I thank the sub-committee for inviting Christian Aid to make a presentation to it. Christian Aid is an Irish development organisation which is involved in work in approximately 40 countries across the globe. We have been working on tax and development for a number of years and became the first leading NGO to make it a major campaign priority in 2008. Since then, the importance of tax justice has been recognised by the G20, the UN, the OECD, the IMF and by many large businesses. In 2010 Christian Aid was identified as one of the 21 most influential organisations in the world of tax by International Tax Review. Christian Aid is a member of the OECD informal task force on tax and development and the task force on financial integrity and economic development. It is also a member of the European Commission's Platform for Tax Good Governance which was established in 2013.
Since the 1950s, Ireland has been very successful in attracting foreign direct investment, FDI. There are now more than 1,000 multinationals with operations in Ireland. The corporation tax rate has been a central plank of this but other factors also contribute to making Ireland an attractive location, including a skilled workforce, an English-speaking population, membership of the EU and various other incentives such as tax credits for research and development carried out here. I wish to highlight how some of these factors leave Ireland vulnerable to exploitation by some MNCs and pose a threat, therefore, to the country's international reputation, as well as to the development of some of the poorest countries in the world. I will also argue that while considering Ireland’s tax regime is important in understanding how we fit in globally, without having a more complete understanding of the workings and structures of multinational corporations themselves and the secrecy on which they depend, we are only ever going to see part of the picture.
A 12.5% corporation tax rate makes Ireland an attractive destination for the legal processes of moving genuine economic activity to this country in order to avail of this rate. Where activities of this nature are part of a multinational's supply chain, transfer pricing is used to assign the value and profits to the activities in Ireland. However, research by Christian Aid and others has illustrated that an accurate application of the OECD's arm's length principle in transfer pricing is difficult to ensure. Intra-company transactions between subsidiaries allows for highly subjective discretion in determining the price at which transactions take place. This results in vast amounts of money being shifted between subsidiaries across the globe, including from those in countries of the global south. It is particularly difficult to ensure compliance with the rules in respect of transactions involving intangibles such as intellectual property or management fees, which may not have a comparable price on the open market. The latter is the basis of the arm's length principle.
Christian Aid's research shows that the least developed countries of the world lose $160 billion each year as a result of transfer mispricing and false invoicing. Further research looking at trade mispricing also showed that between 2005 and 2007, some $5.8 billion in mispriced capital flowed into Ireland. Some $268 million of this came from the least developed countries in the world. Prem Sikka, professor of accounting and director of the centre for global accountability at the University of Essex, made the point in 2010 that allowing companies to offset research and development expenditure against taxes makes it very attractive for them to have a research-and-development presence in Ireland. However, according to Professor Sikka it is often highly subjective as to what constitutes research and development expenditure.
Christian Aid acknowledges the strategic aims behind the research and development tax credit, namely, fostering innovation and research in Ireland and driving future employment and growth. We also recognise the need for Ireland to remain competitive internationally in terms of attracting and retaining sustainable foreign direct investment. However, in examining the architecture of Irish tax policy, consideration must also be given to the potential for our low corporation tax rate and our research and development credit to be used, or abused, in ways that may impact negatively both on our reputation and on the ability of developing countries to raise their own revenues.
Through locating intellectual property rights in developed countries such as Ireland, multinationals have the ability to declare these intellectual properties rights as a large share of their profits on products developed and produced in other jurisdictions, including in developing countries. Research and development tax credits, in reducing a company’s effective tax rate, have the potential to incentivise multinationals to accumulate intellectual property rights in Ireland and represent a degree of moral hazard.
In September 2012, as reported by The Irish Times, the US Senate Homeland Security and Governmental Affairs Subcommittee on Investigations found that Microsoft used subsidiaries in Ireland and elsewhere to reduce its US tax bill for 2011 by €1.87 billion. This was done in part by using the architecture of research and development tax credits and intellectual property rights in Ireland. The subcommittee stated: "Microsoft Corporation has used aggressive transfer pricing transactions to shift its intellectual property, a mobile asset, to subsidiaries in Puerto Rico, Ireland, and Singapore, which are low or no tax jurisdictions, in part to avoid or reduce its US taxes on the profits generated by assets sold by its offshore entities."
In 2001, Microsoft established a subsidiary, Round Island One Limited, operating from the offices of a Dublin law firm. By 2004, Round Island controlled $16 billion of Microsoft's assets and gross profits of nearly $9 billion, approximately 22% of the company’s global profits. Much of Round Island’s income comes from royalties and licensing fees for copyrighted software code that originated in the US. Through another company, Flat Island Company, Round Island licenses rights to Microsoft software throughout Europe, the Middle East and Africa. Round Island has absorbed other Microsoft units, from Israel to India, moving much of that intellectual property to Ireland.
Colm Keena, writing in The Irish Times on this subject, noted: "Seen from the perspective of Africans, it must seem very rum indeed to see profits from sales in their countries being taxed in Dublin, to fund a society a million miles away from theirs in terms of development". However, arguably the most important elements of our tax policy for enticing multinational investment to Ireland are our extensive network of tax treaties and a relatively benign transfer pricing regime. In theory, multinationals could base themselves out of one of the traditional tax havens of Europe, but doing so would place them outside of the global network of treaties available in Ireland and leave them vulnerable, for example, to any potential crackdown on tax havens. Ireland’s membership of the European Union, however, and our network of over 60 tax treaties, in particular our tax agreement with the US, has encouraged numerous multinationals to use Ireland as a base to manage their operations in the Middle East and North Africa. Considering the importance of our tax treaties, it is surely in our national interest to ensure their integrity is not threatened by a perception that we are engaging in harmful tax competition. It is in our interest to ensure that elements of our tax regime are not contributing to such a perception. For example, an Action Aid report from last year highlighted how Ireland’s tax treaty with Zambia enabled a subsidiary of the giant food multinational ABF, called Illovo Sugar, with an address in the Irish Financial Services Centre but with no record of employees or activities in Ireland, to avoid paying withholding tax on loan payments from Zambia into Ireland, and likewise on management and purchasing fees booked in Ireland, an accusation that ABF rejects.
The impact of tax treaties on development is being increasingly debated internationally, by both developed and developing countries. Mongolia, for example, has recently cancelled its double tax treaty with the Netherlands. While the Netherlands is particularly in the spotlight following research suggesting its treaty network is costing developing counties more than €700 million a year, it is at least beginning to acknowledge the problem and has offered to review its treaties with developing countries. While Ireland does not have many tax treaties with developing countries, Ireland should seek to lead in this area and advocate for the need to establish principles and practices for development friendly tax treaties, both at national, EU and international levels.
In regard to our to our transfer pricing regime, allowing for retroactive challenges to inward transfer pricing as well as outward transfer pricing would bolster the integrity of our tax regime. To explain, changes made to our transfer pricing rules in the Finance Act of 2010 granted powers to the Revenue authority to challenge suspected cases of transfer mispricing that aimed to minimise the amount of profit being transferred into Ireland. Of course, instances of multinationals engaging in transfer mispricing to minimise the amount of profit recorded in a low tax jurisdiction such as Ireland would be highly unlikely and the changes in rules could be described as self-serving and designed to protect only Ireland’s tax base. Dr. Sheila Killian of the University of Limerick has made the point that it would be useful if the revenue authority were granted power to challenge retrospectively instances of suspected transfer mispricing into Ireland rather than just assume that what is being declared by the company in Ireland is the correct amount and not the result of transfer mispricing. That would be especially helpful to developing countries, where weaker capacity-----
