Being on the right side of history is important.
When there are huge global forces moving in a certain direction, it’s crucial that a country and the Establishment of the country recognize this – and do something about it. In terms of the way large corporations avoid tax, the world is moving in a certain direction. People will look back in years to come and be astounded at the way corporations were able to play countries off each other in order to avoid tax.
The world is moving towards a level playing field in the area of corporate tax. Earlier this year, US President Barack Obama described American companies that use foreign countries to avoid US taxes as “corporate deserters”. This is serious language.
Earlier this week, the OECD published a paper that will form the basis of the next G20 meeting about multinational tax planning. It plans to eliminate the ability of corporations to avoid tax by “shifting” profits to low tax countries.
The OECD estimates that countries lose $100-240bn annually from multinationals using tax shelters to avoid tax.
The reason for this change is quite simple. Governments need the tax base to maintain a proper functioning economy. The multinationals use the same roads as everyone else. Their employees use the same hospitals and schools as everyone else. Ultimately, all the functioning areas of a normal society, from the police force and the transport infrastructure to environmental regulations, are paid for by tax.
All of these things make the relevant country a better place to live and invest and if the corporations aren’t paying their share, someone else has to pay for them.
In Ireland, we have a lot to gain from these new moves towards tax harmonization because we have so much at stake. For example, multinational corporations are supposed to pay 12.5pc tax in Ireland – which is already a great deal for them.
However, latest figures from the American Bureau of Economic Statistics reveal that American multinational companies make $100bn profit in Ireland. That means they should pay $12.5bn in tax; in fact, they pay only $4bn total tax. This means that $8.5bn is being avoided, even taking into account Ireland’s already very low corporate tax rate. This is a lot of money.
To better understand just how much of a good deal the multinationals are getting here, let’s look at some more figures.
Did you know that American corporations make on average $970,000 profit per employee in Ireland every year?
This is an amazingly high figure – making Ireland the most profitable place in the world for US multinationals.
However, these same multinationals pay $25,000 tax per employee. Even if they were to double their tax paid here, they’d still be making $920,000 profit per employee in Ireland.
So it is not difficult to see how we would benefit from a global level playing field.
The second major reason that authorities are clamping down on corporations is because it doesn’t feel right that, in an age of massive wealth inequality, capital is taxed much more leniently than labour.
If you depend on wages for your income – as the vast majority do – you pay significant amounts of income tax. In Ireland, the marginal rate is above 50pc. Yet if you are a company whose income comes from profit, you pay 4pc!
Such disparities drive up the value of the shares of these companies, but in the main, it is other companies or rich people who own company shares!
So the tax disparities are driving a wedge between those people who depend on wages for income (the majority) and those who depend on assets for income (the minority).
Consider for a moment the Irish worker who is working at a multinational this morning. His marginal income will be taxed at 50pc. In contrast, the corporation he works for will have its income taxed effectively at 4pc.
Why should the worker pay 12 times more tax than the company?
The third big reason for these historical shifts against tax avoidance is that America needs its cash. This is why Obama referred to corporations who use aggressive tax avoidance strategies as “corporate deserters”. When the American government cloaks the discussion on tax in patriotic terms, you know they are serious.
Now all this is a significant opportunity for Ireland.
There’s nothing to be afraid of. However, to benefit most from this global shift, we have to be part of the conversation.
Ireland needs its own position. We should begin a discussion with the multinationals. We have had a brilliant experience with them for years. They make good money here and in turn provide 100,000 jobs, which is about 7pc of the workforce. In terms of the capital base of the country, the multinationals have transformed the place, bringing in know-how and networks that would never have otherwise been constructed in Ireland.
There is absolutely no reason to be confrontational. Typically, when you want to start a serious conversation about change with someone, you begin by speaking the same language.
You do not start by shouting or laying out conditions. The Irish State and the multinationals should regard themselves as being on the same side for the purposes of this next phase of the relationship.
We want to avoid them leaving. If we have a level global playing field, where would they go? They’d hardly get a better deal anywhere else. But that said, most of what the multinationals do here is services and services can move more quickly than manufacturing.
On the other hand, the multinationals are happy here. They make great money. The society is stable and, like an old marriage, we’ve got used to each other’s peculiarities.
Maybe now it’s time to introduce a new element to the relationship. Why not embed them deeper here, by for example asking the likes of Google, Apple or HP to fund and staff a new engineering university? After all, they have the best engineers in the world. They could do this easily.
This would provide brilliant graduates for them and we could get world-class infrastructure for free.
There could also be a stipulation that 25pc of graduates in these new schools have to come from deprived areas – making the multinationals agents of change.
This is just one of many ways we can use the big shift in global attitudes towards tax and multinationals to our advantage. Let’s not bury our heads in the sand and start having the conversation, and make our own suggestions rather than have someone else make the decisions for us.