Column We can keep our corporation tax AND please Europe. Here's how

ON 23 NOVEMBER 2010 the international news agency, Bloomberg, asked the president of European Markets at Cisco Systems, Chris Dedicoat, for his opinion on Ireland’s corporation tax regime. This was in response to the EU and IMF’s multi-billion-euro bailout package for the country, and to the rumours that the famously-low rate might be up for discussion. Dedicoat said that Ireland “is a good place for us to do research and development and we don’t make decisions based just on tax.” He highlighted the education system, in particular the focus on maths and engineering, as factors which made the country attractive to Cisco. It would be the “wrong thing” for the company to leave Ireland simply on recent developments, he said.

The chief executive of General Electric’s international business, Nani Beccalli-Falco, echoed Mr Dedicoat’s sentiments. “To take a decision today to get out of Ireland is a knee-jerk reaction which doesn’t demonstrate a lot of strategic thinking,” he told Bloomberg. “There is a market, there is talent and you can find the people who can help you in creating the business you want to create; taxes are something on top of it.”
Neither comment was covered by the Irish media, who instead focused on the Government’s pronouncement that Ireland’s corporation tax rate was sacrosanct.

It may seem strange for the Government to offer reassurances on an issue that is simply one consideration among many for multinationals in Ireland. But this is because the reassurances were not intended for the likes of General Electric and Cisco, but rather for those who operate within the financial services sector. The 12.5 per cent corporation tax rate applies not only to companies such as Google, Dell, GE and Cisco, but also to financial firms such as Citigroup, JP Morgan, Bank of Ireland, AIB and BNP. The Irish government wants to protect the IFSC, and is using multinational industrial sector in Ireland as a ruse for maintaining that particular status quo.

The Irish government talks about the IFSC in terms of job creation, but in reality it is little more than an off-shore tax haven. The main focus is on allowing both Irish and international financial firms to maximise profit through tax avoidance. There is little by way of actual investment in the State, with the main economic stimuli taking place in accounting, legal services, rent and construction.

From the beginning, a significant part of the IFSC has consisted of Irish firms who moved from one part of the city to another, slashing their tax bill as a result. “Well over half the office space in the IFSC is occupied by Irish companies such as AIB, Bank of Ireland, Irish Life, Smurfit Paribas and many lesser-known names,” wrote the journalist Frank McDonald in 1991. “The relocation element has been substantial – with the banks, for example, simply shifting their currency dealing operations to the Custom House docks to take advantage of the lucrative tax incentives.” The IFSC became a drain not only on Irish tax revenue – as seen by the amount of Irish institutions based within its walls – but also on the tax revenue of sovereign states in Europe, Asia and the Americas. This is the main reason why our European partners want the Government to change the rules regarding corporation tax.

‘The Wild West of European finance’

In January 1992 the German authorities highlighted the fact that the IFSC and Shannon zone were little more than “tax havens for many big foreign investment companies”, in particular Special Purpose Investment Companies which handled large amounts of funds but which had “no real trading function, and had only located in Dublin or Shannon for their low-tax regimes”.  At the same time, Sweden launched a similar investigation. “The Swedish authorities have become unhappy about the loss of tax revenue arising from companies establishing in the Centre,” wrote the Irish Times.  “The authorities believe that 20billion Krone (£2billion), much of it borrowed, has been placed by Swedish companies in IFSC subsidiaries which then invest in bond and equity markets. After paying 10 per cent tax on their profits to the Irish authorities, they return the rest to Sweden and avoid 30 per cent Swedish company tax.” The Irish Times said that Sweden was investigating whether “the size of the money invested was being matched by real activity conducted through its centre, or whether the IFSC is being used to channel funds for tax avoidance.”

Dr Jim Stewart, senior lecturer in finance at Trinity College Dublin, produced a report into the IFSC which found that many treasury management firms in the IFSC were little more than ‘brass-plate’ firms or ‘letter-box’ companies with zero employees. He surveyed 41 firms and although they had no staff, the median size in terms of gross assets was $379 million, with a median profit of $6.3 million. The figures were from 2002, as these were the earliest available to Dr Stewart. It is not surprise that in 2005 the IFSC was labelled by the New York Times as the “Wild West of European finance”.

At the same time a litany of Irish politicians, journalists and financial experts spoke in glowing terms about the ‘light touch’ of the country’s financial regulators and the necessity of a low corporation tax rate in order to keep its economic miracle alive. An Irish Times editorial in August 2007, written in the wake of the near-collapse of the German bank Sachsen LB as a result of problems arising from its Irish operation, urged caution with regard to regulation. “On the fact of it, there appears to be a strong case for stricter regulation of international financial services here,” wrote the paper’s editor. “In considering any such action, however, it is important to have regard to the role that the existing ‘light touch’ regulatory regime has played in the development of a world-class [Irish] financial services industry in a few short decades.”

Since 2008 the focus has shifted from regulation to lost revenue. Our EU partners look at the IFSC and see a gaping hole into which billions of euro in tax revenue disappears. This is the reason for the assault on Ireland’s corporation tax rate. It has little to do with industry and almost everything to do with the financial sector.

Ireland’s low corporation tax rate dates back to the 1950s, in one guise or another. However, it was only extended to financial services in 1987 with the establishment of the IFSC and Shannon area. The real source of EU anger and frustration with  Ireland’s tax policy is not with the industrial sector per se, but with the ability of Irish and EU financial firms to use the IFSC to avoid their tax obligations – and this when taxes are the only thing keeping the financial world alive.

The EU bailout is of vital importance to the German and French banks which sold Irish banks much of their now-worthless credit, that is for sure; but at the same time the Irish Government is using the leverage provided by that bailout to ensure that Irish banks can keep their ‘off-shore’ tax haven on the banks of the Liffey. Meanwhile, the ordinary taxpayer is stuck in the middle, squeezed for every last drop.

It is possible for the Government to argue for the retention of its 12.5 per cent rate for industrial exports. However, in order to do so, it would have to limit the tax avoidance measures of the IFSC. That is the trade-off. The fact that neither Fine Gael nor Labour are willing to do so is evidence – if such evidence be needed – that both parties are as subservient to the banking and financial sector as the previous administration.  The singer may have changed, but the song remains the same.

Dr Conor McCabe is a historian who writes at Irish Left Review. His latest book, Sins of the Father: Tracing the Decisions That Shaped the Irish Economy, is published by History Press Ireland and is also available here.