Tax Haven Ireland - the inside story
Article originally published in Issue 6 of Rupture, Ireland’s eco-socialist quarterly, buy the print issue:
by Brian O’Boyle
Something strange happened in the summer of 2016. Several asset management companies with significant property portfolios declared corporate taxes of just €250. The WLR Cardinal Mezzanine Fund owned €70 million in assets, made €3 million in profits, but paid just €250 in tax.[1] The same was true of Blue Bay Capital, a company which loaned out €160 million, made €36 million and paid just €250. Both companies were co-investors with the Irish Strategic Investment Fund, and both were paying hardly any taxes in the state.[2] It seemed like more than a coincidence - and it was. Analysis of the company filings of fifteen subsidiaries of global funds by the UCD School of Social Policy, found that they each paid just €250 in tax annually despite controlling loans worth €10.3 billion. Included were major US Vulture Funds, such as Oaktree Capital Management, Cerberus Capital Management and Goldman Sachs. In total, these companies paid just €8,000 in tax with a loss to the exchequer estimated to be around €500 million in just two years.[3]
But how exactly did they get away with this? The clue to the riddle was a piece of legislation known as a Section 110 company. Enacted as part of the Taxes Consolidation Act (1997), Section 110 companies are Special Purpose Vehicles (SPV’s) that must be managed out of the International Financial Services Centre (IFSC) and have no less than €10 million under management. Once these criteria are met, Section 110 SPV’s can be legally separated from their parent companies and used to buy property assets in the state. The key advantage is that when they borrow money from their parent company, they can make it look as if they are borrowing from a third party. The Irish state allows companies to deduct loan interest from their corporation taxes, so by paying interest back to their parent company, Section 110 companies could write off almost all their taxes. If they made €30 million in profits, they miraculously owed €30 million in interest payments to themselves. If they made €40 million, this was the amount they owned in interest. It was risk-free investment and tax-free profits. It was also sanctioned and overseen by the state. Ireland was in the grip of its worst ever housing crisis and here were some of the world’s wealthiest companies making enormous profits in the housing market and deliberately avoiding taxes on the profits. Welcome to the Irish tax haven.
““Irish bankers had historic links to the City of London thanks to decades of post-colonial policy-making”.”
The IFSC
To understand the links between tax dodging and the housing crisis, we must go back to the early days of the offshore centre. Ireland began offering tax advantages to US companies in the 1950’s, but it was during the 1980’s that the real action started. In 1986, Margaret Thatcher carried through an enormous deregulation of the City of London, known colloquially as the Big Bang. Having recently defeated the miners, Thatcher’s government was anxious to create a more financialised capitalism for the British ruling class. In the same year, Thatcher was also the driving force behind the European Single Market, which, among other things, guaranteed free movement of capital across the bloc. Both moves were immediately noticed in Dublin. Irish bankers had historic links to the City of London thanks to decades of post-colonial policymaking. There was also a history of offering tax advantages to locate in the state, ensuring that the possibility of an Irish financial services centre came into focus. One man who understood these opportunities better than most was the Irish financier, Dermot Desmond. Desmond started his career with Citibank during the 1960’s, before moving into his own brokerage firm - National City Brokers - in 1981. This gave him the perfect vantage point from which to recognise the potential for an offshore system, linked to the City of London.[4] He also understood the extraordinary support he would receive in a country run by Charles J. Haughey. Within a year, the Irish elites had established an International Financial Services Centre offering 10% tax on all trading income; a range of treaties to avoid international taxation; rent allowances for companies in the Docklands, and exemptions from local rates. Most importantly, the IFSC offered extremely light touch regulation and soon major companies were piling in.
From humble beginnings, the IFSC has grown to become one of Ireland’s leading industries, with assets under management 25 times the size of Ireland’s Gross National Income. Almost 40% of all European Financial Vehicle Funds are housed in the IFSC, as are 14 of the 15 biggest Airline Leasing companies.[5] Founded as a response to neoliberal capitalism, The IFSC is now the heartbeat of the Irish offshore system, housing the most important legal and accountancy firms who make the avoidance happen.
The double Irish
The next staige of the Irish Haven was similarly opportunistic. Historically, the American government operated a worldwide taxation system, meaning every company had to pay 35% tax regardless of where they declared their profits. If a company paid 12.5% in Ireland forexample, they were still expected to pay the other 22.5% in the states - leaving little incentive to distinguish domestic profits from those made abroad. All of this changed in 1996 when the Clinton Administration introduced new rules that allowed companies to separate foreign profits from those made at home. By filing an IRS 8832 form, US corporations were suddenly allowed to pay foreign taxes, without any obligation to pay the balance in the United States.[6] The aim was to leave extra profits in the pockets of US shareholders, and once again the Irish elites spotted an opportunity. Within a year of the IRS decision, Fianna Fáil undertook an enormous overhaul of the domestic tax code running to 1,518 pages. The most important initiatives in the resulting Taxes Consolidation Act (TCA) (1997) were intentionally ambiguous rules around establishing companies and new rules for establishing Section 110 SPVs.[7] We dealt with Section 110 companies in our earlier discussion. The new rules around incorporation were designed to facilitate the infamous “Double Irish” through a divergence in how the respective administrations now dealt with profits.[8]
The IRS links profits to legal residency, meaning a company registered in the United States is necessarily registered for taxes as well. Legal residency was also the test for Irish taxes, but following the TCA, residency was redefined so that it now depended on where a company’s key decisions were being made. If a company wanted to pay its taxes in Ireland, for example, it had to incorporate in the state and inform the Revenue Commissioners it made executive decisions here. If it wanted to pay taxes in Bermuda, it would incorporate in Ireland and inform the Revenue that its key decisions were happening in the Caribbean. This created an obvious loophole, as companies could incorporate in Ireland to avoid US taxes and claim board meetings were taking place in Bermuda to avoid Irish taxes – hence the Double Irish. The US government was aware of these practices for at least a decade, before a Senate Committee, chaired by Senator Carl Levin, blew the practice open in 2013. This soon sparked an official enquiry by the European Commission, which eventually found Ireland guilty of allowing Apple Inc to get away with more than €13 billion in unpaid taxes. Indeed, the Double Irish became the most successful tax scam in history, allowing US companies to build up more than a trillion dollars in tax-free non-US profits. However, with the heat now rising they needed a new strategy and they found it in the digitisation of the global economy and the accompanying proliferation of intellectual property assets.
Capital allowances for intangible assets
““It is almost impossible to get an accurate valuation on intangible assets, allowing companies to vastly inflate their value.””
The third key stage in the Irish tax haven was initially developed in response to the Great Recession. Many workers will remember 2009 for its two austerity budgets, but it was also the year that Fianna Fáil set up a Commission on Taxation to bring in some badly needed revenue.[9] The most important clause in the 560 page report that resulted, was one that extended tax deductions to investment in intangible assets by global multinationals.[10] Tax deductions for capital goods are well established in corporate law, reflecting the fact that profit is the outcome of investment, that itself, costs money. If a company spends €1 million on a piece of machinery, they are entitled to write off the cost over the period it will be used -say the next ten years. A profit of €1 million a year would therefore be liable to tax at €900,000, with the other €100,000 allowed as a deduction for expenses. There are two major reasons why these deductions are easily abused when the assets are intangible, however. The first, is that it is almost impossible to get an accurate valuation on intangible assets, allowing companies to vastly inflate their value. To get a sense of the scale of this problem, KPMG recently told investors that a company with physical assets worth €100 million and a market valuation of €1 billion can define the other €900 million as intangible investment and write off the difference against their profits.[11] Much of this paper value comes from speculators inflating company shares through the stock markets, but this doesn’t stop companies claiming that the difference between their physical and intangible assets is made up of actual investment. To make matters worse almost all this trade happens inside multinational corporations, making it impossible to work out how much is genuinely being spent on these assets. With the Apple case threatening the Double Irish, capital allowances for intangible assets were seized upon by the Irish establishment. Front of stage they were forced to establish an official Review of Ireland’s Corporation Tax Code. Back stage they invited Apple to move hundreds of billions of intangible assets into Ireland so they could continue to get tax free profits for years to come. Comparing this scam with the ‘Double Irish’, several notable points emerge. The first is that Ireland’s role in the tax evasion system has now shifted from a conduit for moving profits into Bermuda, to a sink for hundreds of billions being booked through Dublin.[12] This has given the Irish state greater control of the process, and, as the added bonus, dispenses with the fiction of an Irish incorporated entity paying tax in the Caribbean. Secondly, capital allowances for tangible assets is a well-established principle in corporate tax law, making an extension to intangible assets potentially more defensible in legal cases. Thirdly, CAIA is more lucrative for the state, as far greater amounts of taxable income end up in the Irish system. Look at the table below to see the vast increase in corporate taxes now being declared in the state.
The CAIA tax dodge is the key reason why the corporation tax take has increased so significantly in recent years, even as the effective rate has barely changed (it remains about 5%). It also explains why Paschal Donohoe was so slow to sign up to the recent OECD agreement on global taxation, as at least €2 billion of the profits being collected by the state are on assets being moved here artificially through avoidance mechanisms. The OECD deal will mean that some of these taxes now get reallocated – but with the effective rates still wide open to manipulation, tax haven Ireland is still very much open for business.
Conclusion
In 2018, Gabriel Zucman and his colleagues exposed a startling reality. Based on figures available for 2015, they found that Ireland was the biggest tax haven on the planet, responsible for more tax avoidance than all the Caribbean Islands put together. At the time Ireland was already under investigation for illegal state aid to Apple, and yet the state remained at the very heart of the tax evasion network. None of this happened by chance. None of it was inevitable. It was the result of a ruling class that spent decades creating some of the most effective tax avoidance mechanisms in the world and then sold them to the world’s biggest corporations. This article has outlined three key moments in the development of this system, but it is essential to remember that behind these schemes are countless lives devastated by the consequences. Research by Oxfam estimates that tax havens deprive 124 million children of their education each year, showing the human costs for some of the world’s poorest people. They also found that tax haven policies are responsible for the deaths of 6 million children annually in a form of financial genocide which the Irish state has underwritten and participated in. Whether they want to acknowledge it or not, the Irish state has the blood of children on its hands. This is the shocking story of tax haven Ireland.
Brian O'Boyle is an economist and socialist activist currently living in Sligo. He is co-author (with Kieran Allen) of Tax Haven Ireland, which was released in November by Pluto Press. The book retails at £12.99.
Notes
1. Marie O’Halloran, ‘Loophole lets firms earning millions pay €250 tax, Dáil told’ Irish Times, 6 July 2017
2. Ibid.
3. Cormac Fitzgerald, ‘Vultures pay just €8,000 in tax on €10 billion in assets’ thejournal.ie 8 January 2017 https://www.thejournal.ie/vulture-funds-2-3176030-Jan2017/.
4. Nick Shaxson, ‘How Ireland Became an Offshore Tax Haven’ Tax Justice Network. 11 November 2015 http://www.taxjustice.net/2015/11/11/how-ireland-became-an-offshore-financial-centre/.
5. Ibid.
6. Andrew Mitchell, ‘What is a check the box election’ International Tax Blog, 25 June 2010 https://intltax.typepad.com/intltax_blog/2010/06/what-is-a-checkthebox-election.html
7. Taxes Consolidation Act 1997, https://www.oireachtas.ie/en/bills/bill/1997/42/
8. Vanessa Houlder, ‘Q&A: What is the double Irish?’, Financial Times, 9 October 2014, https://www.ft.com/content/f7a2b958-4fc8-11e4-908e-00144feab7de
9. F. Daly et al., Commission on Taxation Report 2009, 7 September 2009, https://researchrepository.ucd.ie/bitstream/10197/1447/1/Commission_on_Taxation_Report_2009.pdf.
10. Capital Allowances for Intangible assets, Under Section 291A of the Tax Consolidation Act 1997, https://www.revenue.ie/en/tax-professionals/tdm/income-tax-capital-gains-tax-corporation-tax/part-09/09-02-05.pdf
11. KPMG, Intellectual Property Tax Quoted in https://en.wikipedia.org/wiki/Double_Irish_arrangement.
12. Ibid.
13. Revenue Commissioners, Summary of Corporation Tax returns (revenue.ie)