Thursday, October 28, 2010

Taxing Times and the ‘Double Irish’

This piece from Bloomberg last Thursday hit the newswires and generated a front page story in Friday’s Irish Times with further analysis on Monday here.  These most recent pieces focus on the accounting practices of Google but this isn’t the first time that the ‘Double Irish’ manoeuvre has received some coverage.  Bloomberg had an excellent (though long) article back in May that tracked the proceeds of a pharmacy sale back in May. See here.

The articles on Google reveal that the company had an effective corporate tax rate on it’s profits of 2.4%, far below the 35% corporate tax rate in the US and less than a quarter of the 12.5% corporate tax rate in Ireland.  The first Bloomberg article contains plenty of references to Ireland and is worth a detailed read

Google 2.4% Rate Shows How $60 Billion Lost to Tax Loopholes

The earlier piece from May on Forest Laboratories is worth equal consideration. Two paragraphs from the pieces highlight the “productivity” of Irish workers.

On Google:

That licensee in turn owns Google Ireland Limited, which employs almost 2,000 people in a silvery glass office building in central Dublin, a block from the city’s Grand Canal. The Dublin subsidiary sells advertising globally and was credited by Google with 88 percent of its $12.5 billion in non-U.S. sales in 2009. Allocating the revenue to Ireland helps Google avoid income taxes in the U.S., where most of its technology was developed. The arrangement also reduces the company’s liabilities in relatively high-tax European countries where many of its customers are located.

On Forest Laboratories:

Overall, Forest’s Irish operations, which employ about 5 percent of its 5,200 workers, reported $2.5 billion in sales during fiscal 2009, the most recent year for which figures are available. That equals about 70 percent of the parent company’s $3.6 billion in net sales. Lexapro alone generated $2.3 billion in revenue in 2009, according to company filings.

Ireland is credited with 88% of Google’s non-US sales and the 5% of Forest Laboratories workforce based in Ireland account for 70% of total company sales.  Of course, we have been happy enough to turn a blind eye to this chicanery as the companies provide employment and pay corporation tax on their profits earned here – a couple of thousand jobs and 12.5% of profits is better than no jobs and 40% of no profits.

But do these companies actually pay much tax in Ireland.  According one of The Irish Times pieces linked to above “Google paid taxes of €18.3 million in Ireland last year, up from €8.1 million in 2008”.  Google might have billions of euro flowing through Ireland but very little of it seems to generate corporate tax revenue for The Exchequer.

The most recent corporation tax distribution statistics from the Revenue Commissioners are for 2007.  These show that there was €56.8 billion in corporate income booked in 2008 and that €6.3 billion in corporation tax was paid on this.  This gives an effective tax rate of 11.1%.  The statistics do not provide a breakdown between indigenous and foreign-owned firms but we can see that €4.5 billion (71.2% of all corporation tax) was paid by the 570 companies (1.0% of total companies filing) which had net trading incomes of more than €10 million for reported year-ends in 2007.

We can compare the corporate income reported by the Revenue Commissioners (which is for the entire economy) to the level of repatriated profits reported by the Central Statistics Office in the Balance of Payments.  The 2007 figures can be seen here.

The most recent revision of this figures show that €112.7 billion left the country as income paid abroad in 2007.  Opposed to this €84.9 billion of income flowed into the country.  The balance between these two figures is “net factor income for abroad” which accounts for the nearly €30 billion gap between GDP and GNP in Ireland in 2007.

The CSO provides a breakdown of the €112.7 billion which left the country. €1.2 billion was to labour in the form of wages.  The remaining €111.5 billion was investment income.  This total is divided into three categories (and is net of any tax charged in Ireland):

  1. Direct Investment Income (€37.0 billion) covers income accruing to a foreign direct investor from  their ownership of (correspondingly) a direct investment enterprise located in Ireland
  2. Portfolio Investment Income (€42.4 billion) covers income receivable and payable to non-direct investors on their holdings of equity and long and short-term debt securities. 
  3. Other Investment Income (€32.2 billion) covers interest on loans, deposits and trade credits.

There is a huge amount of income leaving Ireland.  The figures do not tell us who gets it but it is clear that we are not even collecting 12.5% on a lot of this income. 

As the Bloomberg articles suggest a lot of money is also flowing out of the country in the form of royalties and licenses.  In 2007 the Balance of Payments shows that we received €865 million in royalty payments while making payments of €18.6 billion.

These flows cause a substantial difference between the GDP and GNP measures of national income in Ireland and create difficulties when making international comparisons based on GDP as we saw here.  A further difficulty emerges as it is unclear as to whether we are capturing significant tax revenue from the huge income flows that create the wedge between GDP and GNP.

A certain attractiveness to business is undoubtedly a good thing but do we want to be seen as too “friendly”?

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