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Sunday 15 March 2015

Britain's new "Google Tax" threatens Irish recovery

A new British "Google tax" could threaten Ireland's impressive economic recovery, with unimaginably adverse consequences for both countries, so should Britain think again and wait for the OECD's reforms, know as the "base erosion and profit sharing (BEPS) project? The risks of Britain's unilateral approach suggests that it would be safer to adopt the OECD joint approach, even if that process would take years compared with the British "diverted profits tax" that will be levied next month on foreign companies that use "contrived arrangements" to avoid having a taxable presence in the UK and route profits to a foreign tax haven. The tax will be 25%, some 5% more than Britain's corporation tax. It is designed to sidestep Britain's treaty obligations by introducing a charge that would fall outside the corporate tax system.

The UK Treasury has denied that its new "Google tax", described as "a highly aggressive piece of legislation" by the Association of Chartered Certified Accountants, conflicts with the OECD's reforms and says that its diverted profits tax is complementary to BEPS and is consistent with the principle of aligning taxing rights to economic activity. Australia has indicated that it may follow Britain's lead.

                            Mine's a double Irish

The  UK Treasury cited the "Double Irish" as an example of the tax dodging arrangements in its cross hairs. This legal tax avoidance ploy, used mainly by American technology and pharma companies, routes profits to tax havens like Bermuda, where they hold intellectual property rights. The Double Irish (DI) exploits the different definitions of corporate residency in Ireland and America. Ireland taxes companies if they are controlled and managed in Ireland, while America's definition of tax residency is based on where a corporation is registered.

Companies exploiting the DI put their intellectual property into an Irish-registered company that is controlled from a tax haven such as Bermuda. Ireland considers the company to be tax resident in Bermuda while the US considers it to be tax resident in Ireland. The result is that when "royalties" go to the company they go untaxed, and these royalties can be so substantial and manipulable that they sharply reduce or eliminate profits in a relatively higher taxing country like Ireland, even though Ireland has the EU's lowest corporation tax rate of 12.5%. Ireland, too, therefore, does not reap much corporate tax revenue from global corporations. In 2013, for example, Facebook, who employ about 425 in Ireland, saw its revenues there rise from Euro1.798 bn to Euro2.997 bn, but its corporate tax bill fell to a derisory Euro5.2 million. 

Ireland does, however, benefit substantially from the tens of thousands of jobs created by US multi-nationals, which generates employee and VAT taxes and excise duties, which has a trickle down effect that boosts the many dependent industries. It also strongly boosts tangible exports provided by the likes of Apple and Pfizer. Foreign-owned firms, mainly American, are responsible for about 90% of Irish tradeable exports, and this rises to the mid 90s in respect of services exports. Much of that, however, could be put at risk, even though the foreign technology companies have invested heavily in Ireland and therefore, according to some, unlikely to move. Facebook's customers in Ireland, however, are dwarfed by those in Britain so it might find that paying 25% rather than 20% UK corporation tax if registered in Britain would be incentive enough to up sticks from Dublin to Britain, followed by others if the law of comparative costs, including tax, are in Britain's favour. 

Well on the road to economic health, Ireland has done well, having suffered years of austerity, albeit brought on largely by themselves through their naivety over an unsustainable property boom. In 2014, for example, Irish tax payers paid Euro 3.5 bn more than in 2013, thanks to rising employment. But it is not out of the woods yet, and there is a real chance of a second Irish banking crisis related to high, non-performing mortgage loans. Now is not the time for Britain to risk harming that recovery, given the billions of pounds it stumped up to tide Ireland over its economic crisis and the importance of the Irish market for its exports. 

The Institute of Chartered Accountants in England and Wales was right to say that the rush to push the legislation through ahead of the General Election meant it was unlikely to be "afforded the scrutiny it needs." Sod's law may always be at work but the law of unintended consequences, though far less common, can be far more ruinous.
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