Daragh McCarthy and Aoife Ní Lochlainn: In the wake of the Public Accounts Committee in the UK interrogating a trio of multinational executives on the meagre sums of corporate tax paid by many trans-national companies, last Saturday’s episode of the Business on RTE featured a segment on the topic that closed with Feargal O’Rourke of PwC saying that he expected to see these companies pay “a fairer rate of tax” in the coming years. It appears that the pressure for reform is building.
The issue has garnered a significant amount of media attention over the past couple of months—from the storming of Google’s offices in Paris to the naming and shaming of Facebook, Starbucks and Apple in the UK press. Senior government officials in many EU countries are openly voicing their discontent with the increasingly aggressive tax dodging strategies employed by these corporations, and the European Commission is scheduled to discuss the international tax practices of multinational businesses on December 5th. It remains to be seen if this is simply bluster, or if there is a genuine will to devise a coordinated pan-national strategy to reduce tax avoidance.
A recent report by TASC, Tax Injustice: Following the Tax Trail highlighted how the Irish tax system is a key component of a subsidiary-based structure that drastically reduces the overall tax bill of transnational businesses. A friendly tax environment has been a central part of the effort to lure multinational corporations to Ireland. FDI of this nature has been at the core of successive governments’ industrial policy for over half a century, and this policy is generally regarded to have been successful.
Accommodating these companies has come at a substantial cost, however. Contributors to this site have noted the obsessive focus on FDI is likely to have hindered the development of indigenous firms. The contribution made by multinationals to the Irish exchequer has diminished considerably in recent years; currently it is down 2.5 per cent year-on-year. The recent spike in media attention heightens the risk of damage to the state’s reputation. This summer, the US Senate’s Permanent Subcommittee on Investigations sought to establish Ireland’s role in “tax practices that range from egregious to dubious validity.”
However, while much of the media focus of the past few weeks has been on the use of tax loopholes to decrease tax bills in European countries, it remains the case that these countries are still better equipped to address the consequences of such corporate behaviour than countries in the Global South. Tax avoidance by companies and individuals hampers the capacity of these states to develop their economies and pay for much needed public service.
According to Christian Aid, between 2005 and 2007, six Irish Aid programme countries lost nearly €82 million in tax revenue to EU or US – almost 17 per cent of total Irish Aid budget for the countries concerned. A recent report by the Tax Justice Network (TJN) claimed that since the 1970s, 139 low-to-middle income countries have lost a total of $7.3 to $9.3 trillion to tax dodging by the super rich. This vast sum is more than enough to cover the debts of these countries, whose aggregate gross external debts stood at $4.08 trillion in 2010.
The TASC report contains a number of recommendations for tackling tax injustice, including the introduction of country-by-country reporting. However, while increased transparency would help countries better understand the methods of tax avoidance, it will not in and of itself solve the problem and is unlikely to appease many of Ireland’s critics.
7 comments:
Contributors to this site have noted the obsessive focus on FDI is likely to have hindered the development of indigenous firms.
Aoife, have you any actual, y'know, evidence to back up this claim? Other than the he-said-she-said variety.
Though expecting to encounter some economics, seems like I stumbled onto a gossip site.
Dear Anonymous,
For a discussion on the focus on FDI you could try this blog post on the TASC site:
http://www.progressive-economy.ie/2011/03/innovation-rather-than-high-tech-is-key.html
How is the discussion on tax avoidance by multinational companies gossip?
Ireland's international reputation on this issue is in the mud and we had better start planning for a post-12.5% regime.
Dear Anonymous,
I have added the link to the previous blogpost on FDI and innovation in the main text now - thank you for pointing that out.
I suggest that you read the TASC report on Tax Injustice which was commissioned by Christian Aid.
It examines the issues of tax avoidance and tax injustice from a domestic and a global perspective. In particular it looks at the ways in which Ireland's tax system can be used to decrease a company's global tax bill.
It also contains many references which you might find useful.
The sacred cow of Corporation Tax seems to me well worth investigation in Ireland. It is symptomatic of what seems to me to be the crux of many problems; i.e. the power imbalance between national governments and global businesses.
To think simply that there is a lack of money is bordering on ridiculous at a time of rapid technological advance or a time where potential for living standard improvements permeate.
Dealing with this issue requires greater national honesty and principled behaviour, and would be helped by promotion of international political economic macro-management.
Both are, and certainly, the latter is, changes that would be extremely difficult in current systems
However, aside from that broader inter-governmental macroeconomic management and financial market regulation context we should really raise corporation tax in Ireland. The reality is if another country was behaving like this we would see it as irresponsible, unfair and immature. Beyond that, though, the reality is that many FDI's would not even consider relocating if there were a marginal increase in C.T. There are many reasons a company locates and Ireland is already in an excellent position in terms of the hubs of businesses that exist, the labour market (though this is suffering quickly from the wholly connected emigration of our young educated workforce) technological infrastructure and much else. It is obscene to argue that the budgetary cuts, that are at this point, quite clearly ruining people's standard of life can constantly be reinforced and augmented, and 1-5% can't be added to the ridiculously low corporate taxes played.
'Because companies would leave' is the sort of thinking evidenced when Bertie Ahern outlined that Ireland would not investigate rendition flights stopping in Shannon because of the danger that American companies might leave(regardless of whether they tortured or not that was the offered and shocking logic/reason), it is the logic that allowed for a financial service sector to take much too much control of a state, and it is not disconnected from the non-governmental authority that formed much of the basis for the national disaster of the bank bailout. It is similar to a form of national prostitution to business. It is, ultimately, symptomatic of a dearth political courage
@Martin
"There are many reasons a company locates and Ireland is already in an excellent position in terms of the hubs of businesses that exist"
If you're suggesting that there are substantial network effects between different MNCs located here, can you support that contention?
It's not as if the Irish arms of those MNCs do substantial business with each other.
"... the labour market (though this is suffering quickly from the wholly connected emigration of our young educated workforce)"
The labour needs of high-tech MNCs based here are increasingly being from abroad as the requisite skills are simply not being fostered by our education system.
And the tight labour market faced by MNCs is not due to the emigration of plasters apprentices (due to the construction bust) or newly qualified nurses & teachers (due to the state and public sector unions conspiring to transfer most of the adjustment costs onto the next generation of public servants).
And if those people had the skills the MNCs need, they wouldn't be leaving int he first place. Emigration is a last resort, not a first resort.
"... technological infrastructure"
Really, FDI is attracted here by our extremely slow adoption of high-speed braodband?
Did the really fast broadband available in other countries make their noses bleed or something? ;)
I think your relatively on the ball - in that all of these things are areas it would be great to improve drastically - my point is that accepting the E.U. membership, (language and cultural pull - particularly U.S.), the success of the IDA in many years of networking, etc and everything I pointed out above relative to many within E.U. alternatives (and you countered); I would argue that corporation tax goes to 15%, risk of companies leaving is negligible. To disagree with this here, you are saying that the only reason that MNCs set up in Ireland is because of the C.T. not only that but by your argument they are here because of CT and in spite of these other deficiencies you highlight.
To be honest though, I think that is still not the point I am trying to make. My point is the difficulty of accepting that morality/fairness are dependent on economic scale
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