Irish finance minister to lobby US Congress on anti profit-shifting tax
A week after the Paradise Papers were published following a leak from Appleby, a Bermuda law firm and facilitator of corporate avoidance, Pascal Donohoe, Irish finance minister, will lobby Republicans in the US Congress, to scale back or eliminate an excise tax proposal in their tax cut and reform bill, which is designed to reduce profiting-shifting by giant multinational firms.
The New York Times says that a tiny handful of jurisdictions — “mostly Bermuda, Ireland, Luxembourg and the Netherlands — now account for 63% of all profits that American multinational companies claim to earn overseas, according to an analysis by Gabriel Zucman, an assistant professor of economics at the University of California, Berkeley. Those destinations hold far less than 1% of the world’s population.”
The Paradise Papers were leaked to the German newspaper Süddeutsche Zeitung and shared with the International Consortium of Investigative Journalists.
On Monday it was reported that Apple in 2014 had registered 2 of its 3 Irish offshore shell companies as tax resident in Jersey, one of the Channel Islands.
In May 2013 a subcommittee of the US Senate had disclosed that Apple had for decades conveniently designated its Irish companies as stateless meaning that they were not taxed resident anywhere and in 2012 it channelled 65% of its profits through these entities, giving it a foreign tax rate of 1.9% compared with an average headline corporate tax rate of about 25% in Organisation for Economic Cooperation and Development mainly rich country members.
In late 2013 the Irish Parliament closed the stateless loophole and Apple went shopping for a new tax haven.
By the end of 2014 according to the Paradise Papers, Jersey became the tax domicile of the Irish offshore companies Apple Sales International and Apple Operations International ̶ the latter is Apple’s principal overseas subsidiary.
A third Irish Apple firm, Apple Operations Europe, became tax resident in Ireland and it’s believed that this decision was a response to the Irish Government’s move to raise the capital allowance write-offs in respect of spending on intangible assets to 100% in one year from 80%.
Several US multinationals in 2015 posted accounting transactions and at a stroke, virtually moved billions of intellectual property values to Ireland. It together with aviation leasing firms locating multi-billion assets in Ireland, resulted in Ireland reported a 26% jump in gross domestic product in 2015, which Paul Krugman, New York Times columnist and Nobel economist, famously dubbed “Leprechaun economics.”
Finfacts 2016: How Apple found a bigger tax loophole than the Double Irish
US corporate tax proposals
Last week Republicans in the US House of Representative published a broad tax-cutting and reform bill and the main reforms are in business taxation with a permanent cut in the US federal corporate rate to 20% from a current statutory rate of 35% ─ the effective rate for sectors with high foreign sales, such as pharmaceuticals, computer services and semiconductors (chips) is less than 20% and for sectors such as retail and transportation is in the 30s.
The tax system would become a territorial one, in contrast with a worldwide system with offsets for foreign taxes paid.
The Republicans propose a 10% minimum global tax on US companies’ high-profit foreign units, calculated on a global basis, to discourage shifting profits abroad.
An estimated $2.6bn in profits is parked abroad but in reality, most of this is in cash or cash equivalents in US banks or US treasury bonds.
The proposals are in contrast with a possible rate of 35% on repatriation, overseas profits would be taxed at only 12% of cash assets and 5% of illiquid assets. The tax due would be payable over 8 years.
According to the New York Times, Apple has $236bn in Irish shell companies, followed by Pfizer at $178bn and Microsoft at $146bn.
The tax proposal caps the maximum tax rate on small businesses and other non-incorporated firms to 25% from the maximum rate on “pass-through” income of 39.6%.
Finally, the excise tax of 20% that Minister Donohue is concerned about is targeted at multinational companies from using transactions with foreign affiliates to reduce their US taxes. Companies with at least $100m in annual payments to foreign affiliates would be subject to the tax.
According to Kevin Brady, chairman of the tax-writing House Ways and Means Committee, tweaks would be made to the provision that is designed to prevent large, mostly foreign multinational companies from making payments to subsidiaries in order to shift profits to low-tax jurisdictions and expenses to high-tax areas. The Wall Street Journal says that pharmaceutical and car companies have complained that the excise tax would impose on transactions that aren't connected with a US trade or business of the foreign corporation.
"It will need to be addressed," Brady said. "At the end of the day, we need good safeguards against importing expenses and deductions and all that, and level that playing field, but I do anticipate changes."