Dare we shake our tax tree a bit more while the going is still good?

Ireland’s corporation tax take is the envy of many countries, but it could be a whole lot higher, writes

THE late Russell Long, a former chair of the US Senate Finance Committee, summarised most of the tax reform proposals presented to the committee as being “don’t tax me, don’t tax thee, tax that fellow behind the tree”.

In Ireland, we can engage in something similar with corporation tax. There are many reasons why our corporation tax is unusual, and a significant one is that more than 80pc of it is paid by foreignowned companies. It is a common refrain that we would collect even more tax if they only came out from behind the trees facilitating their tax avoidance.

Much of this is focused on US technology giants, many of which have their international headquarters in Ireland. Given the scale of these companies, it is a relatively easy task to get a big number for profit, a small number for tax and decry the resulting minuscule tax rates.

It is undeniable that US multinational companies have structures in place to minimise their tax and that many have Ireland as a part of the chain, but selectively picking and choosing parts of these structures may not always reveal a true picture.

Apple is frequently highlighted as a poster child for tax avoidance. It is one of the most profitable companies in the world. In the 10 years from 2011 to 2020, Apple had a cumulative pre-tax profit of nearly $600bn (€494bn).

Over the same period, Apple paid more than $100bn in corporate income taxes, which was equivalent to 17pc of its pre-tax profit.

Margrethe Vestager garnered significant headlines with her claim that Apple’s Irish subsidiaries had a tax rate of 0.005pc, pretty much indistinguishable from zero. This was calculated by putting Irish tax paid by one subsidiary as a share of Apple’s global profits. It ignores the fact that as a US company, Apple pays most of its tax to the US — and this is done by the parent company in the US, not by its Irish subsidiaries.

An effective tax rate that leaves out most of the tax paid might make for a good headline, but it does not make for a good legal argument. Vestager’s finding was given a thorough filleting when it was thrown out by the European courts.

In the past 10 years, Google had a pre-tax profit of $250bn and made close to $40bn of tax payments to governments. For Microsoft, the outcomes were €300bn of pre-tax profit and €55bn of tax payments.

The profit figures are enormous, but these companies also make significant tax payments. Between them, Apple, Google and Microsoft have paid nearly $200bn in corporate taxes over the past 10 years, equivalent to 17pc of their profits.

Some of this is paid to Ireland in proportion to the profits generated by their operations here. We can wish it was higher, but a common view outside of Ireland is that we already collect too much.

Last year, the Exchequer collected €11.8bn from corporation tax. Making international comparisons is not straightforward, but looking at things in per capita terms is one way of doing so.

With our population approaching five million, this means corporation tax last year was equivalent to €2,350 for every man, woman and child in the country.

Looking across the EU, we can see the equivalent figure for France was around €1,000 and for Germany around €1,100, while it was below €600 for both Italy and Spain.

If Ireland collected corporation tax at the same per capita rate as France, the receipts last year would have been €5bn instead of €12bn.

The green-eyed nature of the international discussion around Ireland’s corporation tax is exacerbated by the fact that most of the excess is paid by foreign-owned companies. We have found a way of taxing the guy behind the tree. In 2019, the 10 biggest payers were responsible for €4.4bn of the corporation tax we collected.

This was never really the intention of our tax-based industrial policy. When the first moves in this direction were made in the 1960s via the Export Profits Sales Relief, the purpose of the legislation was to provide an effective tax rate of zero on the profits from export sales.

Over time, the effective rate has increased, to 10pc via the Manufacturing Relief introduced in 1980 and, since 2003, to 12.5pc with the headline rate. The intention was to increase our national income via foreign investment and employment.

These contributions persist, but we are now in a position where the tax paid by foreign companies is responsible for nearly 5pc of national income. The EU infrastructure grants of the 1980s and 1990s have been replaced by the MNC tax payments of the 2010s and 2020s. What will we have to show for this — likely temporary — boon?

‘Margrethe Vestager garnered significant headlines with her claim that Apple’s Irish subsidiaries had a tax rate of 0.005pc’