It’s time for a new deal with the multi­na­tion­als

The Irish Times - Weekend Review - - NEWS REVIEW - David McWil­liams

The ar­rest of Meng Wanzhou, the chief fi­nance of­fi­cer and the daugh­ter of the founder of Huawei, one of China’s rich­est men, by Cana­dian au­thor­i­ties on spy­ing charges could be a game-changer for the global mul­ti­lat­eral trad­ing sys­tem. The Cana­di­ans are act­ing on be­half of the Amer­i­cans here. Wash­ing­ton is pulling the strings.

Huawei is the world’s largest tele­com man­u­fac­turer, and the sec­ond largest smart­phone maker af­ter Ap­ple. The US ac­cuses it of steal­ing Amer­i­can tech­nol­ogy; most likely Ap­ple’s tech­nol­ogy.

This move is a se­ri­ous up­ping of the ante in the on/off trade war be­tween the two su­per­pow­ers. If you were an Amer­i­can multi­na­tional ex­ec­u­tive sit­ting in your ho­tel room in Shang­hai you’d be right to worry about an un­ex­pected knock on the door from Chi­nese in­ter­nal se­cu­rity.

Such an ob­vi­ously mer­can­tile move in Canada, dressed up as a po­lit­i­cal act, fo­cuses at­ten­tion again on large multina- tional com­pa­nies, in­ter­na­tional trade and the po­ten­tial for a break­down in global com­merce.

Stock mar­kets have plunged around the world. When stocks are fall­ing, you might find it a lit­tle odd that the col­umn is re­turn­ing to the is­sue of what best to do with the prof­its of multi­na­tion­als based here.

I be­lieve, de­spite re­cent volatil­ity, that Ire­land should seek to get paid by multi­na­tion­als not just in tax revenue but in a split be­tween tax revenue and com­pany stock op­tions. The rea­son is very sim­ple: his­tory proves that stocks con­sti­tute wealth that is per­ma­nent, while tax revenue is in­come which is tran­si­tory.

Tax take jumped

Ire­land col­lected ¤8.2 bil­lion in cor­po­ra­tion tax in 2017 (2.7 per cent of GDP and 11.6 per cent of to­tal tax re­ceipts). This is an in­crease of ¤849 mil­lion (11.5 per cent) on 2016. In the last quar­ter the ex­pected tax take jumped nearly ¤500 mil­lion above tar­get for Novem­ber.

The num­ber of com­pa­nies pay­ing cor­po­ra­tion tax in Ire­land rose to over 50,000 – with man­u­fac­tur­ing the largest sec­tor, ac­count­ing for 27 per cent of re­ceipts. How­ever, the top 10 largest cor­po­ra­tion tax con­trib­u­tors ac­counted for 39 per cent of to­tal re­ceipts, and for­eign-owned multi­na­tion­als ac­counted for 80 per cent of cor­po­ra­tion tax re­ceipts in 2017.

Yet the US Bureau of Eco­nomic Anal­y­sis shows that ma­jor­ity-owned for­eign af­fili- ates of US multi­na­tional en­ter­prises op­er­at­ing in Ire­land gen­er­ated $149 bil­lion in net profit in 2016. So, al­low­ing for ex­change rates, US firms made around ¤130 bil­lion profit last year here. On this they are sup­posed to pay 12.5 per cent tax or ¤16.25 bil­lion. But they paid only ¤8.2 bil­lion.

So around ¤8 bil­lion is miss­ing. This is the ¤8 bil­lion that the EU wants us to col­lect. And so does Wash­ing­ton, but for it­self, not for us.

The multi­na­tion­als are well aware that both the EU and the US want more revenue from them, so what are they to do?

Maybe we give them an exit strat­egy and tell them that, us­ing our own sovereign tax regime, we will take the dif­fer­ence be­tween what they ac­tu­ally pay us (¤8.2 bil­lion) and what they ought to pay us (¤16.25 bil­lion) in stock op­tions to be ex­er­cised some­time in the fu­ture.

These op­tions go into a start-up fund and, given the way share prices have been go­ing his­tor­i­cally de­spite crashes, very soon this fund would be worth se­ri­ous money.

We could treat the wealth from the multi­na­tion­als as a one-off source of wealth in the same way the Nor­we­gians treat their oil find: they use it to bol­ster a na­tional wealth fund. But whereas the Nor­we­gians pledge the wealth to pay fu­ture pen­sions, what about us­ing the wealth as a kick-starter fund – not a wind­ing down fund?

Cre­ate busi­nesses

Imag­ine each cit­i­zen would have small bit of this wealth fund so long as it is pledged as liq­uid col­lat­eral to a bank in or­der to fund a start-up? We could trans­form so­ci­ety into an en­trepreneurial trad­ing en­trepôt, open to the world, with easy avail­able fi­nance for peo­ple to in­no­vate and cre­ate busi­nesses.

Set­ting up trad­ing com­pa­nies is what makes so­ci­eties rich. Lack of start-up fi­nanc­ing is a reg­u­lar im­ped­i­ment to new com­pa­nies. A na­tional kick-starter fund would elim­i­nate the ini­tial fi­nanc­ing prob­lem that be­dev­ils many new busi­nesses.

From the multi­na­tion­als’ per­spec­tive, any cor­po­rate chief fi­nan­cial of­fi­cer faced with the prospect of hav­ing to pay hard cash to­day in ex­tra taxes or an IOU to­mor­row in stock op­tions would al­ways vouch for op­tions.

Ob­vi­ously, there are many tech­ni­cal­i­ties to fig­ure out, but the idea of us­ing multi­na­tional wind­falls as wealth not in­come to kick-start com­pa­nies could re­de­fine the whole re­la­tion­ship be­tween the na­tion state and the global cor­po­ra­tion at pre­cisely the time it is un­der threat and needs to be re­de­fined.

Cur­rent revenue

Speak­ing of cur­rent revenue, while we are at it why not also use the Ap­ple money, the ¤14 bil­lion which is ly­ing idle in an ac­count to (a) do some­thing so­cially ben­e­fi­cial and (b) make more le­git­i­mate Ap­ple’s busi­ness here? Why not use it all to build houses? (¤14 bil­lion could build close to 50,000 units) – see ta­ble). This would be cor­po­rate so­cial re­spon­si­bil­ity on a mon­u­men­tal scale!

In short, Ire­land is in a very strong po­si­tion even if there are clouds on the global trade front. We have the scope to use our tax sys­tem in­tel­li­gently. Us­ing tax-owed as a medium-term wealth gives us much-needed kick-starter cash for young en­trepreneurs who will make the place tick.

This could be to­tally trans­for­ma­tive for the coun­try. Imag­ine post-Brexit a coun­try with full ac­cess to all mar­kets, and kick-starter funds avail­able to ev­ery cit­i­zen to have a go?

In ad­di­tion, if we used the Ap­ple money on hous­ing we could go a long way to solv­ing the hous­ing cri­sis, build­ing State-owned homes, bring­ing down the cost of ac­com­mo­da­tion and the over­all cost of do­ing busi­ness in Ire­land for a gen­er­a­tion. This has to be a na­tional prize worth con­sid­er­ing.

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