Tax Break

John Fisher, international tax consultant

Archive for the category “Ireland”

Apple bites back

In Plato’s Republic, Socrates is presented with the cynical argument that the appearance of justice is more important than the reality of it, an idea taken up two millennia later by Machiavelli in The Prince.

The General Court of the European Union’s rejection yesterday of the EU Commission’s claim that Ireland had given illegal state aid to Apple to the tune of 13 billion euro, was greeted by a disingenuous self-righteous statement of the Emerald Isle’s three week old government, that Ireland has “always been clear that, based on Irish law, the correct amount of Irish tax was charged and that Ireland provided no State aid to Apple”. Apple quickly chomped in with: “This case was not about how much tax we pay, but where we are required to pay it” followed up by: “We’re proud to be the largest taxpayer in the world as we know the important role tax payments play in society”. Everyone west of the Irish Sea was taking the moral high ground, and justice appeared to be done.

Really? To quote an old Yiddish saying: ‘Don’t urinate down my back and tell me it’s raining’.

‘Way back in 2014 (see Taxbreak 8/10/14), the European Commission decided to go after Apple and the Irish government over tax rulings provided to the multinational that meant it paid an insignificant amount of tax in Ireland. As a central feature of its Celtic Tiger economic policy, Ireland had operated a low corporate tax rate for years (in the period in question, 12.5%) which was unashamedly geared to attracting US multinationals looking to set up operations beyond the IRS’s immediate grasp. This provided employment, and the taxes arising from employment. Nothing wrong with that. However, in an international tax world where competition for low tax was not only between economically mature states like EU member Ireland, but also tax havens that were unfettered by extraterritorial rules, the competition was fierce. The Irish tax authorities – who could not lower the headline tax rate because of domestic revenue requirements, and could not provide special rates for inbound investment under EU rules  –  were by no means alone in rubber stamping the ideas of international tax planners that cleverly sought to minimize taxable income in Ireland while not picking it up at home in the US until repatriation sometime (perhaps) in the future. And thus were born a slew of Irish registered companies managed and controlled from abroad (that were not Irish resident for tax purposes), the Irish taxable branches of which were endowed with generous transfer pricing policies that shifted the vast majority of their profits to nowhere. All legal from an international tax point of view; all remarkably smelly from a moral point of view. But the European Commission had a trump card to play – internal EU law banned Illegal State Aid, which is what they claimed schemes, like that agreed between the Irish Treasury and Apple, were.

In truth nobody comes out of this week’s court decision, rejecting the European Commission’s claim, smelling of shamrock. The European Commission appears to have completely mishandled its case, leaving the court no choice but to throw it out. But, in so doing, the court made some very important points. The Commission’s primary argument (and the basis for a 13 billion euro assessment) was that the non-resident Irish companies owned intellectual property and, as there were no real HQ activities offshore, all the income of the companies should be taxable in Ireland. The court remembered that Apple was a US group, not an Irish one. Although not stated specifically, that HQ activity belonged somewhere else. The critically important takeaway here is that, as BEPS-era transfer pricing seeks to reflect reality and ensure the tax pie of the digital economy is cut fairly across the globe, the big money belongs in the US, where, since the US tax reform, it is more likely to be taxed. Apple’s reaction about ‘not how much they paid but where’, would be entirely acceptable, had they paid tax in the US on that income in the years under discussion, which it appears they didn’t. That might also result in a question mark over their pride at being the largest taxpayer in the world.

The secondary argument of the European Commission was that, even if income attributable to HQ IP was not taxable in Ireland, the transfer pricing methodology was wrong. The decision accepted that examination of the methodology by the authorities for the purpose of the ruling had been, at best, sketchy, but – in order to prove illegal state aid – it was necessary to show that the transfer pricing used produced less profit in Ireland than the correct method. Although the peanuts paid to the Irish Treasury imply this was a no-brainer, the court had not been presented with the required analysis, and therefore could only rule that the case was not proven. A far cry from the government’s claim that the right amount of tax had been paid to Ireland.

The decision is expected to be appealed. In the meantime, the threat of past Illegal State Aid will still hang over other cases, while EU members will have to be careful about chipping away at the US’s rightful share of digital economy income.

The Celtic Tiger changes its stripes

boris-johnson-yes-minister-main (1)

I can’t wait for 2046

The biggest debunker of conspiracy theories has to be what the British call ‘the thirty year rule’  for the declassification of secret documents. It is not that the released documents reveal the truth (the really juicy ones are locked up for far longer); it is, rather, the realization that the behind-the-scenes machinations of government way back then were far more chaotic than anything we imagined at the time. Conspiracies need thought.

So, my conspiracy theory about Ireland’s mammoth tax bill  to pharmaceutical giant Perrigo towards the end of last year will probably be utterly disproven sometime in 2048. But, by then I will be either dead or too old to care. So, here goes.

The (undisputed) story:

In 2013 the (undisputed) Irish Elan Corp sold its interest in Tysabri, a multiple sclerosis drug, to Biogen Idec Inc for a lot of money. A few months later (undisputed) US corporation Perrigo Inc entered into an inversion transaction with Elan. The transaction involved the smaller Elan achieving ownership of Perrigo, with the Perrigo shareholders receiving a majority of the shares of Elan. The principal  (undisputed) advantage to Perrigo was a reduction in future tax. This would be achieved by (calculated conjecture) including future non-US acquisitions under the Irish parent, thus bypassing the then draconian US tax system, and engineering debt from the US to the Irish parent. The latter  would reduce US taxable income at 35%, and increase Irish taxable income at rates of between 0% and 25%, with the Irish foot secretly holding the scale at the lower end thanks to leprecaunish Irish wheezes such as the Double Irish and Single Malt schemes ( the Irish clearly chose names they were convinced could never be traced back to them).


Ireland is quite a distance

In December 2018 it became known that the Perrigo group (Elan had very cleverly changed its name to that of its new subsidiary) had been issued a bill by the Irish tax authorities for  €1.64 billion. The justification was the reclassification of  the profit on sale of the intellectual property to Biogen from trading income (somewhere between 0% and 12.5% tax) to capital gains (33%). Perrigo promptly announced  that  it was suddenly hard to run a US customer-service organization from the other side of the pond. It is now rumoured that the group is threatening shelving plans for expansion in Dublin unless, presumably, their appeal against the tax assessment is successful.

And now, the conspiracy theory:

As opposed to the $13 billion tax claim from Apple forced upon Ireland by the EU (poor Ireland), the issue  here is what one commentator called Tax 101 – the party trick of tax advisers worldwide walking the tax classification tightrope between capital gains  and trading income, ready at all times to pull the tax-saving bunny out of their moneybags. The sale of the IP was several months before Perrigo merged into Elan. It is to be presumed that Perrigo ordered a tax due diligence, and even if some bits and pieces were obscured by the Guinness, had some inkling of a potential €1.64 billion tax bill. Either they received an utterly obese indemnity from Elan’s shareholders, or there was a clear understanding from somewhere that lreland’s long-standing open-sewer policy of encouraging American investment at all moral cost meant that the authorities could be expected to stay out to a liquid lunch.

Fast forward to the beginning of 2018, and the US had a new tax law . The complementary regimes of Foreign-Derived Intangible Income on certain income of US companies from abroad, and Global Intangible Low Taxed Income of non-US subsidiaries, established a planning benchmark US effective tax rate  in either case of  around 13% . Add to that new inversion rules and restrictions on interest deductibility, and the question that comes to the befuddled mind is: ‘Why Ireland?’

So, what does a country do when its economic raison d’etre is disappearing down the  sewer? It takes a leaf out of Donald Trump’s book – and thinks protectionism. But, in the case of Ireland – other than its beer and whiskey industries – there was precious little of its domestic economy to protect. Other  than its tax advantage, that is.


And where do you think you’re going?

In October 2018 the Irish budget included, as expected, Controlled Foreign Corporation provisions as required by the EU (see Tax Break 1/1/19). What wasn’t expected was the early imposition of an Exit Tax (which was not due until 2020). Companies wanting to expatriate from Ireland will now face a 12.5% ‘capital gains tax’ – or, in other words, they are pretty well stuck.

All this opened the door for the Irish Treasury to take off its kid gloves, and treat captive foreign companies just like any other. The Irish seem to be saying to Perrigo: ‘You can check out any time you like. But you can never leave.’ I wonder how many Irish-Americans there are in California.


Make it a double, Paddy

"Look. This one doesn't bend."

“Look. This one doesn’t bend.”

The scene in Disney’s Snow White, where the wicked witch entices the heroine with a poisoned apple, has fueled the nightmares of generations of kiddies since it first saw the light of day (or should that be ‘the dark of night’?) in 1937. I had double the reason to be terrified as my parents had an old acquaintance  – the mother of a friend – who, I was genuinely convinced, must be related to the evil lady.  Her name was Megan, born sometime in the last decade of the 19th century. She had masses of unruly hair that matched her nicotine-stained, spindly fingers. And she spoke in an Irish smoker’s brogue. Bed-wetting material, par excellence.

Half a century later, I can still hear my parents talking about her having been in the “Post Office”. For years, my mind’s eye saw her going from house to house delivering mail and, when some unfortunate maiden opened the door, offering her a juicy red apple. It was only when she had died, and I had progressed to a higher degree of cognitive reasoning, that I understood that she had been an Irish Volunteers (later, IRA)  operative in the 1916 Easter Rising. She was in the General Post Office on O’Connell Street when almost the entire leadership was carted off by the British and put in front of a firing squad.

Although the Easter Rising served to unite the people of Ireland in the cause of independence, it was a bit daft really. The arms the rebels were counting on were intercepted by the British, and they knew that they didn’t have a chance, but they went ahead anyway.

The Irish are big on miracles

The Irish are big on miracles

In the spirit of 1916, over the last 30 years successive Irish governments have proven adept at blundering almost thoughtlessly into madcap schemes for economic progress, like the 12.5% corporate tax rate;  miraculously they keep pulling them off. They managed to build a Tiger economy without an ounce of local initiative, relying on US multinationals and extremely generous European Union aid. True, they were hit quite badly by the global financial meltdown, but they pulled out of that faster than any of the other crisis countries.

It would appear that the luck of the Irish may be running out (or, maybe, not). The EU Commission is investigating whether tax agreements with the Irish Government brought  Apple and 4,000 juicy jobs to the depressed area of Cork. For the first time, the Commission is using the argument of ‘State Aid’ to attack a tax break (Fiat and Starbucks are getting it in the neck elsewhere).

The alleged scheme is annoyingly simple (almost, crass) and has been an open secret (but not necessarily in relation to Apple)  to international tax advisers for years. Referred to as the ‘Double Irish’, it takes advantage of two bits of Irish Blarney in local law. Firstly, as opposed to just about every other nation no longer in loin cloths, Ireland did not have  significant Transfer Pricing rules until recently. Secondly, Irish law defines tax residency of a company purely on the basis of management and control (most countries today have an additional test of place of incorporation).

Once those fiercely permissive non-rules were in place, it was time to pour the Guinness. Apple (and there will be plenty more US companies joining the wake, if the EU pull this one-off), is, it appears,  accused of  establishing two companies in Ireland. One, subject to the standard astronomical rate of 12.5%, is alleged to have carried on the business. Lest Apple be saddled with such an unacceptable tax rate, that company had an agreement to pay royalties to the other Irish company (it’s subsidiary) at a Disney fantasy rate. The second company, however, was managed and controlled from an offshore jurisdiction (BVI is popular) so was not liable to tax in Ireland (not even withholding tax on the royalties). Abracadabra – a minimal level of taxation in Ireland. Now, the US has, as everybody knows, a fairly draconian system for catching low-tax profits of foreign subsidiaries (Subpart F) in its tax net. The only  part of this scheme requiring intelligence (the American part) required that the lower Irish company check-the-box for US purposes turning it, effectively, into a branch of the other Irish company. The intercompany payments then, if the rumours are true, disappeared for US tax purposes.

The irony of all this is that the Irish might still come out of this laughing. If the scheme is found to be State Aid, Apple may be required to pay an absolute fortune in tax – to the Irish Treasury.  The Irish Government is claiming innocence in the whole matter (it will need to get over the hurdle of how the world’s tax advisers knew what was going on while it didn’t,  AND possibly embarrassing revelations concerning those rulings). Apple, meanwhile, can reasonably claim that it did nothing wrong – a sovereign country (and EU member, to boot) offered it  a favourable ruling.

Workaholics or Alcoholics?

Workaholics or Alcoholics?

The Irish Government has belatedly announced that it is  taking steps to eliminate  the Double Irish – from January 2015 it is proposed that companies incorporated in Ireland will be Irish resident under domestic law.  With headline rates in other jurisdictions brushing against their once incredibly favourable rate, the Irish may have to start doing things for themselves. They could try learning  from the Seven Dwarfs: ‘Hi Ho, Hi Ho, it’s off to work we go’.

Letter to America

Minister For (sic) Finance, Republic of Ireland

June 1, 2013

Mr Seamus Noonan, Boston MA, USA

Dear Seamus,

Mother Ireland is being crucified once again and she is hurting, to be sure. I was walking past the General Post Office on O’Connell Street yesterday when old Stephen Megan accosted me: ” What’s all this about Apples, young Michael?” he growled, he did. “Were not the good old earth apples our ancestors died for in the famine good enough for the likes of you? Don’t you remember what the Church says about the Forbidden Fruit and the  Fall of  Man?  If poor Patrick Pearse had been standing over there in 1916 (he waved a finger at the entrance to the Post Office) reading out loud the Easter Proclamation, and he had known what you were going to do, he would have folded it up – he would truly – and gone back inside to post it to his mother. Then the British wouldn’t  have executed him and all our beloved martyrs.”

And just last Sunday I was queuing up after Mass to speak to Father O’Leary (he is new to the Parish since Father Callaghan had to go away because of something we don’t talk about), when Mam and Da’s friend Mrs Flaherty started bawling at me at the top of her voice: “Michael Noonan. You are a disgrace to our country. Why did we have to lend all that money from the Yooropeeans? You were an Altar Boy, Michael Noonan (at this point Father O’Leary shuffled uneasily from one foot to the other). You know that the  Church loves thrift – but you had to try to be like the Yooropeeans. That poor De Valera will be turning in his grave”. I thought of telling her that I had not been in the Government when the crisis hit, but she was looking like our mother used to look when our father came home from the pub, so I held my peace.

Talking of pubs (which is always a comfort, so it is), last month the barmaid was just pulling me my first pint at a nice little establishment in the centre of the City when a leprachaun-sized fella in a grey suit and coiffed hair holding a glass of red wine, tapped me on my arm and asked in an accent not from around these parts : “Qu’est que vous doing with a 12.5% tax rate, screwing the rest of us in L’Europe, cochon?”. I politely explained how a wine suppository could cure the little reptile’s  constipation and went to join friends – but it was disconcerting, that it was.

Seamus, it’s just not fair. We are being made to suffer for all mankind. Well brother, I have decided that we are going to take action. You are going to be St Paul  spreading the gospel and putting the record straight once and for all. Next time you are in Paddy O’s in Boston’s fair city,  buy a round for all our brothers and cousins  (I enclose a 50 Punt  note as a Government contribution to the cause) and then sit them down by the fire and tell them Ireland’s  tale of woe. Add a bit o’ the ol’ blarney and, if any of the Kennedys, Connellys or O’Neils are listening you can tell them that the next time they are running Washington, they should tell our story to the world:

When Ireland joined the European Economic Community in 1973 together with Britain and Denmark she had an economy that was worth bugger all. Her biggest export was people, who built the whole world except the Great Wall of China and the Pyramids in Egypt. One day someone had a great idea to lower the corporate tax rate to 12.5%. American companies  competed with each other to swim across the Atlantic and set up operations here. Nobody could nail us on the tax rate because we offered it to everyone – Irish and others alike. We were willing to pay the price of less welfare payments because we had been raised by the Fathers and Sisters  not to expect much. Of course, there were other reasons those companies chose Ireland. There were lots of the Irish in America and, when we were sober, we spoke something resembling the same language. This got up everybody’s nose in Europe but the only concrete response was the French building Euro Disney.

In 2008, when the financial crisis hit, the Irish government’s finances were healthy. Our Budget Deficit was manageable as was the Debt – GDP Ratio. What was not healthy was the private housing market where the banks were overexposed. We should have remembered our Bible lessons and what happened to the tables of the money changers in the Temple. Not wanting to leave the banks to tumble,the government rescued them – and that left the government totally buggered. So they had to take a loan from the EU (usury is, I confess, a dreadful sin) and impose austerity – which was the nostalgic fun part for most of the population. Unlike other crisis countries, within 2 years Ireland was proudly back on track.

So everything was starting to chug along beautifully when, last week, some  brightsparks in Washington started asking Apple questions. In fact, the gentlemen were very polite to Apple, praising it for its iconic status in the US economy. But, their largesse did not extend to poor Ireland. We were flayed mercilessly for tempting the little Innocent with Government-backed tax schemes that brought the tax rate down from the lofty 12.5% to 2%. There was talk of Double-Irish structures (believe me Seamus, the only Double-Irish I know is a 12 year Bushmill’s Single Malt – and very good it is too) with companies registered in Ireland but not resident there and subsidiaries that shared American research and development costs.

Tell me, Seamus, was this not the hypocrisy that the Church tried to exorcise from God’s Earth? Ireland, a country with a legitimate 12.5% tax rate being used by Americans taking advantage of all the vagaries of  OECD guidelines and idiotic US tax law – and it was our fault! Look across Europe at their special R&D rates and Finance Company rates and Heaven knows what else.

Seamus, it is time for us to act. Starting spreading the pints. The spirit of 1916 is back!

Your loving brother


P.S. You couldn’t see your way to picking me up a new iPhone from the local Apple Store the next time you’re there, could you?

P.P.S. The characters and events in this letter are fictitious. I do not have a clue if the Minister For (sic) Finance has a brother, had parents or, most notably, what (if anything) he actually said to that  Sarkozy look-a-like  in the pub.

Irish blarney

I have always been skeptical about the rave reviews on the covers of books. “I just couldn’t put this book down”, may  have been the first part of a sentence that concluded, “the kitchen sink disposal unit”; “His best novel yet” , could have ended, “which, given his other semi-literate offerings is no great achievement”.

So, when Irish ministers recently insisted on quoting  over and again an OECD survey praising the preservation of the 12.5% corporate tax rate despite the country’s ills, I dived for the survey to find out what it really said.
And what it really said was: “The decision to maintain the corporate tax rate at 12.5% is prudent as a sudden increase in tax rates would create uncertainty about Irish tax policy that could undermine investor sentiment.”
Now,  before I go on, I must be fair to the Irish. They may have found themselves waist deep in the bog  and requiring a bail-out by the IMF thanks to their outrageous housing speculation but, if there is one thing the Irish are really good at, it is austerity. And that is just as well, because that is just what the IMF and everybody else has demanded of them. They learned it from the British, who spent hundreds of years abusing their economy, and then spent the first sixty years of independence  doing the same to themselves. As a result, the prognosis for the Republic, which has stoically accepted its position, is surprisingly good according to most economic indicators.
Having said all this, the new government’s November budget included two entirely understandable, but morally questionnable, tax elements. The first, as mentioned above, was a commitment to the 12.5% tax rate which – while, as noted by the OECD, may under current conditions  be unavoidable – is obscenely low for a country relying on the charity of others and arguably gives it an unfair advantage over many of its EU competitors. The second, which received little publicity, was an incentive scheme for Ireland’s all-time number one export – people; tax benefits are being offered for Irish residents working abroad part of the year for Irish companies. The emphasis was put on the BRICS countries (Brazil, Russia, India, China and South Africa) which, given that they only comprise around 3 billion citizens, are obviously short of labor or, at least, will not notice another million or two Irishmen taking jobs that could have gone to the locals (I may be suffering here from a minor bout of Irish Exaggeration).

The Irish economy has always bothered me. I vacationed there with my family a few years back, before the Celtic Tiger tripped over its tail, and apart from coming close to being throttled by a petrol (gas)  station manager in the border area for asking for a copy of the London Times (“We don’t like the British round here, you know”), we had a delightful time driving up and down the country’s only motorway admiring the myriad of signs advertising EU financed infrastructure projects. It seemed pretty clear that the country was not doing enough to build an independent economy for when the foreign multinationals get tired of relying on the tax rate and decide to move on. Should the Euro Zone survive, it will be interesting to see what happens to Ireland in the long term.

And, as regards those book reviews, I remember the late Auberon Waugh reviewing the results of a BBC poll of the “Best English Language Novel of the 20th Century” at the end of 1999.  Tolkien’s  Lord of the Rings and Orwell’s Animal Farm took second and third places.  First place went to the Irish Joyce’s Ulysses which, Waugh pointed out, proved that the British are a nation of pseuds since hardly anyone manages to read it from start to finish. The writer Anthony Burgess (A Clockwork Orange) said on the cover of my (half-read) copy  that “Everybody knows now that Ulysses is the greatest novel of the century”. History does not record whether that was the end of the sentence.

Happy New Year.

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