Monday, February 18 11:18:53
Ireland has been - and is still - inn the spotlight for our low headline rate of corporate tax but the tax base - the rate firms actually pay - is lower in some States and has been shrinking all over Europe.
In late November, members of the American Chamber of Commerce gathered at the Four Seasons hotel in Dublin for a Thanksgiving lunch and a declaration of hospitality from the finance minister.
"We're a friendly country for investors and one of the key elements of the friendliness of the package is the 12.5 percent tax rate," Michael Noonan said. "I want to tell you once more, that's not negotiable."
Noonan's comment alluded to attempts by some fellow European Union countries to persuade Ireland to increase its official corporation tax rate, one of the lowest in the developed world. The 12.5 percent rate, Irish politicians often say, is core to Ireland's 'brand' as an investment location.
But low headline taxes are just one reason companies like to base themselves in Ireland, and not even the most important. Many of the multinationals gathered at the Four Seasons that day pay far less than 12.5 percent tax, their accounts show. Ireland helps them do this by generously defining what profit it will tax, and what it will leave untouched.
And it's not just Ireland. The amount of profit a country taxes - commonly known as the tax base - has been shrinking for multinationals in many European countries over the past decade or so, experts say, a fact easily lost in talk about headline rates. Countries have found that reducing the base - agreeing to not tax some profits that a company makes - helps attract firms and, they hope, jobs. But as recent protests against corporate tax avoidance in Britain highlight, voters are beginning to question that tactic. If taxpayers see governments helping companies to avoid taxes, it could hurt their ability to tax everyone else.
That is a point made by the Organisation for Economic Cooperation and Development, a Paris-based club of rich economies, which last week called for an overhaul of the entire international corporate tax system.
Most national tax rules pre-date the widespread rise of multinationals, it said, and desperately need to be updated. Perhaps the most pressing concern is the tax base.
"The problem of the tax base is clearly more important than the tax rate," says Sven Giegold, a German Member of the European Parliament (MEP) for the Green Party and a member of the EU parliament's Committee on Economic and Monetary Affairs. "And that's, interestingly, exactly the opposite of the public debate."
The situation is particularly severe in Europe, a single market of more than 500 million people. Tax competition is a global phenomenon but European countries are especially vulnerable, because EU rules bar members from hindering capital flows.
Multinationals which set themselves up in smaller countries such as Ireland, Luxembourg or the Netherlands can pay low taxes, not just on profit earned in those places, but also on that earned in much bigger markets such as the UK or Germany. And sometimes, they may not have to pay any tax at all on profits earned in those bigger markets. Their host countries allow them to send it offshore to tax havens.
"This is a huge problem in the EU because you have a common market but you have 27 different corporate tax systems," said Kimberly Clausing, a Professor of Economics at Oregon's Reed College who specialises in corporate tax avoidance.
If you look at headline tax rates alone, you might think tax competition in Europe had ended. Between 1980 and 2007, average EU corporate income tax rates fell from more than 45 percent to almost 25 percent, according to data from the OECD and the EU. Since then, though, they have shed just one percentage point.
But the more stable headline rates say nothing about how countries define a company's tax base. Take, for example, the Netherlands, which has a history of tax leniency dating back 120 years. Today, its headline corporation tax rate of 25 percent is actually above the EU average. But by being selective about how it defines taxable profit, it offers many firms a much lower effective tax rate, tax advisers and executives say.
The country allows foreign companies to reduce their taxable profit by making payments to affiliates for loans, the use of brands and other services, said Kees van Raad, Professor of International Tax Law at the University of Leiden. And while many other countries charge withholding taxes on such payments, the Dutch usually do not.
Tax deals are often agreed in advance with companies that are considering basing themselves in the Netherlands, so they know where they stand.
That was the experience of coffee chain Starbucks, which established its European headquarters in Amsterdam in 2002. The company received a ruling which gave it a "very low" tax rate, Troy Alstead, the company's Chief Financial Officer, told a UK parliamentary committee in November, although the firm declined to provide further details. In 2011, Starbucks' European headquarters declared a pre-tax profit of just 500,000 euros on sales of 73 million euros. Starbucks says it follows the tax rules of all the countries where it operates. The Dutch tax authority declined to comment.
Some tech firms shift much bigger amounts. Amazon.com Inc's main operating unit, based in Luxembourg, faced a headline tax rate of 30 percent. But for 2011 it managed to report a taxable profit of just 29 million euros on 9.1 billion euros of sales at its Luxembourg-based EU headquarters by paying hundreds of millions to a tax-exempt affiliate, which is also based in Luxembourg. (C ) Reuters