Ireland, accused of being a tax haven for multinationals such as Apple to pay nearly zero tax on the bulk of its profits earned outside the United States, finds itself with a new adversary in the global fight against unfair tax practices — Brazil.
As of October 1, Brazil will add Ireland to its blacklist of tax havens, where it will join Panama and Monaco. As a result, any company based in Ireland will have to pay a 25% tax rate instead of 15% on its Brazilian earnings.
In effect, those companies will be made to pay from their Brazilian earnings for the generous tax breaks Ireland gives to multinationals.
But Ireland has refuted the claim that it is a tax haven and its ambassador to Brazil is seeking a meeting with the Brazilian tax authorities to get Ireland taken off the list.
Companies set up in Ireland pay 12.5% tax on their Irish operations. The European Commission (EC), in line with its state aid doctrine, has deemed it illegal for Ireland to allow Apple, one of the world’s richest companies, to pay a minimum corporation rate, which was just 0.0005% in 2014.
Ireland is contesting the decision and is refusing to collect €13-billion in back taxes from Apple, as directed by the EC.
The case has again highlighted how little tax some multinationals pay on their global earnings. Figures supplied by Oxfam show that the top 50 US-headquartered multinationals have $1.3-trillion in retained earnings in foreign bank accounts, having paid little to no tax on them in any foreign jurisdiction.
According to the EC, Ireland allowed the major part of Apple Sales International’s vast international profits to be allocated to a “head office” that was not based in any country, did not have any employees or premises and were not taxed. Only a small fraction of the profits were allocated to Apple’s Irish branch and subject to tax in Ireland.
Keith Engel, the chief executive of the South African Institute for Tax Professionals, warned that a country that offers an especially low rate to select corporates is “selling somebody else’s tax base for a few jobs”.
Logan Wort of the African Tax Administration Forum said these sorts of tax deals add to mounting evidence of the enormous amount of tax lost because of some multinationals engaging in complex tax-planning strategies to reduce their tax bills.
“Apple sales of iPhone in the Middle East and Africa are reported to have grown by 133% between 2014 and 2015. If nearly all of the profits from these sales are being booked in Ireland rather than in the local African subsidiary, this represents a major tax loss risk in Africa,” Wort said.
Dermot Gaffney, the head of tax markets at KPMG South Africa, said the problem facing Ireland is that, if Apple has to pay up, it may mean many others will also have to. Other tech companies such as Google, Facebook, Microsoft and Amazon also have a presence in Ireland.
“As Ireland continues to move toward a knowledge economy, these companies are highly mobile industries that can just pack up and go,” Gaffney said.
But Indonesia is tackling the matter head on and pursuing Google for five years of value-added tax and corporate taxes, with an estimated $400-million owed for 2015 alone, Reuters reports. This follows Google’s alleged refusal to co-operate with a tax audit.
Indonesia is following in the footsteps of countries such as the United Kingdom and India. The UK managed to collect £130-million in back taxes from Google and has drafted a new regulation, which has been dubbed the “Google tax”.
In June, India began imposing its own tax, although indirectly, by slapping a levy on Indian companies advertising on global platforms.
Judge Dennis Davis, chairperson of the Davis Tax Committee, which is assessing South Africa’s tax policy framework, said a blacklist is something South Africa could consider when it has more detailed information in hand.
“If we think our companies are using Ireland in this way, we could also abolish the double tax treaty,” he said.
There is evidence, though, that the international tax landscape is changing.
The G20 and some other nations have agreed to new rules, including the exchange of information between tax authorities.
The new rules are already in place and have started being phased this year.
Pascal Saint-Amans, the director of the Organisation of Economic Co-operation and Development’s (OECD) centre for tax policy and administration, said that once countries implement minimum standards in reforming the global tax system, as required by the organisation’s base erosion and profit shifting (Beps) project, to which South Africa is a signatory, arrangements such as those between Ireland and Apple will no longer be possible.
Crawford Spence, a professor of accounting at the Warwick Business School in the UK, said countries have been spurred on by transnational initiatives such as Beps and are quickly developing the confidence to tackle these issues.
The new rules require country-by-country reporting on what tax multinationals pay in each country.
But some serious issues remain because the G20/OECD reforms do not require multinationals to disclose this information publicly.
It will be made available only to the tax authorities in the respective countries.
Liz Confalone, policy counsel at Global Financial Integrity, said top of the organisation’s agenda is to ensure the country-by-country reporting is made public.
“It’s a fair criticism and those asking for transparency have good arguments,” said Saint-Amans. “That said, we start from a situation where there is nothing.
“ The big guys who have the information … they don’t feel like going public. Countries are sovereign and do what they want. They said they will give it up if it is only shared with tax authorities.”
The reasons not to release the information include a concern about sensitive information being revealed to competitors. The OECD sought to secure a compromise instead of pushing for more and possibly losing it all, Saint-Amans said.
Another criticism is the reforms do not go far enough to curb the abuse of transfer pricing, which allows corporates to shift profits to subsidiaries in jurisdictions where they can pay little or no tax.
Saint-Amans said, although some economists are suggesting the taxing corporates as a single entity, the view is not shared by many.
“Nobody has pushed for this. There is almost consensus that nobody is ready,” he said.
Instead, the organisation has made realistic attempts to start fixing the system.
He was also not convinced that such taxation would be the best solution. “When you look at it, you will find a number of flaws, not the least being that the benefits of it have never been tested.
“When you start reflecting on it, you will see serious issues arising.”
The project appears to be creating some ructions already as countries prepare to implement reforms, with some multinationals issuing profit warnings as a result of the incoming Beps requirements.
Referring to the current initiative, Saint-Amans said: “I’m not saying it’s great. I’m saying it’s much better.”