Here’s why raising Irish corporation tax to 15% doesn’t make sense

LATELY it is now understood that Ireland’s “foreign direct investment” business model orchestrated by the Irish Development Agency results in large tech and biotech companies paying virtually no corporate tax on their international income.

This meant a significant loss for the UK and US Treasurers, and the G7’s introduction of a global minimum corporate tax rate of 15% was hailed as the solution to this problem. One commentator even described Ireland’s deal as an act of economic self-immolation.

If that was the case.

Without determined follow-up on other issues, it is just another headline-grabbing but wasted achievement by our leaders.

All that is proposed is a 2½% increase – from 12½% to 15% – in the rate of tax levied on the profit ultimately reported by the Irish incorporated legal entity in which each global group’s international income is concentrated.

Nothing is said about Ireland’s eligibility of the deductions that allow the reported profit to be so low, nor about the other bogus benefits Ireland has given to its FDI clientele. The deductions are split into two lines and are used to reduce the reported profit by approximately 66% from its original level. As a result, the reported profit X a tax rate of 12½ percent equals actual profit X a tax rate of 3 to 4%.

In other words, the effective tax rate is 3 to 4 percent, not 12½ percent.

First, there is the charging of intercompany expenses at inflated rates, where the sister subsidiary of the same ultimate parent company that takes the charge – for the use of an item of intellectual property such as a logo or patent – is in a place like the British Virgin Islands where there is no corporation tax at all. The G7 agreement omits places where corporate tax does not exist in the first place. These expenses reduce profit before tax.

Second, Ireland offers investment tax credits which have no relation to the useful life and residual value of the investment. These reduce the taxable profit. It is an open invitation to profitable companies to reduce their taxes by “investing” in assets that have nothing to do with their core business, by investing a fraction of the cost of the asset but by benefiting from the full tax credit. The tax credit is 1/8^and of the investment cost annually for 8 years, at which time the investment object should logically be worth zero. This aggressive schedule does not match assets like aircraft that have a useful life of 17-20 years and a residual value of 10-15% at the end.

This is why around 80% of the world’s commercial airliner fleet is owned by Ireland.

An Airbus A380 costing US$445 million qualifies for an annual investment tax credit of US$55.6 million.[1] The value of this aircraft owner tax credit is US$6.95 million.[2] The tax credit reduces the owner’s corporation tax by this amount.[3] The owner does not even have to invest $445 million but only 15% of it: the direct owner of the aircraft is an Irish Limited Liability Company or LLP, in which the Irish subsidiary of the large technology or biotechnology group is the general partner.[4] The LLP’s general partner contributes a fraction of the cost, but can use the full investment tax credits.[5] The general partner also gets their partner’s capital back at the end, plus a nominal raise for the show. On an Airbus A380, the general partner in effect lends US$66.75 million interest-free to the LLP for 8 years and reduces its Irish corporation tax bill by US$55.6 million in the meantime.[6]

Next, we come to the false benefits. The first is secrecy. The Paradise Papers and Pandora Papers testify to the failure of global efforts to create transparency about corporate transactions. Ireland combines a regime of secrecy in its substance with the fact that it is considered – because of its membership of the EU – as Persil-blanc on all questions relating to the fight against money laundering and financing of terrorism: a perfect escape. Irish public disclosure requirements on limited companies and limited liability companies are thin to the point of being virtually non-existent. The Irish Public Register has established de minimis requirements relating to the list of documents to be produced and filed. Even if the documents must be filed, they may not be freely available. Even though they are freely available, their content is a minimum level of compliance with international frameworks on really important topics, while voluminous on information freely available from other sources. The transposition dates of the various EU anti-money laundering directives are repeatedly missed.

The second, much appreciated by internet giants, is to soften the police of the General Data Protection Regulation. This protects internet giants from complaints brought against them by residents of other EU member states.[7]

Will a 2½ per cent rise in the corporate tax rate make a significant difference to Ireland’s attractiveness if the other elements remain in place? Unlimited ability to prepare B2B expenses. Huge tax credits available on assets that never approach Ireland and do not relate to the principal business of the nominal owner. Company secrecy on everything that really matters and enthusiastic transparency on everything that doesn’t. Asking the government to stifle embarrassing data protection complaints so you don’t have to deal with them yourself, let alone change your business model to prevent them from happening.

Now perhaps you, dear reader, will understand why Ireland has signed the 15% minimum headline corporate tax rate, while they collectively laugh up their sleeve. Hypocrisy remains, as it always has, the vaseline of intergovernmental relations when it comes to fiscal and regulatory frameworks.

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Photo of a Ryanair plane usually rented by Route66 on Shutterstock.com

[1] US$445 million / 8 = US$55.6 million
[2] US$55.6 million x corporate tax rate of 12½ percent
[3] Ironically, the value will increase to $8.34 million per year if the tax rate increases to 15%.
[4] The Irish subsidiary of the large technology or biotechnology group inserts partner capital of $66.75 million or 15% of the cost of the aircraft into the LLP, with the balance of $378.2 million being borrowed by the LLP from the banks
[5] This is a perfect example of “leveraged leasing”, as the LLP then leases the aircraft to an airline for the 8 years, with an option for the airline to purchase it at the end for US$66.75 million – usually plus US$1.
[6] US$55.6 million represents both 12.5% ​​of the cost of the aircraft and eight times the annual value of the tax credit which is US$6.95 million.
[7] https://www.euractiv.com/section/data-protection/news/irelands-privacy-watchdog-accused-of-paralyzing-gdpr-enforcement/