely different history of tax law and company law. Our tax and company law derives from British law. It has been modified on some occasions but has an entirely different logic. Under Irish law, the two companies in my example are subsidiaries of the American multinational. As Irish law says the nationality of these companies is where their ownership and control lies, under Irish law they are American companies. Both companies are incorporated in Ireland but where are they tax resident? This is the key. This is how Apple has apparently developed schemes to be tax-resident nowhere in the world, as the US Senate sub-committee found. Irish law sees the operating company as tax resident in Ireland because it has factories and real, substantive activities here. The holding company, which holds the intellectual property, does not have substantive operations in Ireland, so is not tax resident in Ireland. This is where US and multinational companies everywhere exploit differences in the company and tax laws of different jurisdictions. It is called cross-border tax arbitrage.
Most countries might like to cut down on this but it is up to the large countries. If the Americans wanted to cut down on this they could do it overnight. If the British wanted to do it they could close down the Caribbean tax havens because, other than the Dutch Antilles, they are all British overseas territories. They do not want to do it, so they are saying Ireland is to blame and so on. It is grandstanding, to my mind. The Irish law originates from a particular 1929 case in Britain, and operates by precedent.
This is my last slide. To remind members of the logic of what I am saying, the IRS changed its procedures in 1997 and made it easier for multinational companies to exploit tax loopholes around the world and make it easier for them to keep their profits offshore in Caribbean tax havens because they would not be subject to immediate US tax as they had been up to 1997. If Ireland had changed our laws after 1997 to facilitate this I would regard that as quite fishy. That is the key. I did not know if we had, so I went looking. Being an academic is like being a detective; one tries to piece things together.
I found that we had not changed our laws to facilitate this. Our Finance Act 1999 tightened our laws to prevent the exploitation of Ireland by Irish-incorporated entities. The Act stated that only Irish-incorporated companies whose parent companies are from countries with which we have a tax treaty could be deemed to be non-resident. That means primarily the EU and the US, although we have extensive tax treaties with developed countries in general. The Act also said such companies could use the non-resident status only if they had a related company in Ireland that had substantive activities here. Companies such as Apple, Google, Intel and all the big firms that we know of have substantive activities here, so they can use related companies that can be deemed to be non-resident. However a Russian computer company which has no substantive activities in Ireland cannot incorporate a company in Ireland and be deemed non-resident. We tightened our rules to ensure the only companies that could be incorporated in Ireland but deemed to be non-resident had real activities in Ireland. The IDA is very proud of this because it says the whole point of our corporation tax law is to attract real, substantive activities into Ireland.
My key theme is that Irish corporation tax law extends way back in history. Our company law is derived from British origins, so in that sense it has a different history from American tax law. Multinational companies exploit the gaps between the laws of one jurisdiction and another. The only real way to treat it is through the OECD approach, which is trying to get multilateral agreement to get tax laws changed everywhere to prevent this kind of "base erosion".
As I said, if the Americans wanted to prevent their companies exploiting this, they could do it overnight, but, politically, they cannot because they would need cross-party support. The British could close down the British tax havens but they do not. Why they do not, by the way, is because the British tax havens funnel huge amounts of funds into the City of London, which has substantial influence on the British legislature.
That is my understanding of it. I have tried to present it objectively because my purpose in this is just to try to understand what is going on.
I thank Professor Barry. Before I move to other members, I will ask some quick questions. What I gather from Professor Barry is that this is a tax avoidance issue that dates back to 1997 and the check-the-box issue from the US. To deal with any problems the corporations had with this, they managed to persuade Congress to push legislation through, creating the look-through rule which actually copper-fastened this activity on behalf of the American corporations.
Professor Frank Barry
Yes.
Professor Barry said that what goes on in the Caribbean suits some of the American corporations. He might give us a very short note on that. What is more interesting is the recent OECD report on base erosion and profit shifting. Can Professor Barry give me an idea why the EU is coming to talk to us when it is bypassing the City of London and Washington? There is a sense that it is the small fellows getting kicked around. What is the purpose of the EU coming to talk to us when, according to Professor Barry, they have bigger fish they could be discussing these things with?
Professor Frank Barry
Do you want me to answer those questions now?
Yes.
Professor Frank Barry
The first question was how use of the Caribbean tax havens benefits US multinationals. Is that correct?
Professor Barry said American corporations do not want to highlight too much about the Caribbean because it suits both the politicians and the corporations in America. Is that correct?
Professor Frank Barry
Intellectual property was much less important in 1997, although everybody now has all sorts of electronic gadgets and it has become much more important. How this situation suits the corporations is that, before 1997, royalty payments for intellectual property were taxed as soon as they were earned, no matter where they were made in the world. Since 1997, however, they are taxed only when they are repatriated to the US. The US multinationals earn this money in the Caribbean but they do not repatriate it, so this does not trigger immediate tax liability. It is like getting an interest-free loan from the American taxation authorities. That is how they benefit from this.
As I said, the Republicans in Congress realise this, which is why they are defending the use of the Caribbean tax havens. I paid attention to the Senate sub-committee and I did not particularly get a sense they were trying to hide the role of the Caribbean in all of this, but the Chairman might have read it differently. I believe everybody is aware of the role of the Caribbean.
Why Ireland gets mentioned and gets called a tax haven is simply, I think, that the American politicians do not want public recognition of the fact they are responsible for allowing their US corporations to avoid immediate US taxation. There may be good reasons for allowing their companies to exploit these rules, but they just do not want to recognise it. I guess it is populist politics at play, or that would be my understanding of it.
The Chairman's second question was why the EU was now looking into Ireland. I was talking to some people about this recently. First, it would be great if it clears us - if the Revenue sends over its Excel files or whatever, Brussels looks at them and everything is fine and above board. From talking with other people in the past couple of weeks, there is a sense that the European Commission has been so sidelined by the euro crisis that it is nowhere near as important as it used to be five years ago. It may be struggling to find a role for itself and it is being overshadowed by the OECD in this matter, so maybe it is saying: "We want a bit of publicity out of this." That is a sceptic's point of view but there may be validity to it.
I welcome Professor Frank Barry to the committee. I have heard him before through the technology of YouTube, where I watched his very informative presentation to the IEA. I want to raise several issues. Professor Barry mentioned tax havens like Bermuda and how the "Double Irish" and "Dutch sandwich" work. Are there others Professor Barry would point to, or is it just Bermuda, the Cayman Islands and the like?
Professor Frank Barry
No, there is a whole pile of them.
The purpose of this committee is not to determine whether Ireland is a tax haven but to look at how we try to get more from our multinational companies to help contribute to the recovery of the country and ensure we are not being used by multinational companies in legal tax avoidance. On the issue of tax havens, which has come up in the US Senate, Professor Barry says it is Alice in Wonderland stuff and that we should refer to the OECD criteria for tax havens. Would Professor Barry not agree that, using the same criteria of the OECD, his claim that Bermuda or the Cayman Islands is a tax haven is equally Alice in Wonderland because they do not fit the criteria of tax haven as expressed by the OECD, which has been confirmed to this committee by an eminent member of the OECD at the last hearing?
Professor Frank Barry
I am amazed. Is the Deputy saying the OECD has deemed these Caribbean island states not to be tax havens?
The OECD has confirmed to the committee that there is no tax haven in the world, based on its definition of tax havens.
Professor Frank Barry
Okay-----
If we were to apply the definitions of tax haven the Americans and the OECD are using to Ireland, we equally have to apply them to the Cayman Islands and Bermuda. The reason I am saying this is that "tax haven", if we go back to the definition, does not mean anything today because tax policy has changed so much, whether Professor Barry believes one place is a tax haven and another person believes it is not.
Professor Frank Barry
That is a very interesting point. I know that when the OECD initially came up with these criteria, even after the fourth one was vetoed by the Americans, there was a whole batch of states that fit those criteria, including all of the Caribbean countries, but the OECD has progressively forced them to take certain actions to extricate themselves from that precise definition. I did not realise they had all been deemed acceptable now. We know, for example, that one of the things the OECD forced them to do was to sign tax exchange agreements with a minimum of maybe eight other states. What the Caribbean islands did was to sign tax agreements with each other, which is generally regarded as doing the very bare minimum to escape being harassed by the OECD. It is a good point. If there are no longer any tax havens in the world, then I suppose we have to come up with a new definition.
I say this because what the Americans and others say is that it is really about how some companies perform. I do not believe the definition of a country as a tax haven is applicable any longer.
To move on to other questions, the table on corporation tax rates is very interesting and shows we have the lowest effective tax rate out of the 33 listed on the table. When we ask the Government in regard to the effective tax rate of this State, it relies on the figure of 11.8%, which emanates from a PricewaterhouseCoopers report. Why has Professor Barry not relied on that report and does he believe it is valid?
Is Professor Barry familiar with the PricewaterhouseCoopers report which gives our effective tax rate at 11.9%?
Professor Frank Barry
Was it done in conjunction with the World Bank?
It was. It used the methodology used by the World Bank.
Professor Frank Barry
It was probably the same report in which France's rate came in at approximately 5% or 6%.
I am not familiar with it. The reason I ask is that the PricewaterhouseCoopers report, which claimed our effective tax rate was 11.9%, used a standardised methodology as described by the World Bank, whereby to come up with our effective tax rate it examined a company in Ireland which produces ceramic flowerpots and has a gross profit margin of 20%. This company does not trade internationally and operates out of Dublin. It does not have land, leases, machinery or trucks and is not able to avail of any tax relief. I state this because it is about busting these myths. Ireland is not a tax haven because there are no tax havens in the world. The Government tells us Ireland's effective tax rate is 11.9% but this is based on the example of a company which produces flowerpots and is not Apple, Google or any company able to avail of tax incentives. Will Professor Barry comment on this?
Professor Frank Barry
The PwC report is the same as the World Bank study to which I referred, and they were done in tandem. They take a hypothetical company, exactly as Deputy Doherty states, which is a producer of ceramics which has no exports, and asks what tax rate this company would pay in every country. It is how it came up with its number. It is a bizarre company which is not reflective of the real companies that operate in the world. That is why I dismiss these studies. It is what I call a back-of-an-envelope study. It is done over the space of a few months. I prefer to rely on academics, whose entire life's work is working out how to evaluate appropriate tax rates. Amazingly, 11.1% is close enough to 11.8%, but what really matters is how other countries are ranked. In the PwC study the rate for France was 5% or 6%, whereas in the academic studies it comes in closer to 30%. These numbers are much more plausible because they fit in with the logic, as I explained, of why centrally located large industrialised countries invariably tend to have higher effective tax rates. These numbers are much more credible.
I would also love to see the methodology behind the numbers.
Professor Frank Barry
Yes. I can make the report available.
I would appreciate that. Much stock is being put on the OECD report by certain sources in the Government. Professor Barry called it a damp squib and I believe his analysis is 100% correct. I put it to the OECD representative who came before the committee, whose name I cannot remember, that the threat of the US vetoing this is enormous and that Professor Barry's analysis with regard to deferral and the headline in The Irish Times from 1975 to which he referred in previous presentations is accurate. If the OECD report is a damp squib - we will go through all of this - and if it is vetoed by the United States, how will we as a country deal with base erosion and profit shifting? What steps can we take to deal with it? I know it is best achieved through global co-operation and, on a secondary basis, through EU co-operation, but there are actions we can take ourselves. Does Professor Barry have any recommendations as to what we could do to deal with this issue?
Professor Frank Barry
When I called the OECD report a damp squib, it was prior to the recent G20 meeting which everyone anticipated would come up with dramatic policies. Clearly, if it is not in the interests of the US to institute dramatic change, it will not happen. I do not have high hopes that the OECD will introduce dramatic changes. It certainly will not introduce them without US support; perhaps it will do some tinkering at the margins. The White House statement from the Obama Administration in 2009 threatened to introduce all kinds of radical policies but they went nowhere. I see paralysis at the heart of the US position as preventing action at a global level.
What we can do ourselves is a big debate among academics who work in the area. Committee members will probably have seen newspaper reports of studies which state we receive only a tiny proportion of the corporate taxation revenues we are due. Revenue economists disagree vehemently with this and state that studies such as these include as taxable profits in Ireland a whole chunk of profits which are not taxable in Ireland, namely, profits spent paying royalties to where the intellectual property is located. If the intellectual property is located outside Ireland we cannot tax the revenues paid for it as it is a cost to the company in Ireland. There is a separate line of thought, with which committee members are probably familiar, that we do very well in terms of corporation tax rates compared to most of the rest of the OECD. Generally, corporation tax rates as a share of GDP in Ireland are higher than the OECD or EU average. As a share of GNP they would be far higher. We do not too badly in collecting corporation tax.
The difficulty with trying to take unilateral action is that other countries are hovering and waiting to see whether Ireland makes a mistake. The Netherlands always keeps a close eye on Ireland; when we change our laws it changes its laws also. It is like a football match. In recent years, the UK introduced the patent box, which offers an effective rate of 10% corporation tax. It is a competitive battle and we must be very careful in what we do because other countries will be waiting to exploit any leeway we give them.
I disagree with Professor Barry's claim that when the US introduced the check-the-box system in 1996, which came into effect in 1997, Ireland closed down its loopholes. Of course it closed down its loopholes in the Finance Act 1999, but it was not directly as a result of the check-the-box system. The paper commissioned by the Department of Finance on the loopholes that were closed down, which Professor Barry identified, with regard to Irish-registered non-resident companies was produced in 1998 but identified the flaws in the changes the Government had made to the Finance Act 1995, how they had not proved effective and how they could not be enforced, and examined how to strengthen them. It discussed how Irish-registered non-resident companies posed a threat to Ireland's international image and reputation and also mentioned cases before the courts. All of this emanated prior to 1997. It discussed the measures introduced in the 1995 Act and made recommendations which were contained in the subsequent Finance Act. The check-the-box system was introduced in 1997 and this happened in 1998, but it was a coincidence. The document makes no reference whatsoever to changes in US taxation law, and the check-the-box change, which was the subject of the US Apple hearings, facilitated companies such as Apple in doing what they do legally in both jurisdictions. The recommendation for the Finance Act 1999 proposed that registration in the State should be a test for tax residency as an alternative to the control and management test for all companies other than those ultimately under the control of a company resident in the State, the EU or another tax treaty country.
Basically this excluded companies such as Apple, Google and so forth. In my view, it did not strengthen the provisions of check-the-box. Check-the-box facilitated what Apple and other companies are doing and the Irish finance Bill remained silent on it. I have drafted legislation to deal with this issue.
A number of companies are not tax resident here because they are controlled in America, for example, Apple. One of the Apple subsidiaries makes massive profits, but there are also other such companies. They do not pay a penny in tax anywhere in the world. We could do what the Irish Government did in the 1999 Finance Act which is basically say that a company is tax resident here by virtue of the definition that it is incorporated here, if it cannot prove to the Revenue Commissioners that it is tax resident in some other jurisdiction in the world. That would immediately have an effect. Companies today can parade in the global taxation structure and say they are tax resident nowhere globally. That is what Apple did in those hearings; Apple Operations International, AOI, does not pay a penny in tax anywhere in the world on any of its profits, which were $74 billion over three years. We can close that immediately by considering the same measure that was introduced in the Finance Act 1999. Is that a measure we could introduce? I agree that BEPS will not produce a solution. What can we do to uphold our reputation and also increase our profits?
Professor Frank Barry
I would have to think very carefully about that. I am reluctant to give an off-the-cuff answer because it could have really profound consequences. That would really be a game changer. Apple strategists would ask, "Are there alternative locations where we can do better than in Ireland under this new legislation?" It might move out. That is the danger. I would have to think about it very carefully. I will and would love to do that. It is the type of question that fascinates me.
We must move on to the next speaker. I call Deputy Dara Murphy.
I found Professor Barry's presentation extremely interesting. It echoes comments we have heard from the IDA and some of our senior Ministers. In the debate in Ireland we talk too often about the rate, which appears to be quite transparent from Professor Barry's tables and figures, but not enough about some of the other rules in respect of our tax position. It is interesting to hear the professor's comment that for a small country such as this, any unilateral act could be particularly difficult. That said, there has been much talk about our reputation following the recent hearings in the UK and the United States. Does Professor Barry believe there is any genuine reputational damage that would affect the corporate decision making of a large company, or is it something we are a little paranoid about ourselves in terms of what our neighbours are saying or thinking about us?
Professor Frank Barry
That is a very interesting question. We speculated for some time about whether the US Senate hearings and reports would cause reputational damage for Ireland. The US newspaper The Wall Street Journal has had Ireland in its sights for a long time, complaining about Ireland's tax regime. I spoke to one of its journalists from the US. It has a stringer in Ireland to whom I often talk, but I was called by a journalist in its US office and had a long chat on precisely this subject. They told me that the sense they were getting from Silicon Valley was that this was doing us no damage whatsoever. I talked with the IDA economists afterwards about this and they said that was exactly what they were hearing as well. That is interesting. I regard The Wall Street Journal as a hostile source in that sense, so the fact it was saying that was interesting and certainly indicative. Yes, I think we might be over-paranoid here about the possible reputational consequences.
There are two things to worry about. One is the companies, and the American companies do not appear to be worried. However, there are also the international organisations and what they might do. The fact that Brussels is looking into this, no matter how informally, is probably a result of the Senate sub-committee hearings and the like.
To simplify the ambition of some of the large powers and groupings in the world, be it the OECD, the G8 and the like, the ambition would be that multinational corporations would pay tax somewhere. How long realistically will it take them to arrive at that point? Second, given that we have been so successful so far with the tax system we have in place, and we have adopted a position of low taxes to attract high volume which is clearly the best business model for any business, are there things we should be doing now to position ourselves on the basis that action will be taken on a global scale and that if corporations must pay tax somewhere, we are positioned to be that place, as we have done on the rate?
Professor Frank Barry
All of the questions so far have been really interesting. The perspective of the IDA, and I believe it is right on this, is that we stand to benefit from any changes at the global level. I am a little sceptical about whether radical changes will happen but the IDA says we stand to benefit because we have the substantive activities here. Deputy Pearse Doherty was correct when he said that the 1999 changes were not a direct response to check-the-box. I was simply making the point that they did not respond to check-the-box in a way that would facilitate further tax avoidance. The fact that we insist that any companies using Ireland have substantive activities here must stand the test of time and will stand to us whenever any changes are introduced at the global level that apply to all countries. The country that will lose out there is the Netherlands, besides the countries that used to be called tax havens. Most US foreign investment that comes to Ireland comes through the Netherlands, through Dutch holding companies, for tax reasons. The Netherlands does not require substantive activities. We are protected to a large extent in that regard.
Can Professor Barry identify or has he any fear of imminent unilateral tax moves that might be made by some of the larger countries individually or within the EU tax family or in the United States? Are clear proposals being brought forward that might get cross-party support in the United States, or has it not arrived at that stage yet?
Professor Frank Barry
Not unless the Democrats totally sweep everything over the next ten years. Even then, if they swept everything they would be forced to ask themselves about these changes on which President Obama ran his campaign for the Democrat nomination and on which John Kerry ran his campaign, which are to close off all these corporation tax loopholes, and to ask to what extent it is in their interests overall. It might bring in some extra tax revenues but, as I mentioned in the IEA talk, the US State Department clearly likes having US multinationals everywhere in the world. It is a form of soft power, so what if one closes down what we might call these tax loopholes? Most US investments overseas are funded out of unrepatriated profits. These are profits that remain offshore. If they insist that those profits are repatriated back to America and subject to immediate taxation, there are fewer funds to fund US investment overseas and the State Department is unlikely to like that.
As already indicated, the US State Department is unlikely to like that. I do not envisage dramatic changes on the part of the US. However, I referred earlier to the UK and its patent box. I understand, from informal sources, that we have already lost to the UK some companies which are exploiting its patent box regime. That is a threat. The Germans are quite antagonistic towards the UK's patent box. Spain has also introduced a patent box. The Germans want such boxes closed down so we will be obliged to wait to see that will happen. The threats are closer to home.
There is one other point, namely, that it depends on the sector involved. In sectors such as that which relates to pharmaceuticals we are not competing against other EU countries. We are, in fact, competing against non-EU states such as Switzerland, Singapore, our old friend Puerto Rico, etc. This matter must, therefore, be considered on a sector-by-sector basis. Singapore could certainly introduce dramatic new policies which would reduce our competitiveness in the pharmaceutical sector, which is the key export sector at present.
Ireland takes first place in the table in terms of its effective and actual corporation tax rates. There is a gap of a few percentage points to the next country. The Government - in which I am happy to serve as a backbench Member - puts great stock in the fact that our rate is so solidly banked at 12.5%. How important would it be for Ireland not to be seen to start an upward movement in this regard? Would it be acceptable to increase the rate by a certain amount or would corporations see such a move as the ending of something sacred? Would they be of the view that while Ireland's rate remains the lowest, the authorities here are prepared to increase it?
Professor Frank Barry
That is my feeling. I referred earlier to the incredible stability of our corporation tax regime over 60 years. It has really only been changed twice or three times. That is incredible stability. If we start tinkering with it in response to short-term considerations, we will lose the benefit of that stability. It is very difficult to isolate precisely how important is the stability of the regime. My guess is, however, that it is pretty important. Again, it is uncertain but there are benefits to retaining the stability of the regime.
I thank Professor Barry.
I thank Professor Barry for his contribution. He set matters out in a very interesting and illuminating way. What this sub-committee is about is debatable. Is it about protecting the 12.5% rate, about understanding the corporate tax regime or about ensuring that we have a fair corporate tax regime? I would be interested in hearing Professor Barry's opinion on what this sub-committee should be doing.
Professor Frank Barry
I cannot answer that.
Our work relates to-----
The Vice Chairman should not cut across me.
-----carrying out a review of global taxation architecture in the context of base erosion and profit sharing.
That is very illuminating for the people following these proceedings.
I just wanted to inform the Deputy.
In my opinion we need to examine the position with regard to corporate tax because this country is in a dire state and desperately needs revenue. People who bear no responsibility whatsoever for the current economic crisis are being crucified to the point where it is unbearable. At the same time there is significant evidence that enormously profitable corporations are paying nothing or next to nothing as a contribution to the states and societies which host and facilitate them. We need to address that and discover whether we can rebalance matters in a fair way so that those who have a lot will pay more and those who have nothing or close to nothing will obtain some relief. I am of the view that this is why we are considering the matter before us.
The moral-relativist argument put forward by Professor Barry to the effect that it is all very ironic that the Americans or the EU should point the finger at us simply misses the point. I take it as read that politicians in America engage in grandstanding and that they are hypocritical, deceitful and cover up what is happening in their own country. However, that does not in any way answer the more substantial question about whether our tax regime is fair and just. Neither does it indicate whether that regime facilitates aggressive tax avoidance on the part of multinational corporations. If there has been a shifting of position by Senators Levin and McCain in the US, this may largely be explained as being opportunism and grandstanding on their part. There is, however, a much more fundamental reason for the shift to which I refer, namely, that they are being forced to address this question. This arises because ordinary American people and their counterparts in other countries are - faced with the global economic crisis - examining these things and demanding answers in respect of them. Whether they are American, European or Irish citizens, they are asking "How the hell is it that we are being screwed to the wall when these corporations are making billions and, apparently, paying no tax?" Is that question not the starting point for a serious discussion rather than pointing to hypocrisy on the part of American politicians?
Professor Frank Barry
I introduced those ironies by way of trying to keep the discussion a bit lighter. As already stated, it is spectacularly complicated. I was using them in the way I would with a group of students in order to retain their interest while discussing a complicated issue.
In reply to the Deputy's question, one issue about which Ireland must be concerned is the need to consider short-term considerations versus long-term ones. In that context, the issue of stability must be important. We could, for example, increase our tax rate and, presumably, realise higher revenues for some short period. In the longer term, however, the multinationals might disappear. At the margins, some would certainly disappear and we might end up with less revenue.
I understand that argument and Professor Barry outlined it clearly. In fairness, he was very objective but he did make one moral value judgment when he stated while it may make sense for larger economies to have higher corporate tax rates, it does not make sense for smaller economies to have them. That matter is very much open to question and debate. I wish to put a direct question to Professor Barry. I was the first person to reveal - via replies I received to parliamentary questions I tabled approximately one year ago - startling facts about how little effective corporate tax is being paid by corporations in this country. The figures contained in the replies to which I refer and which emanated from the Department of Finance indicate that €70 billion was made in pre-tax profits by the corporations and that - following the various deductions, the application of reliefs, etc. - €4 billion was paid in tax. This means that approximately 6.2% was paid in corporation tax. The latter is the effective rate - not 11.1% or 12.5% - and it happens to coincide with EU Commission figures which indicate that our implicit rate of corporation tax is 6.8%.
Notwithstanding the browbeating I received for revealing this information and references to the World Bank's measurement for effective rates which indicates a rate of 11.1% for Ireland, has Professor Barry not effectively admitted that I was right? Is it not the case that the real effective rate - and not one based on that which might apply to a mythical medium-sized company that produces ceramics - in terms of the level of profits made and how much tax paid is more in the region of 6% to 7%? Is this not borne out by Department of Finance and EUROSTAT figures and by Professor Barry's friend, Professor Devereux, in the second column which, I presume, involves a different calculation?
Professor Frank Barry
It is. The second column is a different concept.
What is the concept?
Professor Frank Barry
It is called the effective marginal tax rate. The effective average tax rate is the one that is important for attracting in a multinational, the effective marginal tax rate is the one that applies when a multinational is here and what will be the effective tax rate if it expands its factory or something like that. I did not include that in the slide shown here.
On the numbers, which I guess I read about in the newspapers at the time, the €70 billion versus the €4 billion giving an effective rate of 6.2%, if that is an official Government statement-----
That is empirical evidence, is it not?
Professor Frank Barry
How is that getting through Revenue? It is Revenue's job to collect whatever tax is appropriate on taxable profits. If Revenue is collecting 6.2%, it will not be happy with that. That means there are taxable profits that are not being taxed here, and I do not understand how that comes about.
I would say that what we need-----
Professor Frank Barry
I would need to read the fine print. I would like to talk to the Deputy afterwards or if he would send me the Dáil debate or reference to it, I would examine it carefully. I do not understand how that happens because Revenue's job is to collect whatever are the appropriate taxes.
Professor Barry has the reference for this, and for anyone who wants to seriously examine this, it is the CTS 1 table from the Department of Finance. People should also examine the CTS 3 table, which gives some of the headings under which the taxable profits of €70 billion are written down progressively such that they end up at €4 billion. That would be under headings such as trading losses, which allows an incredible €21 billion to be deducted from the figure, moving losses around from one part of a company to another, extraordinary losses appropriate to the trade and credible group relief charges.
Professor Frank Barry
Relief and losses are technically deductible from profits before one comes up with a figure called taxable profits. The Deputy is not doing that, he is calling them taxable profits and saying the profit rate levied on the figure he cited of €70 billion is 6%, but that is not an appropriate calculation. He has to deduct allowances and so on before he comes up with a number that he can call taxable profits.
What I am saying is the figures are enormous and they need to be examined closely. I do not know what lies behind each of those. There is another heading, that of other deductions, which is baffling.
Professor Frank Barry
That is Revenue's job. It is its job to examine that.
It is our job to examine the impact of these reliefs and if they are being exploited. Research and development is a good idea in principle, but what is being actually classed as research and development? Is it being abused?
Professor Frank Barry
We know that Revenue is looking into that.
Is that not a reasonable question given the fact that Professor Barry is stating objectively that highly paid lawyers and accountants are finding every possible loophole they can? They are pushing the law to the absolute limit. In those circumstances, do we not have to examine all these elements? Another major issue-----
Professor Frank Barry
I will pick up on one point the Deputy made, that of large economies having a higher appropriate tax rate than smaller economies, which is not a moral argument. In terms of the revenue one can collect with a particular tax rate, large economies can collect greater revenue with higher tax rates than can small economies. It is a purely economic argument; it is not a moral argument. I am trying to stay away from morality in which I have no expertise.
That is a subject to debate. Professor Barry spoke about closeness to markets and so on as part of the reason for that. We are part of a very big market, the European Union. It seems obvious that part of the reason American companies base themselves here is that we are an English speaking country within the European Union and we have a well educated workforce which speaks English. That is as much an attraction as anything else.
I suggest we focus on the large companies, such as Google and so on that Professor Barry mentioned, and the use of new technology, as I understand it. I was told by somebody who used to work for Google - I would like Professor Barry to confirm it - that it sells advertising from a building on the quays, its Dublin headquarters, to Europe, the Middle East and Africa. It makes enormous profits from those advertising sales but a charge is levied by the Google Ireland holding company which is not tax resident, and that charge, conveniently, is almost exactly the same as the amount of its advertising profits. Given that our tax law does not deem that holding company to be tax resident in this country, it does not pay any tax on work that was done here but people in that building on the quays sell that advertising. That is tax dodging. The simple way to close it down is to say those people are selling advertising from here, generating those profits from here and that we do not deem it acceptable that this holding company is not tax liable as a way of dodging tax. We consider any company that is incorporated here to be tax liable here and we will enforce the 12.5% tax rate in respect of it. Surely that is the simple way to deal with what is a blatant tax dodge.
Is that the Deputy's final comment?
Professor Frank Barry
Needless to say, I would have a somewhat different perspective on it. Google is a brand name. It is not "Cyborg", the imaginary company that I came up with. The Google brand name is very valuable. That is why it sells advertising revenue - because it has a spectacularly important brand name. The intellectual property - in order words, the ownership of that brand name - is owned presumably somewhere in the Caribbean and that brand name accounts for most of the profits that Google earns. That is the logic of it. To me, a Dunnes Stores cola is pretty much the same as a Coca Cola, yet a bottle of coke retails for €1 and Dunnes Stores was selling its cola at 20 cent last time I checked. The value of the difference is the value of the brand name. I am not going to debate with the Deputy on this because it is not my role to debate it, but that would be the argument as to why things are set up as they are. I would agree that it is not a perfect world and things could be changed but what is important to bear in mind are things that can be changed at a global level versus things that can be changed at the Irish level. At the Irish level we are very constrained in terms of the effective changes we can introduce. If we introduce changes that are damaging to the competitiveness of companies, they will leave and go elsewhere and that is the dilemma we face in trying to think what changes can we introduce.
I will bring in Deputy Donnelly.
I thank Professor Barry for giving of his time today and for sharing his expertise. It has been very useful. I wish to pick up on the point of the effective tax rate. It puzzles me when we get a figure from Revenue of 11.9% or the figure Professor Barry produced of 11.1%. If we assume a corporation tax figure of, say, €4 billion is paid in Ireland, the difference between the 12.5% and 11.1% cited in the presentation is 1.4 percentage points, which on a base of €4 billion is €56 million. What we are being told is that there is a gap of only €56 million between what is effectively paid and what would paid at 12.5%. That is the contention. The Government is saying that is what Revenue or the Department of Finance says. Would Professor Barry accept that?
Professor Frank Barry
I am not familiar with the numbers. I am not sure what the €70 billion refers to.
They are Professor Barry's figures.
If we take the 11.1% from Professor Barry's presentation, the difference between that and the rate of 12.5% at 1.4% against a base of about €4 billion paid is a difference of about €56 million.
Professor Frank Barry
Is the figure of €4 billion the total corporation tax revenue?
Thereabouts.
Professor Frank Barry
Fine.
For the sake of mathematics, we will call it €4 billion. So 1.4% is €56 million. If we are to believe the 11.1%, we must also believe that €56 million is the amount of foregone corporation tax. That is what we would have to believe mathematically. Let us take a made-up example called GIZMO. GIZMO creates a holding company that is either resident here but non-resident for tax purposes as per Professor Barry's example or resident in the Caribbean. GIZMO operating company makes €2 billion in revenue in a given year and has operating costs of €1 billion. Therefore, it has a pre-tax profit of €1 billion. It also pays €1 billion to GIZMO holding company in royalties for the brand or whatever it is. GIZMO operating company attracts €2 billion in revenue, has €1 billion in operating costs and pays zero corporation tax. If I understand correctly, that sort of tax avoidance could not conceivably be included in the effective rate which we as parliamentarians are informed is somewhere between 11% and 12%. Does Professor Barry agree with that?
Professor Frank Barry
That sounds right to me.
Therefore, this-----
Professor Frank Barry
As far as I understand, the difference between 12.5% and 11% is probably primarily in the research and development allowances. There are very generous research and development allowances. The Deputy is right in that they are under investigation by Revenue to the extent that they may be exploited but that the primary difference between the figures of 12.5% and 11% is that one gets big tax benefits in respect of certain expenditures on research and development.
This is why I have always struggled with these corporation tax effective rates because what we are saying is that around €50 million goes back to companies for proper research and development activity, let us hope. By the way, there are tens of billions of euro being made here which are almost entirely being funnelled out of the country or just not being paid anywhere and when we figure out our corporation tax, we ignore all of that. I would like Professor Barry's opinion as to whether it is reasonable of me to say that our effective rate of corporation tax is 11.1%, ignoring all the tax avoidance that goes on.
Professor Frank Barry
Yes.
That is an interesting effective rate. So the effective rate is 11.1% if we do not include all the tax avoidance.
Professor Frank Barry
Tax avoidance is legal.
Professor Frank Barry
In the US in particular, we have good data on the amounts spent on lobbying politicians and so on so, presumably, laws are influenced by interest groups - no surprise there. This might well be a first. It is really the last question that Deputy Boyd Barrett was asking as well. Let me use the example of a pharmaceutical company. In respect of the pharmaceutical firms down in Cork, the stuff that goes in one end consists of bulk chemicals, which are very cheap. The stuff that comes out at the other end are these pills that cost $20. That does not mean that those factory workers are the most productive workers in the world. The profit there is the profit associated with the fact that this is Pfizer that has billions in research and development that ran into the sand because out of every €20 billion one spends on research and development in pharmaceuticals, most of that is wasted and never sees the light of day. It is not really true to say that all the profits are generated in this factory in Cork where what comes in are cheap bulk chemicals and what comes out are very valuable products. One cannot say this is because those Irish workers are spectacularly productive.
Just to be clear, I am not. I am just establishing a base that says 11.1% is our effective corporate tax rate ignoring all of the tax avoidance. My second point is an aside-----
Professor Frank Barry
Let me put it my way. The 11.1% is the revenue generated on the base of the profits that are deemed taxable in Ireland minus certain allowances.
By definition, absolutely. The point I am making, which is conveniently ignored when one talks about effective corporation tax in Ireland, is it is that rate ignoring all the tax avoidance. On a quick aside because I would not like anybody listening to think that Irish engineers do not add any value, I started off my life as a engineer out of UCD. While the science for the compounds for these things may indeed come from China, the US, Portugal, Dublin or wherever, there is a huge amount of intellectual property, innovation and value add in high-end manufacturing. One thinks of the Intel and Hewlett-Packard plants. This is super high-end, world-class manufacturing with vast intellectual property and value added from Irish engineers. I am not suggesting that Pfizer, Intel or Hewlett-Packard do not pay any taxes here.
Professor Frank Barry
I presume there are lots of scientists and engineers in Deputy Donnelly's constituency.
I have no idea. I think that is important because it follows on to the next question. I would like to see and would love to know whether Professor Barry has seen an analysis of the quantums involved. As far as I can tell, there are four different types of tax paid and avoided in this country. I would like to hear Professor Barry's thoughts as to whether these four segments are correct. The first is corporation tax paid here in full, be it at 11.1% or 12.5%. I deem the research and development credits to be perfectly legitimate.
Segment 2 is an interesting one and consists of taxes paid here in full plus more. This is something we know the UK is beginning to look at. An example would be an advert sold in the UK to a UK company with the advertising in the UK but where there has been an exchange on a server sitting in Dublin and, therefore, the profits for that are declared here at 12.5% rather than in the UK at 40%. In this second segment, we gain from companies paying on revenues from here and abroad.
The third segment is transfer pricing. Let us go back to GIZMO where the holding company may be resident here and the operating company pays €500 million in royalties and then declares €500 million in taxes. Corporation tax is paid here but not fully and the royalty transfer would not be included in the effective corporation tax.
The fourth segment is taxes not paid anywhere. Apple has discovered this loophole between Irish and US law. I have the briefing note to the US Senate sub-committee which said that Apple Operations International, which has no employees or physical presence, is managed and controlled in the US and received $30 billion of income between 2009 and 2012, has paid no corporate income tax to any national government for the past five years. In Professor Barry's opinion, are these the right four segments: normal tax paid; normal tax paid plus a bit, possibly from activity in the UK; part tax paid due to transfer pricing; and no tax paid due to non-residency anywhere or residency for the holding company in a jurisdiction where there is zero corporate tax paid?
Professor Frank Barry
One can split that pie any way one wants. One could look at it from the viewpoint of the British tax authorities, the Irish tax authorities and global tax authorities. One could chop it up any way one wanted. Let me make one point about this. As a US company, if Apple's profits accumulating from wherever, presumably somewhere in the Caribbean because it tends to be the Caribbean, are ultimately distributed to Apple shareholders, they must go back to the US.
That triggers a tax liability. If they are not repatriated to the US, which they must be if they are to be distributed as dividends, they contribute to the value of the company, in that they are invested overseas and the value of Apple shares increases. As a capital gains liability will be triggered on that, there will be some tax revenues. While this is not optimal by any means, the profits will be reflected in the company's share price, regardless of where they are accumulated. I imagine that the Deputy knows more about this matter than I do. The profits either go to shareholders in the form of distributed profits or they are reflected in share prices, thereby triggering capital gains tax. They do not disappear into the ether. This is finance, whereas my area-----
I thank Professor Barry and take his point on segmentation. I am interested in getting the full picture. We have numbers, for example, 11.1%, €70 billion and so forth. However, I can find no figure for the X hundreds of billions of entering and leaving Ireland in those segments. Does Professor Barry know of anyone who has done such an analysis? It would give us a full picture of the scale of the transfer pricing.
Professor Frank Barry
That is the sort of work that my colleague, Dr. Jim Stewart, undertakes. I would not necessarily stand over his final numbers, but he analyses flows through Ireland. The flows out of Ireland can be easily traced through the balance of payments. They tend to be repatriated profits, royalty payments and so on. These are significant components of the services account in the balance of payments. I am unsure as to how to trace the flows inwards. Dr. Stewart examines individual companies' accounts and tries to trace their flows, but the Deputy is probably more interested in the aggregate.
Professor Frank Barry
I do not know it. Presumably, it is reflected somewhere in the balance of payments, but a fair bit of detective work would be needed to figure it out precisely. Senator Barrett might know better.
This is why we have schools of economics in our universities. I thank the professor for his answers. Should we take any action unilaterally or should our approach be wholly a multilateral one? I believe he is saying that the correct approach for us is the OECD's one.
Professor Frank Barry
Sometimes, unilateral actions are beneficial if we are a step ahead of the game. Nothing springs to mind in terms of what we can do to generate extra tax revenues, which is the Deputy's point, without possibly suffering detrimental long-term consequences. As I told Deputy Doherty, our corporation tax revenues as a share of national income are higher than the average for the OECD and the EU. This may have changed over the course of the recession, but it was the case for a decade or more before the crisis. We are not losing out in terms of corporation tax revenues. We are gaining substantially in terms of jobs, spill-over effects and so on. There is no silver bullet item that I can point to as a change that we should be considering. Whatever changes have possible short-term benefits, we must worry about the long-term costs.
I thank Professor Barry for his time.
I welcome my colleague. It is always great to see him. The context of this discussion is that nearly all countries have unsustainable debts, the Vito Tanzi thesis and so on. The US economy cannot face up to even the slightest suggestion that fiscal stimulus might be removed. It is a Lance Armstrong economy.
Tanzi used the phrase "fiscal termites". We do this all the time. In the last Finance Act, there was a rights tax break for investments in property. We conducted that experiment and it was a disastrous form of tax relief. That we are doing it again concerns me. Previously, the recipient of the research and development grant needed to spend 75% of his or her time doing research and development. This level was reduced to 50%. This seems to be deliberate tax avoidance, in that we will pay people twice what they are doing for the benefit that we are seeking. Firms were provided an allowance to export to BRIC countries because they were far away, the hotels were not great, there could be riots outside, etc. It has been proposed to extend that allowance to the US, Switzerland and Japan. This happens all of the time.
People regard the Starbucks and U2 cases as scandals. There is a universal problem whereby straitened public finances are prone to lobbyists, as has been mentioned. The back of the Vito Tanzi book mentions that the most profitable person in most US companies is the lobbyist. He actually gave examples of tax laws being designed that were so complex that the President signing the Bill could not possibly understand them. Only the person in the corporate law firm who designed them and his or her opposite number in the tax authority could understand them. Frequently, senior people from most countries' revenue bodies move on to work for these corporations after designing tax loopholes. I am concerned that we have a problem.
I thank Professor Barry for the numbers. Some 11.1% is not that far off 12.5%. However, I am concerned by the continuous attempts under every Finance Act to erode the 11.1%. The termites do not stop. Tax avoidance is an unproductive industry, in that it moves money around rather than creating anything. Although Ireland needs the jobs, only 150,000 people or so of the 1.8 million at work actually work in these companies. Should we be part of an international effort to get a much less complicated system and to stop the gnawing of the fiscal termites? In Canada, Mr. Kenneth Carter advocated a single low-rate system without deductions or allowances. This would cut out the large tax lawyer and tax accountant industry and try to restart the Adam Smith capitalism mentioned in one of Professor Barry's papers.
The fiscalisation and financialisation of economies in this legislative environment reward many activities that do not have much social benefit. This is a concern. Perhaps we do it less than anyone else, but it must be a major OECD problem. I was in favour of the low rate of tax when the Government was running a surplus. It was a reward. Like companies, governments should compete. If a country can run its governance without needing high corporate taxes, that is a part of the reward for good governance. Hopefully, the same would apply to personal taxation. However, that world ended in approximately 2008 when we hit the rocks.
We could simplify our code. We should be a part of an OECD attempt to extend it worldwide. Tax lawyering and tax accounting are substantially unproductive activities.
Professor Frank Barry
The message coming out of Ireland is that we have a simple code compared with many of our competitors. In the Netherlands, every activity that one can imagine has its own code.
The famous statistic we used to examine was the ratio of lawyers to the population and whether it was beneficial or detrimental to growth. We have a more basic code than a lot of our competitor countries. Senator Barrett seems to be arguing for a flat tax across the economy and maybe he supports that. A few countries, such as Estonia, have introduced flat taxes. I do not really know how well they have worked but that would be a huge change. I suspect that Senator Barrett might be fighting for it single-handedly in the Oireachtas.
I thank Professor Barry very much. We had a debate last week seeking kinder tax treatment of people who did not report their offshore accounts accurately. There is an industry working all the time against the kind of model that Professor Barry and I might have in mind.
Professor Frank Barry
Yes.
It never relaxes and seems to have easy access to the Department of Finance and the Revenue Commissioners. The latter could stop it if they had less special pleading and lobbying.
Professor Frank Barry
In general, I would agree with Senator Barrett. On the other hand, one might say that some of these people may have genuine asymmetric information that is valuable to impart to the bureaucracy. Sometimes changes in the tax codes may be valuable when we get in ahead of the posse. In financial services I used to think that about the single European passport, as it was called. We were the second country after Luxembourg to introduce it and it gave the IFSC a boost at a certain time. Now I would have to go back to see whether or not it was a valuable change to have implemented so early. I have no idea and I have not thought about it since then. Sometimes, however, when one gets in ahead with changes in the tax code - because one has received information from business people who are aware of imminent changes - it can be valuable. That would be the beneficial side of this process of maintaining links with business. In general, I agree with Senator Barrett's lobbying point.
I thank Professor Barry very much.
I have a few questions for Professor Barry. What are we gleaning from taxpayers and shareholders in America? Over the years, people have been starting to realise that the figures we are talking about are in billions. As Professor Barry said, there were a few patents around but they were not that valuable. In the grand policy scheme, the State Department saw this as an opportunity for American companies to expand globally. It was like interest-free loans and it served American interests well. They may have been unhappy about it but there was no big issue. However, we are no longer talking about a few hundred million or a couple of billion to help American corporations establish themselves. We are really talking about hundreds of billions that are being secreted away in Cayman Island accounts. It is starting to seep into the common language of ordinary people that big corporations are making huge funds here.
Do we have any information from shareholders? If I was an Apple shareholder I would wonder when I was going to see my money. What are taxpayers coming back with? Is there any talk in the United States about a general amnesty? That is one way of getting huge funds like this.
Professor Frank Barry
The Irish way of doing things.
It is a very international way of doing things. A general amnesty could move a huge amount of this money back into America. It could give a lower effective tax rate on it. It could provide a stimulus for the US Government, while at the same time getting them over many of the problems they are currently discussing.
Professor Frank Barry
I am sure the Vice Chairman is aware that the US has offered amnesties over certain periods. President George W. Bush offered an amnesty on corporation profits. It was not technically an amnesty because they were not doing anything illegal, but there was a period during which if they repatriated their profits they would pay a reduced rate of tax on them.
This speaks to Senator Barrett's point about the military-industrial complex. The US multinationals got wind that this window was going to be introduced, so for a few years previously they repatriated less than normal to the US. Therefore, the stocks they were holding offshore built up. Then when the window was introduced all those stocks were shunted home. In the grand scheme of things the window, or amnesty, had no effect because the multinationals gained from the system by learning in advance that it was going to be introduced. That is something to be borne in mind.
Right.
Professor Frank Barry
The Vice Chairman's point was that if he was an Apple shareholder he would be wondering when he would see the benefit of this. It is not ideal, but if these profits are earned by Apple and are kept offshore, he will not get the benefits in dividends. However, they will be reflected in the share price because they are genuine profits of the Apple company. Therefore, one would get value from them as an Apple shareholder. That is a more general point and has nothing to do with Ireland.
In the course of the conversation we have had so far, it would seem there is little stimulus on behalf of US law-makers or policy-makers to instigate too much change in what is happening right now.
Professor Frank Barry
Yes, that is right. It is not necessarily just a function of the paralysis of the US tax system that I have talked about - it is that this whole interlocking, overlapping jurisdictional regime can have very unusual consequences that are not apparent at first glance. For example, when profits are ultimately repatriated, the US Treasury benefits more from profits that are repatriated from a tax haven than profits that are repatriated from Japan, for example. That is because one has to pay taxes on the profits when they are repatriated but one gets a tax credit for taxes paid abroad. Therefore, if a subsidiary is operating in Japan it pays a high tax, so it owes no tax to the US tax authorities when those profits are repatriated. When one repatriates profits out of Ireland one gets a tax credit for the Irish taxes paid, but lots more is owed to the US tax authorities. In that sense therefore, if the profits are ultimately repatriated, the US tax authorities benefit more from profits located in tax havens - to use the term loosely - than they do from profits generated in high-tax regimes. There are many unanticipated consequences in all of this.
Would Professor Barry mind if I offered a brief supplementary question to all other members of the committee?
Professor Frank Barry
Absolutely not.
I thank Professor Barry for his interesting submission which got into the meat of this important issue. However, is he not understating the strategic importance of Ireland? Setting aside the tax issue, where else would Google and Facebook seriously go to access the European, north African and Middle Eastern markets other than an English-speaking country? It seems to me that they would not do so. Given the nature of their products, it is simply inconceivable that they would try to sell them from anywhere else other than Ireland, England or Scotland. That is the pattern of that particular type of investment.
Professor Frank Barry
I do not see that.
I have just one more sentence.
Professor Frank Barry
I will come back to it.
In addition, there is a connected point. Professor Barry has accepted that the 11.1% is based on a hypothetical middle-sized company. Is that right?
Professor Frank Barry
No, that is not my data.
The World Bank-PwC data are based on a hypothetical company. The data I have given are not.
Professor Barry has told us they are Professor Devereux's data but he has not told us the source of the data.
Professor Frank Barry
Professor Devereux is located in the Centre for Business Taxation at Oxford University.
I do not accept the figure provided because I have seen the Department of Finance figures and know the European Commission position. I think it is in the region of 6%. However, setting aside that figure, does Professor Barry accept that there is a very significant gap, even if it is 11.1%, between Ireland's effective rate and that of most other European countries?
Professor Frank Barry
Yes.
Given the strategic and language advantages and the fact that our rate is so much lower than in the remainder of Europe, is there not scope to increase the tax take from corporations without risking a flight of investment capital out of Ireland? It seems to me obvious that there is.
Professor Frank Barry
There may be. If we test the Deputy's hypothesis and it blows up in our face we cannot go back and will have lost the benefit of the stability of the regime. If we are going to test the Deputy's hypothesis we would want to think very carefully before doing so. I would be risk-averse in that regard. I believe the cost to us of losing this spectacular stability which we have built up would be significant. However, that is for the Oireachtas rather than me to decide.
On the Deputy's question in regard to where else in Europe American companies would go to sell advertising space, the Deputy will be aware that Irish people are not good at languages and so we have to import into Ireland people with the language skills to do this selling. The fact that we are an English-language environment is obviously of importance to American companies but it is not in my view the huge advantage that the Deputy portrays it to be. Dell initially set up here but when Poland joined the EU it moved there, where labour costs are one-quarter of what they are here. The English-language environment was not significant in that instance. Also, as young people across Europe tend to be pretty good English speakers, it is a declining advantage to the extent that it is one. There are genuine differences of opinion on these issues. I think we can fairly disagree on those things.
I welcome Professor Barry's presentation to the committee, which was very good. I would like to comment on other issues on which Professor Barry previously commented, including who writes the law. I am aware that this is an issue on which Dr. Jim Stewart and Professor Barry would probably disagree. I have heard Professor Barry refer to the radicals who ask who writes the law. I am not sure if I am one of those radicals. There is a big issue in terms of-----
Professor Frank Barry
The fact that I spoke about it means that I think it is an important point.
I asked last year that this committee investigate and holding hearings on these matters. This was prior to the availability of the Seanad report. Since then, we have had formal preliminary investigations into Ireland's sweetheart deals with multinational corporations, which in time will be proved or disproved. This boils down to something Professor Barry said earlier. Professor Barry, along with the Minister for Finance and everybody in this room, knows that there are companies incorporated in this State that are non-tax-resident here or anywhere else in the world. One such company is Apple. There are many other such companies. The Department of Finance does not know how many such companies exist but we do know there are a number of them. These companies do not pay tax anywhere in the world. I have suggested that there is a way to deal with this. The fact that they are not tax-resident anywhere else in the world but are incorporated here means they should be automatically deemed tax resident here. This is allowed. It is what we did in 1999 with other companies.
Professor Barry said we need to be careful. He and the Government have stated that it is not Ireland that is the problem; rather, it is an anomaly in the tax code in America, which is true. However, there are two tax codes involved. It takes two to tango. It is Ireland's tax code and the American tax code. Professor Barry stated that he does not believe the Americans will change their tax code. He is probably correct in that regard. However, Ireland does have the ability to deal with this on its own. We can change our tax code. It must first be acknowledged that Ireland can deal with this. It can deem a non-tax-resident company incorporated in Ireland liable for tax here. The question that arises is whether we should we do this and whether we want to do it.
On the question of whether Ireland is a tax haven, setting aside the OECD criteria, which do not really exist, in people's minds it is a tax haven. If we acknowledge that we can change the rules to allow Apple Operations International, AOI, to pay taxes in Ireland because it does not employ anybody here or does not pay taxes anywhere else in the world but we decide not to do so, then what we are doing is allowing multinational companies to locate here and use Ireland to avoid paying taxes. That is the reason people believe, rightly or wrongly, that Ireland is a tax haven. Most companies on the high street pay their taxes. They cannot access the consultants who have access to the Minister for Finance or his officials to write the tax code for them. They pay their 12.5% taxes. The question is, can we do something about this? Professor Barry stated earlier that America could change this situation overnight. Ireland also could change the position in relation to the company mentioned overnight. If we do not change this overnight, which I know we have the power to do, are we facilitating tax avoidance on a grand scale in our tax code?
Professor Frank Barry
Multinationals, in terms of the manner in which they operate, exploit differences in tax codes across jurisdictions. We have the ability to scrap all of our laws and to adopt American law. This means multinationals would then not be able to exploit any gap between our laws and American laws. Would the Deputy support this?
Professor Frank Barry
Clearly not. However, that is one way of closing it. As long as there are differences between the tax laws in jurisdictions, high-paid lawyers will find ways to exploit them. The only real way of closing down this opportunity is to adopt American tax law, which none of us support. Let us say we closed this down significantly. Multinationals, which are located in 180 countries worldwide, will continue to seek to identify differences between US tax law, which is the one with which we are most concerned, and other countries' tax laws which they can exploit. If Ireland no longer offers them the opportunity to do so they will seek to identify those countries which offer significant opportunities.
I referred earlier to the introduction in Britain of the patent box and to the Netherlands keeping an eye on what we do. Singapore and Ireland are in strong competition. There will be other countries that will not have totally closed down the opportunity for multinationals to operate between the cracks, which is what they do. We could do it but it would be hugely detrimental to us and the companies would go elsewhere and exploit the cracks between those other jurisdictions' tax code and that of the US. Why would we do that? Why would we shoot ourselves in the foot? At national level, we claim to support what the OECD is trying to do - that is, addressing this at a multinational level, which, as I stated earlier, we stand to benefit from. Obviously, in trying to do the right thing, we have to take into account the interests of the country.
I agree with Professor Barry that we have to be very conscious of the ramifications of any measure that we take. However, every year we make changes through the Finance Bill. We know the loophole exists whereby companies locate here and make billions in profits annually while not paying tax anywhere in the world.
The Department of Finance is happy to have the matter dealt with at a global level. As Professor Barry stated, however, this approach is a damp squib which will not lead anywhere. Ireland is caught between a rock and hard place because if we act alone, we will damage the multinational companies located here and if we fail to act, we will effectively admit to these companies that the option of allowing them to continue to exploit our tax code to avoid paying tax here and everywhere else in the world is the lesser of two evils.
Professor Frank Barry
All the profits end up in the Caribbean.
Apple's profits do not end up in the Caribbean.
Professor Frank Barry
They also end up in the Caribbean where taxes are not levied. Ultimately, the companies in question remain liable for United States taxes if they repatriate the profits. However, as they are not repatriating the profits, they are deemed not to be paying global taxation anywhere.
They are buying jets with the profits.
Professor Frank Barry
The big question is whether these profits are taxable in Ireland. Given that the intellectual property is not located here and does not belong to an Irish tax resident company, how can we deem such profits to be taxable in Ireland? That is the dilemma.
Apple Operations International, is incorporated here and is not tax resident in Bermuda, the Cayman Islands or any other country. The company does not have tax residency here but is incorporated in Ireland and controlled in the United States. Either the United States decides the company is tax resident in the US because it is controlled there or Ireland decides the company is tax resident in Ireland because it is incorporated here. AOI does not have to go through the Dutch sandwich of Bermuda because it does not have tax residency anywhere. That is the point and we facilitate this practice because we believe changing the position would result in a worse outcome as we would lose other US companies located here.
Deputy Dara Murphy wishes to comment.
Professor Barry is being consistent. It does not matter how often the argument to the contrary is made; a country with a population of 4.5 million cannot change global taxation to make it fairer. We must be selfish in this regard. The Government has made clear it would like the global architecture changed. Until then, however, the current architecture will remain in place. In light of the contribution to GDP made by corporation tax, one would have to agree that we are successful in this area.
While I appreciate Professor Barry did not refer specifically to Apple, the company was named on a number of occasions and we were informed it does not have operations here. Apple employs 4,500 people on the north side of Cork city, all of whom pay tax and PRSI.
We are discussing a different company.
The Apple corporation is extremely valuable to the economy and my constituency. There is no suggestion that any of the corporations in question are breaking the law. The responsibility for the flaw in the system lies with policymakers around the world. We must make that important distinction.
Deputy Boyd Barrett cited a number of figures. We have not discussed in detail the difference between gross and net profit or the availability of tax allowances. While I appreciate small companies do not have access to research and development credits, are the allowances provided under the tax code available to all businesses, whether companies on the high street or large corporations? These allowances can affect gross and net profit. Is there an appreciable difference between the allowances available here and those provided in other countries?
Before Professor Barry responds, I remind Deputy Dara Murphy that representatives of the Revenue Commissioners and Department of Finance will appear before the joint sub-committee tomorrow.
I am aware of that. However, the officials will be able to give an opinion from an Irish perspective, whereas I am asking Professor Barry to make an international comparison.
Professor Frank Barry
Nowadays, most countries offer research and development tax credits. Ireland was certainly not the first country to provide such credits and I am not sure if those available here are more generous than those provided elsewhere. These tax credits are primarily responsible for the gap between the 12.5% tax rate and the figure of between 11% and 12% which was cited. One makes the calculation that there is a gross taxable profit in Ireland. At that point, the research and development tax credits kick in and one then arrives at a net taxable profit on which the tax rate is levied. Deputy Boyd Barrett's figures are different. He referred to certain costs being deducted from taxable profits. This means one deducts these costs from profits to arrive at a figure known as taxable profits. We started with a figure of €70 billion and the Deputy then referred to a number of costs that are deductible from this figure. Irrespective of whether these are valid costs, they are, I presume, legal. They are deducted and the number one ends up with is profits that are taxable in Ireland. When one applies the corporation tax rate to this figure the number one arrives at is not 6% but closer to 12%. I would need to examine the numbers.
Senator Sean Barrett will make a final comment.
The good transaction described by Professor Barry is the research and development tax credit, whereas the issue at which I look askance is tax avoidance. It is difficult to split the two.
Listening to Professor Barry's reference to the number of people who had to be brought into the country to fill posts in certain companies, I noted that we do not have the relevant policies evaluated when we discuss amendments and so forth to the annual Finance Bill. We could be giving a substantial number of tax breaks to intervene in labour markets in other countries on the basis that, as Professor Barry noted, we have neglected language teaching. This is part of general policy evaluation which does not appear to take place for tax breaks.
This year, the Finance Act included a tax break to aircraft leasing companies for the construction of hangars to house aircraft. The airline industry informs us that it is extremely profitable and Ireland performs very well in this sector. What is the point of providing a tax break in this area if one does not evaluate what one receives in return? This is a recurring issue. Professor Bill Kingston, who is a colleague of both Professor Barry and mine, is so despairing of this practice, particularly since the rescue of banks at considerable expense to taxpayers, that he describes it as the end of Schumpeterian capitalism. In Professor Kingston's view, one will have so much lobbying that hardly any productive activity will take place. This is a strong way of putting the argument. I am worried, however, that firms are diverting resources into this area rather than producing goods and services.
Members will raise some of these points tomorrow when representatives of the Revenue Commissioners come before the joint sub-committee. Professor Barry's treatment of the issue has been extremely interesting and the three hours have passed quickly. I thank him for appearing before us.
Professor Frank Barry
I thank Senator Barrett for not asking me a question.
The question I had in mind was whether we need better economic evaluation of these policies. I presume Professor Barry agrees that we do.
We are waiting for the G20 to produce solutions. I thank Professor Barry for the briefing and giving his time to the joint sub-committee for this very useful discussion.