Time to call a halt on tax

Obama told a Californian audience during the week: ”You don’t get to choose the tax rate you pay. These companies shouldn’t either. Donning the tunic of a patriot, he described these companies as ”corporate deserters.

He added: ”What we are trying to do is to say that, if you simply acquire a small company in Ireland or some other country to take advantage of the low tax rate [and] you start saying, We are now magically an Irish company’, despite the fact that you might have only 100 employees there and you have got 10,000 employees in the US, you are just gaming the system, he said. ”You are an American company.

Gone is all the Moneygall stuff. Gone is the pint of Guinness in Offaly and the sprig of shamrock in the Oval Office on St Patrick’s Day. This is the real deal.

America will no longer tolerate corporate tax avoidance. It has a $130 billion deficit to plug and it wants its tax dollars. In this type of mood, it is only a small jump from here to moving on the commitments made at the G8 last year in Enniskillen, namely that there will be a standardised tax rate for global corporates to prevent funnelling money through places like Ireland to avoid their own tax liabilities.

The problem is that this effective Irish rate of 12.5 per cent cannot be taken at face value, due to the use of intercompany charges by heavyweights such as Google and Microsoft to minimise their reported income.

This so-called ”double Irish method involves shuttling profits in and out of Irish subsidiaries, largely avoiding the 12.5 per cent rate.

For example, Apple paid $713 million in corporation tax on foreign profits of $36.87 billion during the fiscal year of 2012. This corresponds to a mere 1.9 per cent, a solid 10 per cent lower than the effective rate which our government claims.

This is different from the corporate ”inversions to which Obama was directly referring, but it is now all becoming part of the same story.

For the past few years, this column has been arguing that the global tide is turning against the type of ”beggar thy neighbour tax policies which we facilitate.

Ireland’s choice has always either been to do something about this or stick our heads in the sand. We have, up to now, chosen the latter option and sided with the ”corporate deserters.

Rather than see this global change of tune as a threat, we should regard it as an opportunity to rebalance the economy so that we, the Irish people, don’t get the mickey taken out of us in terms of tax.

At the moment, foreign capital is taxed notionally at 12.5 per cent, and the normal workers of the country are facing tax rates that are multiples of that. Is this fair? Is it sensible?

Let’s be clear here. Multinationals in Ireland do not pay 12.5 per cent tax. They pay a lot less than that on profits, and some of them pay in low single figure percentages. This is a joke, and the joke is on you because that which they don’t pay, you do.

One of the reasons why Irish citizens, small businesses and embryonic start-ups are hammered with all sorts of taxation is partly because multinationals don’t pay their fair share.

This stands to reason. If we have a certain bill for running the country (the amount of which we can argue about), and yet one section of the economy is treated differently and more leniently to other parts in terms of what it pays, then the other sectors, by definition, pay more.

The multinationals operate in this country like every other business. Children of their employees go to our schools like the rest of us. Multinational executives drive on our roads, drink our water, use our electricity and get seen in our hospitals like everyone else. Their managers and workers were educated by our state.

These companies are not corporate colonialists living in an economic garrison; they exist as part of a functioning society. And so they should treat us with respect, and pay the modest amount of tax which we – and every country – expects them to.

Reassessing what multinationals pay is not some pseudo-communist idea about taxing capital. It is quite the opposite, and is a legitimate building block of a sensible and entirely reasonable policy where each sector pays its fair share.

In demanding that multinationals actually pay 12.5 per cent – the actual corporate tax rate – Ireland is still one of the most attractive places to invest in the industrialised world. However, the income of the citizens of the country and the returns on foreign investment would at least begin to be treated similarly.

As things stand, the deal that multinationals get in Ireland is phenomenally good for them.

Latest US tax figures indicate that profits per employee at US-owned companies in Ireland are at $970,000, whereas the corporate tax paid in Ireland per employee is just under $26,000. This is a deal like no other for the multinationals.

According to the US Bureau of Economic Analysis, US multinationals in Ireland reported net income of $95.6 billion. These firms employ 98,500 people here, which gives profits per employee of the aforementioned $970,000. In contrast, according to the IDA, tax paid per employee of multinationals to the Irish exchequer was €19,000, or $25,840 at today’s exchange rate.

The American data revealed that ”taxes other than income and payroll taxes payable in Ireland in 2010 amounted to €2.4 billion, giving an effective rate of tax of 2.5 per cent – far below the official headline rate of 12.5 per cent.

If these companies were even to deign to pay tax at the very low (by international standards) rate of 12.5 per cent, the exchequer would net €12 billion in corporation tax per year. €12 billion! No doubt some other jurisdictions would claim they should have a share of this, and some companies might up and leave, but if we phased it in gradually, the gain to Ireland could be huge. The budget deficit would be eliminated immediately, and the country would run a surplus.

The multinationals would still be making over €800,000 profit per employee here, so they could hardly complain. Ireland would remain one of the most profitable locations in the world for US multinationals.

The global tax debate has begun, and we should make our own constructive proposals to influence the outcome, rather than stick our heads in the sand and have a solution foisted on us. Obama couldn’t have been clearer. Let’s listen up.