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IRELAND’S ABILITY TO attract major companies to its shores could be under threat after US financial officials moved to stamp out so-called “inversions”.
The US Treasury stepped in yesterday to stop the “creative techniques” companies were using to avoid its taxes, saying its plans would either get rid of inversions altogether or at least cut the economic benefits to businesses which exploited the techniques.
Several major US companies, including recently medical manufacturer Medtronic, have planned to shift their tax bases to Ireland with the lure of the country’s low corporate tax rate of 12.5% – compared to a nominal rate of 35% in the US.
Treasury secretary Jacob Lew said the tax reforms would mean offshore deals would no longer make economic sense for some companies considering inversions.
“Inversion transactions erode our corporate tax base, unfairly placing a larger burden on all other taxpayers, including small businesses and hardworking Americans,” he said.
It is critical that this unfair loophole be closed. This shifting of a firm’s tax address is not the same as a merger driven by business reasons, such as efficiency or expansion.These transactions may be legal, but they are wrong, and our laws should change.”
So what are these inversions?
An inversion deal involves a company setting up in a new tax home after merging with or taking over an overseas business.
The offshore partner then “owns” the company’s earnings for tax purposes, but can still keep using the money as part of its US operations mostly – or completely – tax free.
But the Treasury move would stop overseas offshoots of US companies being treated as independent from their parent businesses and close a loophole allowing “hopscotch loans” between parts of the same company being used to shift profits without being taxed.
Earlier this year, US-based Medtronic announced it was shifting its tax base to Ireland after buying out major local player Covidien in a €32 billion deal.
The inversion came despite €48 million in penalties the US government levelled at its executive for taking the company offshore for tax purposes.
A TheJournal.ie poll which asked if Irish tax laws should be reviewed to stop companies “gaming” the system showed most readers didn’t care about US companies shifting their tax base here to maximise their profits.
Obama glad
President Barack Obama, who has previously singled out Ireland in his criticisms of US companies’ tax shifting, said he was glad new action was being looked at to “help reverse this trend”.
We’ve recently seen a few large corporations announce plans to exploit this loophole, undercutting businesses that act responsibly and leaving the middle class to pay the bill,” he said.
At least they’re not still talking about the “Double Irish”
The US announcement comes less that a week after the OECD unveiled the first part of its multi-step plan to reform international tax-avoidance schemes – including the infamous “Double Irish” tax loophole.
The tactic involves multinationals using Ireland as a jumping-off point to a tax haven like Bermuda to avoid paying their tax bills.
Jobs Minister Richard Bruton yesterday signalled Ireland could move to close the loophole in the budget ahead of any international agreement.
READ: Obama accuses companies that relocate to Ireland of ‘gaming the system’
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Say goodbye to the Golden Goose.
The problem here is that you can’t control what the other gov’t going to do. Our corporation tax thing is based on shakey ground as a result. And I’m not exactly sure of the figures but it’s a good few jobs relying on our tax advantage. The EU is constantly sniping on about it. What’s needed is good honest indigenous employment, we can’t afford to have it skewed the way it is, could end up in trouble again
It would help a lot – most of all the Irish people – if the government taxed companies at 12.5% and not 2.5%.
Apple paid about $715 million in corporation tax on foreign profits of $37 billion in fiscal 2012.
That is a meagre 1.9% in tax – more than 10% below the effective rate which Irish governments claim.
What multi-nationals do not pay in tax, we do. The joke is on us.
Can someone clarify for me? Closing the loophole here in Ireland does not mean us changing our corporate tax rate does it? Or does it? im still confused .
Our corporate tax rate stays the same.
Closing the loophole on our side means that they can’t move their money again to avoid taxes.
Hi Catherine, Ireland’s corporate tax rate isn’t affected – the US is trying to close loopholes which allow companies with most of their operations there to shift money overseas without paying tax. But if it works, it would mean US companies are less likely to try an “inversion” to a country with a low corporate tax rate like Ireland.
Thank you both for that. Much appreciated
Thank you Peter. The article was pretty clear and an easy to be honest . It was just me needing to double check . :)
The word inversion is makey uppy. These companies are exercising their right to move off shore. No administration is going to outlaw that no matter how much spin they put on it. The most the US can do is add yet another tax on top of their higher corporate tax rate and that is doubtful too. Nobody is breaking the law and no one is likely to change the law much either. Nothing to see here, move on!
@pat. So I don’t understand why they were fined for moving the tax base to Covidien if the US Govt can’t do anything about it? Can you explain plse?
While i disagree with companies abusing tax systems here in Ireland and abroad attention should also be drawn to the inefficiencies in the IRS tax system in the USA and the Americans should stop pointing jealous fingers at other countries and reform their own tax system for companies which is at present punitive
Problem here is US rate of Corporation Tax is way too high. Tell BO to cut his rates and the problem will sort itself out
The bottom line is the companies will push down wages and benefits for the workers. The profits will have to be attractive to the shareholders.
So buy some shares.
The only issue with the Irish Corporation Tax is that a company registered in Ireland for Corporation Taxation had no domical residence for tax purposes, thus leading the to Double Irish tax structure, where one Irish company is tax resident in Ireland and the other Irish company is tax resident in Bermuda and they can transfer money between each other as US Transfer Pricing Rule are not included in Irish Tax Law.
I am nearly sure that Michael Noonan in last years budget speech addressed this by stating that ALL Companies registered in Ireland would have an Irish Domicile for tax purposes.
In addition, if the US are so concerned about this they should use a carrot instead of a stick approach to corporation tax and reduce nominal rate from 35% to 25%.
have your say