Last week’s New York Times op-ed by Prof. Paul Krugman got some attention though mainly for some of the characterisations used. And there is a difference between a pithy remark about a set of national accounts and the pejorative use of language to describe the residents of a country.
But let’s focus on the substance of some of the points made and, in particular, this extract which draws on some comments made by Prof. Gabriel Zucman on the recent G7 agreement:
Which brings us to that G7 deal. How would the 15 per cent minimum rate work? Here’s how Gabriel Zucman – who has arguably done more than anyone else to highlight the importance of international tax avoidance – summarises it:
“Take a German multinational that books income in Ireland, taxed at an effective rate of 5 per cent. Germany will now collect an extra 10 per cent tax to arrive at a rate of 15 per cent – same for profits booked by German multinationals in Bermuda, Singapore, etc.”
It seems it is to be taken as given that the suggestion of a German multinational booking profits in Ireland is a relevant example. But has there ever been evidence of German multinationals with profits booked in Ireland and taxed at five per cent? Unfortunately, Germany has yet to provide aggregate data to the OECD from the country-by-country reports filed by German multinationals with the German tax authority.
There is, though, this recent CESifo working paper which uses the firm-level reports filed with the German tax authority to assess profit shifting by German multinationals. The conclusion of the paper includes the following:
However, compared to the profits in non-haven countries, profits reported in tax havens are small – only accounting for 9% of global profits.
[.]
Our findings suggest that annually, EUR 3.8 billion of EUR 125 billion of total foreign profits of German MNEs are shifted to tax havens, yielding a share of approximately 3%.
In general, estimates of the extent of profit shifting in the literature tend to be higher, although some studies, in particular Blouin and Robinson (2020), find similar magnitudes. The differences in the results may result from different methods or data sources, but they may also reveal that German MNEs are less prone to shift profits than MNEs from other countries. That in turn could reflect tighter anti-tax avoidance policies in Germany and in important host countries of German foreign investment. Another reason could be differences in profit shifting opportunities due to firm characteristics such as the importance of intangible assets.
The final points on policy and opportunities are important considerations when examining US multinationals. While we don’t have aggregate data for German multinationals from country-by-country reports there are other salient sources that can be used. One is Eurostat’s dataset on foreign-controlled EU enterprises.
It is not a perfect match for tax data but does point in the right direction. Here is the gross operating surplus of foreign enterprises operating in Ireland in 2018 by controlling country. This measure is not the same as taxable income and gross means before any adjustment for depreciation.
It it clear that there is only one bar that matters. Most of the other numbers are non-zero but are not large enough to be visible due to the axis range needed to include the figure for the US. Germany is up towards the top of the chart and the gross operating surplus in Ireland of German-controlled enterprises is small compared to that of US-controlled enterprises.
We can see more detail of the distribution of profits of German companies across EU countries with the following table which shows the gross operating surplus of enterprises ultimately controlled from Germany by the location of those enterprises.
Unsurprisingly, the vast majority of the profits of German controlled-enterprises is generated in Germany. The figures for Germany in the table include both multinational and non-multinational enterprises. For German multinational enterprises, the rest of the table gives the amount of gross operating surplus they record in other EU countries. The table is in rank order based on the most recently available outturn.
For Ireland, we can see that the figure has typically been around €1.2 billion in recent years which can be compared to the €117 billion of gross operating surplus that US MNEs had in Ireland in 2018.
In the above table, Ireland is below Finland, Portugal, Denmark, Slovakia and Sweden as a location for the profits of German MNEs. And that €1.2 billion will include the profit of Germany companies which have come to Ireland to service the domestic market such as grocery retailers.
Having people take an example of a German company booking profit in Ireland stumbles on two bases. First, in overall terms, German companies do not shift large amounts of their profits to low-tax jurisdictions (likely because they can not do so under German law). And, second, aggregate data suggests that German companies do not report significant amounts of profit in Ireland (unlike US companies).
Indeed, using an approach that is incorrect but frequently used, the argument could be made that German companies are shifting profit out of Ireland. Here are the recent accounts for BMW Automotive (Ireland) Ltd.
For the years shown BMW sold about 5,000 vehicles in Ireland – across its BMW and Mini brands. The sale of these vehicles generates the revenue for this company. In 2019, it can be seen that after €147 million of cost of sales and €9 million of administrative expenses the company recorded an operating profit of €871,000 and incurred an income tax expenses of €120,000 (or around €24 per vehicle sold).
In 2019, BMW as a whole had revenue of €104 billion and a pre-tax profit of €7 billion. The overall margin of the company was around 15 times higher than the margin reported by BMW Automotive (Ireland). Why was BMW’s Irish subsidiary so unprofitable? The result was mainly driven by the cost of sales figure.
The cost of sales is the price BMW in Ireland had to pay for the cars it sells. It is a transfer price. And BMW has set this price at such a level that almost no profit is left in Ireland. Most of the profit will be reported in Germany.
And this fine. BMW Automotive (Ireland) does little more than wholesale cars. It has very limited functions, assets and risks and a low profit margin is appropriate. The designing, manufacturing, branding, pricing and lots of other things necessary before a BMW car can be sold all take place somewhere else.
Why doesn’t BMW manipulate the transfer price so that more of its profit is reported in low-tax Ireland rather than high-tax Germany? It can’t. BMW Germany has to charge BMW Ireland the same price it charges to other wholesalers of its vehicles.
BMW could try to have more of its profit reported in Ireland by charging BMW Ireland a much lower price. But the German tax authority would simply ask for the price charged in other similar transactions and challenge the transfer price used. Just as they would for all other German MNEs that might try to shift profit to Ireland.
There might be suggestions of German MNE booking profit in Ireland to be taxed at five per cent but there aren’t many examples of it.
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