BELATEDLY it is now appreciated that the Irish business model of “Foreign Direct Investment” orchestrated through the Irish Development Agency results in major tech and biotech companies paying next-to-no corporation tax on their international revenues.
This has meant a major loss to the UK and US exchequers, and so the introduction by the G7 of a global minimum corporation tax rate of 15 per cent has been hailed as the solution to this issue. One commentator has even described Ireland’s agreement to it as an act of economic self-immolation.
Would that this were the case.
Without determined follow-through on other issues it is just another headline-grabbing but vacuous achievement of our leaders.
All that is proposed is a hike of 2½ per cent – from 12½ per cent to 15 per cent – in the rate of tax levied on the profit that is finally declared by the Irish-incorporated legal entity into which the international revenues of each global group are concentrated.
Nothing is being said about Ireland’s allowability of deductions that enable the declared profit to be so low, or about the other false advantages that Ireland has granted to its FDI clientele. The deductions come in two lines and they serve to reduce the reported profit by 66 per cent or so from its original level. As a result, the reported profit x a 12½ per cent tax rate equates to the real profit x a 3-4 per cent tax rate.
In other words the effective tax rate is 3-4 per cent, not 12½ per cent.
First there is the charging-in of intercompany expenses at inflated rates, where the sister subsidiary of the same ultimate parent company that levies the charge – for the use of a piece of intellectual property such as a logo or a patent – is in a location like the British Virgin Islands where there is no corporation tax at all. The G7 agreement misses locations where corporation tax does not exist in the first place. These expenses reduce the Pre-tax Profit.
Second, Ireland offers investment tax credits that bear no relationship to the useful life and residual value of the investment. These reduce the Taxable Profit. This is an open invitation to profitable companies to reduce their tax payments by “investing” in assets that have nothing to do with their core business, and to do so by investing a fraction of the cost of the asset but enjoying the entire tax credit. The tax credit is for 1/8th of the investment cost annually for 8 years, at which point the investment object should logically be worth zero. This aggressive schedule mismatches assets like aircraft that have a useful life of 17-20 years, and a 10-15 per cent residual value at the end.
This is why 80 per cent or so of the world’s commercial airliner fleet is owned in Ireland.
An Airbus A380 costing US$445 million gives rise to an annual investment tax credit of US$55.6 million. The value of this tax credit to the aircraft’s owner is US$6.95 million. The tax credit reduces the owner’s corporation tax liability by this amount. The owner does not even have to invest US$445 million but only 15 per cent of it: the direct owner of the aircraft is an Irish Limited Liability Partnership or LLP, in which the Irish subsidiary of the big tech or biotech group is the general partner. The general partner in the LLP contributes a fraction of the cost, but can use the entirety of the investment tax credits. The general partner also gets its partner capital back at the end, plus a nominal uplift for 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.
Then we come on to the false advantages. The first one is secrecy. The Paradise and Pandora Papers testify to how unsuccessful the global efforts have been to create transparency about corporate dealings. Ireland combines a secrecy regime in its substance with its being deemed – by dint of its EU membership – to be Persil-white on all matters to do with combatting money laundering and the financing of terrorism: a perfect loophole. Irish public disclosure requirements on Limited Liability Partnerships and private limited liability companies are thin to the point of being substantially non-existent. Ireland’s public registry has set de minimis requirements for the list of documents to be produced and filed. Even if documents have to be filed, they may not be freely available. Even if they are freely available, their contents rank as a minimum level of compliance with international frameworks on really important matters, whilst being voluminous on the information that is freely available from other sources. Transposition dates for the various EU Anti-Money Laundering Directives are repeatedly not met.
The second one – much appreciated by internet giants – is soft-pedalling on the policing of the General Data Protection Regulation. This protects internet giants from the complaints raised against them by residents of other EU member states.
Will a 2½ per cent increase in the rate of corporation tax make a meaningful difference to the attraction of Ireland if the other elements remain in place? Unfettered ability to cook-up intercompany expenses. Enormous tax credits available on assets that never come anywhere near Ireland and do not relate to the core business of the nominal owner. Corporate secrecy on everything that really matters and enthusiastic transparency on everything that doesn’t. Having the government choke off awkward Data Protection complaints so you do not need to address them yourself, still less alter your business model to stop them occurring.
Now perhaps you, dear reader, will understand why Ireland has signed up to the minimum global 15 per cent rate of corporation tax, as they laugh up their collective sleeve. Hypocrisy remains, as it ever was, the Vaseline of inter-governmental intercourse in matters of tax and regulatory frameworks.
Photo of a typically leased Ryanair aircraft by Route66 from Shutterstock.com
 US$445 million / 8 = US$55.6 million
 US$55.6 million x the 12½ per cent corporation tax rate
 Ironically the value will increase to US$8.34 million per annum if the tax rate increases to 15 per cent
 The Irish subsidiary of the big tech or biotech group inserts partner capital of US$66.75 million or 15 per cent of the aircraft cost into the LLP, the balance of US$378.2 million being borrowed by the LLP from banks
 This is a perfect example of ‘Tax-leveraged Leasing’, as the LLP then leases the aircraft on to an airline for the 8 years, with an option for the airline to buy it at the end for US$66.75 million – usually plus US$1
 US$55.6 million is both 12.5 per cent of the cost of the aircraft, and eight times the annual value of the tax credit which is US$6.95 million