Pressure rises to close tax loopholes

Plans to curb tax avoidance will hit Ireland. Most countries are set to force multinationals to pay more tax and as the political controversy grows, our own role in these activities will come under ever increasing scrutiny

On Tuesday the OECD, the Paris-based club of the world’s richest economies, published plans to limit “aggressive” tax avoidance by multinationals. The scope of the problem is enormous. According to OECD secretary-general Angel Gurria, so-called “cash vultures” are hoarding more than $2 trillion (that’s $2,000 billion or €1.55bn) in various offshore tax havens.

We in Ireland have played a starring role in this drama. In May 2013, the Investigations subcommittee of the US Senate revealed that consumer electronics giant Apple, which employs more than 4,000 people in this country, had used one Irish-registered company to route $74bn (€57.5bn) of sales and another to channel $30bn (€23.3bn) of profits through this country and that it had paid very little tax on any of this money.

Subcommittee chairman Senator Carl Levin alleged that Apple had negotiated a “special arrangement” with the Irish government that resulted in it paying a tax rate of less than 2pc on profits routed through this country. Although this allegation was strongly denied by the Irish government, mud sticks. In June of this year, the EU Commission announced that it was to investigate Apple’s Irish tax affairs.

Of course Apple isn’t the only US multinational to use aggressive techniques to reduce its tax bill. Google, Amazon and Starbucks have also had an unflattering light shone on their tax affairs.

The cumulative impact on national exchequers has been devastating. In 1952, companies contributed 32pc of all federal tax revenues in the US. This has now fallen to just 9pc.

Of course it doesn’t help that, at 35pc, the US has the highest headline company tax rate in the OECD. This creates a huge incentive for US multinational companies to park their foreign profits offshore rather than repatriate them.

While US companies not repatriating their overseas profits is a long-standing issue, a new twist has been added in recent years as a growing number of American firms switch their tax residence to a lower-rate jurisdiction, so-called “inversion”.

Inversion usually involves a US-owned company acquiring a foreign company with the enlarged company being based, for tax purposes, in the foreign company’s home country. Once again Ireland has played a leading role in the inversion phenomenon with a slew of US companies taking over Irish companies in recent years.

Perrigo took over Elan, Forest Laboratories acquired Actavis and Chiquita is trying to take over Fyffes. One of the big attractions in all of these deals is that what were previously US-owned companies will now be categorised as “Irish” instead and will now qualify for our 12.5pc tax rate rather than the much higher US rate.

The inversion phenomenon has generated enormous political controversy in the US with President Barack Obama stating that: “I don’t care if it’s legal, it’s wrong”.

Fortunately for this country, inversion isn’t unique to Ireland. Pfizer’s unsuccessful bid for AstraZeneca earlier this year would have involved the US firm relocating to the UK for tax purposes.

Only last month Burger King agreed to pay $11bn (€8.5bn) for Canadian coffee and doughnut chain Tim Hortons in a deal that will see the American icon transfer its tax base north of the 49th parallel. Walgreen had also planned to move its tax base to Switzerland when it acquired Alliance Boots.

If the OECD proposals are accepted, the current hodgepodge of bilateral tax treaties will gradually be replaced by a single model tax treaty. Companies will be forced to report their profits and sales in each country to that country’s tax authorities and there will be tougher rules on transfer pricing – the price a multinational’s subsidiary in one country pays a subsidiary in another country for goods and services.

“The philosophy is to realign the location of the profits with the location of the activities and value creation. We currently have a system of double non-taxation by locating profits in small locations where nothing is happening and this needs to come to an end,” says Pascal Saint-Amans, director of the OECD centre for tax policy.

All very fine no doubt, but what does it mean for us in this country? IDA-supported companies employ 166,000 people directly and pay an estimated €2.7bn in corporate profits tax every year. We need the multinationals.

“The OECD has no problem with our 12.5pc rate”, says Feargal O’Rourke, head of PwC’s tax services practice. “Companies will have to locate their activities where their profits are. I believe tax havens will be out of business. The glass is three-quarters full”.

This may well prove to be the case but it is already clear that the tax affairs of Irish-based multinationals are going to be subjected to much greater scrutiny in the year ahead.

Apple

Despite being named and shamed by the US Senate last year, Apple’s Irish operation isn’t a brass plate – far from it. Apple has been in Ireland since 1980 and employs 4,000 people here, a quarter of its total European workforce, mainly in Cork.

Its low tax rate notwithstanding, Apple is conducting genuine economic activity in Ireland – lots of it. This means that once the controversy surrounding its tax affairs has died down, it will be business as usual for Apple here. The company is going nowhere any time soon.

Forest Laboratories

Forest Laboratories became an “Irish” firm when it was acquired by Irish-registered company Actavis, formerly Watson Pharmaceuticals, for $25bn earlier this year. Actavis itself became “Irish” when it purchased Warner Chilcott in 2012 – Warner Chilcott had reregistered as an Irish firm in 2010.

While Forest employs 320 people in this country, one of its main products has already come off patent with its other main product due to lose patent production at the end of 2015, making its Irish operations potentially very vulnerable.

Google

Google’s  Irish operations paid tax of just €27.7m on sales of €17bn last year. It recorded a pre-tax profit of just €154.5m, the equivalent of a margin of just 0.9pc. Pull the other one lads. The sales booked by Google’s Irish operation were the equivalent to 40pc of Google’s 2013 total sales. Global profits at Google last year were more than €11bn.

With the OECD determined to crack down on transfer pricing between multinational company subsidiaries, Google’s Irish “administrative expenses” of €11.7bn look like they could do with some very close scrutiny.

Pfizer

With global sales of almost $48bn in 2013, Pfizer is the world’s largest pharmaceutical firm. It has been in Ireland in one guise or another since 1969 and employs over 3,000 people here.

But nothing lasts for ever. Pfizer has shed almost 500 jobs in Ireland since 2012 and its best-selling drugs, erectile dysfunction treatment Viagra and anti-cholesterol drug Lipitor, are now out of patent. Will mounting competition from generic manufacturers and a more onerous tax regime encourage Pfizer to take a jaundiced view of its Irish operations?

Chiquita and Fyffes

Heard the one about the Irish banana company? US banana firm Chiquita and the Irish company Fyffes, formerly bitter rivals, announced plans to merge in March with the merged company being Irish tax-domiciled.

The deal immediately ran into problems, with Brazilian billionaire Joseph Safra lobbing in a rival offer and the EU Commission seeking concessions before it would approve the merger. While both firms say that they remain committed to the merger, this increasingly looks like a deal that could slip on a banana skin at any time.