Closing offshore subsidiaries boosts corporation tax

Developments driven by Base Erosion and Profit Shifting (Beps) boost Irish tax

The closing down by Irish multinationals of tax planning arrangements involving offshore or foreign subsidiaries is part of the reason for Ireland’s increased corporation tax receipts, according to an informed source.

Under country-by-country reporting rules, Irish companies with very large turnovers will have to file confidential reports to the Revenue Commissioners showing how their operations are broken down across different markets.

The decision to introduce the country-by-country reporting from 2016 was announced in the most recent budget and was in response to an international drive for such a development around the globe.

Another reason for the surge in corporation tax receipts, according to the source, is the decision of a small number of foreign multinationals with operations here to move their intellectual property (IP) from offshore jurisdictions to the Republic.

Large profits

While the move, whereby an Irish-resident entity buys the IP from an offshore entity, creates costs that can be set off against Irish tax over a 15-year period, the profits associated with the IP are understood to be so large that the move is still creating a net benefit for the Irish exchequer.
The two developments are being driven by the Base Erosion and Profit Shifting (Beps) project being run by the Organisation for Economic Co-Operation and Development.

The project is seeking to change the rules on global business taxation.

Beps is likely to close down the use of offshore entities that book profits solely on the basis of their owning IP. Observers have said that a next-best option for a multinational could be to move the IP in Ireland, so as to avail of Ireland’s 12.5 per cent corporation tax rate. For this to work, the corporation has to have a substantial presence here.

The 12.5 per cent rate is substantially less than the rate in other European jurisdictions where multinationals might place sizeable operations.

The two Beps-driven developments are not the sole explanation for the surge in Irish corporation tax receipts this year, but they are “a material and sustainable” part of what is happening, according to the source.

As of the end of November, the State collected €6.36 billion in corporation tax, up €2.18 billion on 2014 and €2.33 billion, or 57.7 per cent, more than was forecast at the start of the year.

Chairman of the Revenue Commissioners, Niall Cody, has said the rise in receipts is widely-based, with the increase in returns from small and medium sized companies growing at a faster rate than those of the largest taxpayers.

He has also said the increased returns are associated with the exchange rate between the euro and the dollar.

The source said that another part of the explanation is the fact that multinationals are “roaring out of the recession”.

A number of the larger multinationals with substantial operations here have decided to “sit tight” and see to what extent the Beps proposals will be implemented and to what extent US tax law may change, the source said.

However, the logic that has prompted some corporations to move their IP to Ireland is likely to see others join them as we get closer to 2020, when the so-called Double Irish tax strategy, which involves offshore entities that hold a multinational’s IP, will be no longer available.

Positive outcome

While other aspects of the Beps proposals are likely to see larger European economies, such as Germany and France, get the right to tax some of these companies profits, the overall outcome is likely to be positive for the Irish exchequer, the source said.
Officials from the Department of Finance have insisted the current spike in corporation tax receipts is not a “once-off” and will continue into next year.

Addressing the public accounts committee, secretary general Derek Moran admitted the department did not have a clear handle on what was underpinning the surge. He said there was probably a range of explanations for the better-than-expected performance.

He cited improved trading conditions, favourable currency movements and Frankfurt’s unprecedented stimulus programme as the most likely reasons. He also noted that more companies were paying tax as the economy exited recession.

“It is going to take us some time to drill down into this . . . we do have to understand what has happened and what lies behind it,” he said, noting detailed tax returns next year will provide a clearer picture.