We should be wary of facilitating companies to sidestep tax

INVITED TO write a guest column due to the absence on leave of my colleague John McManus, I have decided to sound off on the way Ireland facilitates multinationals in their never-ending striving to avoid tax.

The way this phenomenon has developed in recent years has, in tandem with the rise of technology companies, seen Ireland develop a role in the tax-avoidance structures operated by some of the world’s largest multinationals.

Mostly these structures lie alongside the multinational’s Irish research or manufacturing structures, and are hidden from view through the use of unlimited companies that do not have to publish accounts.

This development involves arrangements that irk some of the most powerful governments in the world and, for that reason, could well become the focus of effective countermeasures in the not too distant future.

And even aside from narrow concerns about future moves by foreign governments that could directly affect operations based here, Ireland should be concerned that the globalised world operates in an efficient and sustainable manner.

Our recent history has illustrated the dangers associated with healthy businesses being allowed avoid taxation.

Arguably the decisive event in our recent history was the mistake made by the electorate in 1997 when it opted to elect a Fianna Fáil/PD government that promised to cut taxes.

The economy was, at the time, going through an unusual period of strong but sustainable economic growth. It is common cause among most people that cutting taxes during an economic upswing is a dangerous policy. Yet the first Ahern government did just that.

The decision of minister for finance Charlie McCreevy to cut capital gains tax by half was particularly egregious. Because a long-moribund economy was going through a period of growth, property prices were rising. The cut in capital gains tax meant those who were trading in property and land received a massive boost to their profits (which were already higher than they had been). This had a number of effects including encouraging the search for windfall gains, and discouraging business people engaged in supplying goods and services in return for steady, reasonable returns.

Retaining higher taxes might not just have helped stop the economy from losing its marbles, but could have been used to create social goods – a sovereign wealth fund, a well-resourced State-run pre-school system, more energy efficient buildings – that would be of use to us now in the downturn.

Also, the current governor of the Central Bank, Patrick Honohan, has suggested it was the psychological foundations laid down during the first period of the boom that led to the loss of reason that characterised the second, even more disastrous period.

During a visit here some years ago the Noble prize-winning economist Joseph Stiglitz gave a speech during which he made an obvious point. Because of globalisation, pay rates for labour in the western world are under pressure. This is why so many lower and middle income earners have seen their income levels all but remain static over recent times.

But globalisation has been a boon for capital. It has access to cheaper input prices, and wider markets.

Capital is making windfall gains. Applying the lessons from Ireland’s recent history, it should be subjected to more tax. It is both unfair and unwise that people should benefit disproportionately from conditions that are not of their making.

But the opposite is what is happening. More and more, capital is managing to free itself from being taxed. Money that should be used for social goods that could be used to counteract the effects of globalisation is being directed elsewhere.

Earlier this year the New York Times published an extended feature about US multinationals and their success in avoiding US corporation tax (“How Apple sidesteps billions in taxes”).

The article pointed out that just a mile and a half from Apple’s headquarters in the Silicon Valley, De Anza College, a community college that Steve Wozniak, one of Apple’s founders, attended from 1969 to 1974, is laying off teachers because of a funding crisis.

“I just don’t understand it,” said the school president, Brian Murphy. “I’ll bet every person at Apple has a connection to De Anza. Their kids swim in our pool. Their cousins take classes here. They drive past it every day, for Pete’s sake. But then they do everything they can to pay as few taxes as possible.”

Of course the point applies to all multinationals involved in aggressive tax avoidance.

As is almost always the case in such articles, Ireland came up for special mention.

Multinationals such as Apple, Google, Facebook etc can locate their profits in the jurisdictions where they pay the least tax. Most if not all such multinationals make particular use of Ireland.

Through structures linking Dublin to offshore locations such as Bermuda and the Cayman Islands, some of these companies are now even avoiding Irish corporation tax. All of which should cause Irish policymakers to take heed.

The disfunctionality outlined in the NYT article has the smell of something that is not sustainable.

Ireland has done well from multinational investment but it should be wary of allowing itself be used for aggressive tax avoidance that may well soon become the focus of political reform.