 Ies dwi'n gyrwch oedd nesaf y troedd gennych ar gael ystod y bod yn si detect y dyfi a ydy'r ysgol. Mae'r ddiwyllion yn iawn wlad Gymru i'r gweithio iddyn nhw dweud ynghylch yn ei resyn yn ddillogio motheru a'r ddillogio. Felly yn y prinsyfyr i'r ddefnyddio ddillogio fod yn yw'n gofio cwmlad yw ddillogio hynny, I offer it to give the talk here today, and I'm grateful to the Institute for facilitating this. This is my iconic image of Irish industrialisation. It's from the mid-1950s. The origin of our low-cooperation tax regime, of course, was export-profits tax relief, which was introduced in 1956, which gave a very generous tax break to profits derived from increased manufacturing exports out of Ireland. There's a number of ironings that surface here, one that the Americans were amused by when I was interviewed recently on National Public Radio, that export-profits tax relief was originally envisaged here as a stimulus to indigenous exporters. But the IDA, which was formed in 1949, used some of its martial aid funding to hire a New York consultancy, bizarrely called IBEC, to do this work, and their report in 1952 drew Ireland's attention to the case of Puerto Rico, which had instituted something similar to export-profits tax relief. So that's when two and two came together in the Irish psyche. Another irony is that when we did introduce export-profits tax relief in 1956, it looks to me on paper, as though it was definitely in breach of an agreement that we had signed with the precursor of the OECD, a mere one year previously, which banned artificial aids to exporters. The OEC actually took quite a benign view of the new Irish policy because they saw it as Ireland moving from protectionism towards outward orientation, so they were actually quite laudatory in their response. This one is probably the most significant irony, is that back in 2000 the US introduced a new policy that the EU criticised because it said the use of tax havens in the Caribbean gave US firms a competitive advantage, and really this point is going to surface again and again that there's a paralysis in US tax policy between the Democrats who basically wanted to try and raise increased tax revenues and the Republicans who are concerned with the competitive advantage of US multinationals. I mentioned the OECD. When the OECD instituted its harmful tax competition programme back in 1998, there was initially four criteria by which a tax haven was defined. The first one is that a tax haven would have low or zero corporation tax, but the OECD recognised that that on its own is not a sufficient criterion for a jurisdiction to be deemed a tax haven because countries with different characteristics have optimally different rates of corporation tax. So a country like Ireland that is a small market, that's a peripheral country, that's a late industrialiser, for countries like that you optimally have a lower rate of corporation tax than jurisdictions like the UK, Germany, France. I mentioned France there because if any of you recall the World Bank report of a year or two ago that said France has a very low effective rate of corporation tax, that is just not true. That's a lazy piece of work by the World Bank. They did that over the course of a few months or so. Some academics have spent their lifetimes working out effective corporation tax rates. I have a note to myself there, skip that so I don't want to spend much time on it. France's effective corporation tax rate is very high. The second OECD criterion is a lack of transparency. Lack of transparency meaning that different multinationals can get different special tax deals. The name Jim Hines, he's the leading US academic on corporation tax, tax havens and so on. His name is going to surface again on the next slide so I want to introduce him to you here because he is the main US academic that identified or called Ireland a tax haven and I asked him why he did that and he said well you offer tax holidays to multinationals. That's news to me. On further discussion it turned out that he was misinterpreting what are called grandfathering clauses in Irish legislation with the notion of tax holidays. Grandfathering occurred twice in Irish corporation tax policy, one in the late 1970s when we moved from export profits tax relief to a 10% rate on manufacturing activities. Companies that had come in here before that move were offered grandfathering clauses. That change was eased in over a 10-year period. The other main change was in the late 1990s when we moved from 10% on manufacturing to 12.5% across the entire economy and again companies that were here already that transition was grandfathered into the use of these clauses. So when I heard Apple talking to the US Senate and saying we got a special tax deal that was my initial interpretation of what was going on. That the Apple executives who were speaking to the US Senate were not there in place of course in 1979 or 1980 when Apple came in. The IDA has a different interpretation which is very very interesting if I have time to mention it later on. So how did Ireland some of you might recall in 2009 the White House under Obama recently elected issued a press statement that referred to Ireland and the Netherlands as tax havens and that was taken down overnight because I certainly know our department of finance here and presumably in the Netherlands got in touch immediately. That comes directly from Jim Hines. So I'd mentioned already Jim Hines' misinterpretation of Irish law. Hines and Rice, the leading economic journal American Economic Review included Ireland as a tax haven. The US Government Accountability Office added this Jim Hines list to a list of their own and that Government Accountability Office report was then mentioned in the White House report. Now this happens an awful lot with black lists that they get self-referential sometimes leading to hilarious results like you see here. Venezuela copied the Mexican black list word for word and because Mexico had black listed Venezuela, Venezuela black listed itself. So that sort of thing goes on, goes on quite a lot. The third OECD criterion is secrecy laws. Again, this is interesting because I have another irony here that the leading Marxist journal Time magazine called the US itself, one of the world's tax havens because the US is very secretive. If you're an overseas person with deposits in the US you don't get charged tax in the US and they typically won't reveal your details to other jurisdictions. This is, the Tax Justice Network is an NGO that often has Ireland in its sights, it targets Ireland. This is a secrecy score, jurisdictions ranked by secrecy score. Ireland does very well in that coming out very close to the bottom in other words less secretive than the UK, than the US whereas the main secrecy ones, this is in three columns here so this is Ireland's down here. These are the main kind of tax havens, the Caymans, Bermuda and so on. They're very secretive, Ireland does very well on the secrecy score. And the final criterion that the OECD used to define tax havens was no substantial activities. Well, surprise, surprise, this one was vetoed by the US government. They said we're not adopting that criterion. They said that criterion can't really be measured even though the European Court of Justice in some of its rulings has used exactly that criterion. So the US does not want to blacklist Caribbean tax havens for the reasons that I've talked about earlier on. So the US has been paralysed on corporation tax since the Kennedy administration over 50 years ago. I'll return to this point now but I wanted to talk just very briefly on the morality of this issue and I'm going to use two quotes from Adam Smith. This is Adam Smith's most famous quote which talks about how capitalism works, the invisible hand. Translated into modern economics we say we teach all our students the function of a company what its objective function is to maximise after tax profits. Stay within the law, maximise after tax profits. That's what companies are supposed to do in economics, in Harvard Business School. I know this is what its students are told. Your sole function, your fiduciary duty to your shareholders, maximise after tax profits. So the multinational say what we're doing is entirely legal, end of story. The other interesting quote though from Adam Smith is this one, people of the same trade sell the meat together even for merriment and diversion but the conversation ends in a conspiracy against the public or in some contrivance to raise prices. In discussing the morality of aggressive tax planning a friend of mine said the fact that the multinational say everything we do is strictly illegal. He said that reminds me of the old joke, the boy who's found guilty of murdering both of his parents and then pleads for clemency on the grounds that he's an orphan. So I think that's kind of amusing. So who writes the laws? Well clearly the multinational put lots of money into corporate lobbying. The amazing thing about the US is you can get all this data, you can tell how much each company spends on corporate lobbying. The computer and internet sector now in 2012 spent 133 million corporate lobbying more than the defence sector. That's kind of an astounding statistic. So you make your own decisions on the morality of this. The companies are obeying the law but then you ask or radicals will ask who writes the law. So that's as much as I'm going to say on that matter. Let me return to then the history of US tax policy. Deferol is the main word that always crops up here. Before the Kennedy administration if a US corporation made money abroad it paid no US taxes on that as long as the money was kept offshore. That is a deferred payment of US taxes. If it brought the money back onshore to the US it was liable for US taxes. So that was the law in the US up till the Kennedy administration. Remember US companies only really started to go multinational after the Second World War. So you had eyes on her and power then the Democrats came in with Kennedy and Kennedy tried to change this. There is a particular principle of corporation tax that that view of the world adheres to. But the Kennedy administration and Democrats in general have a different view of corporation tax philosophy that's stated at the top slide here. They say overseas income of US corporations should be taxed exactly the same as income earned in the US. In other words there should be no deferral offered. And you'll recall that when President Obama when Obama was first running for the Democratic nomination he made some noises about getting rid of the deferral clause and some Irish journalists hyped this up as though it was going to be catastrophic for us not realizing that this debate has been going on for at least 50 years in the US. The House Republicans would not agree to any changes on deferral because they said this will disadvantage our multinational corporations in competing against competitors from lower tax jurisdictions abroad. So there was a compromise reached. The 1962 compromise, I don't know if subpart F means anything to most of you here but it's something that has been I was first introduced to the term by the IDA maybe about 10 years ago and since then it crops up in everything you read about US tax law. Subpart F says deferral remains in place if you're US multinational and you earn profits abroad you owe US tax liabilities on them but those tax liabilities are only triggered when the profits are repatriated to the US. That is not supposed to apply to passive income royalties and so on. So think intellectual property. It's really where all the action in these jurisdictional battles all the action in the corporation tax debate now is about royalties on intellectual property. So what has changed since the 1962 compromise? Only one thing but I'll return to that in a short while. I want to say, okay have I missed a slide there? The US has been gridlocked on deferral ever since so here's an Irish Times headline from 1975 when Justin Keating was our Minister for Industry and Commerce where he was worried that the US House of Reps was discussing changing the rules on deferral back that long ago and so if you read the Irish Times again when Obama was running for president you would have seen these people worrying oh he's talking about changing laws on deferral you can go back all the way to Kennedy administration and see that the US has been debating changing laws on deferral since then so there's nothing really new in that and you might recall or you might know that the OECD issued its long awaited report on changing international corporation tax laws just last Friday barely made headlines here even though everybody was worrying where the G7 going to do something in Fermanagh instead they kicked it to the OECD the OECD report is really a damp squib there's nothing going to happen because the US is not going to agree to any changes that are going to target the Caribbean tax havens so as I say this has been going on forever really I just want to have a couple of slides here on how the US tax credit system works so you're liable for US taxes on your overseas profits you only pay those taxes when they're repatriated to the US clearly though if you've paid taxes overseas on your overseas profits you get a US tax credit that's what all these double taxation agreements are about that means that for US corporations booking their profits in Ireland they owe more US taxes than if they booked their profits in Germany so the US tax authorities benefit from low tax jurisdictions around the world because US tax liabilities on profits in Ireland are higher than they would be on profits booked in Germany there's a lot of counterintuitive results that come out of this study that's one that a lot of people might not realise so it's better for the US, the IRS, the Internal Revenue Service in the US if US multinationals booked their profits in the Caribbean or in Ireland than if they booked their profits in Germany well so does Germany lose out again this is another counterintuitive result but if a US multinational books its profits here and repatriates them to the US it owes the difference between the 12.5% rate here and the maybe 35% rate in the US so it owes substantial tax liabilities to the US now but those tax liabilities to the US can be reduced if this same corporation has paid excessive taxes elsewhere say in Germany or Japan so it can reduce the tax liabilities associated with its Irish or its Caribbean operations what does that do? that actually reduces the disincentive that these corporations face in investing in high tax locations like Germany or Japan so multinationals, not just multinationals benefit high tax locations benefit by the existence of other low corporation tax jurisdictions so this is quite complicated but the main key line here is that it allows high tax countries to continue to be able to attract significant levels of foreign investment so that has led some corporation tax economists to think of high tax jurisdictions and low tax jurisdictions as complementing each other rather than as substituting for each other and one further point about deferral before I get on to the stuff about intellectual property which is really the last theme of my talk here that deferral, so you hold your profits offshore so that is like getting an interest free loan from the US government on your residual US tax liabilities so you only pay the US taxes when the profits are repatriated so if you keep them offshore that's like the US giving you as a company a tax free loan that reduces the cost of financing overseas investments by multinationals and a huge proportion of reinvested earnings around well in Europe I have the data for that these are used to finance further US investments in Europe so if the US were to change radically its laws on deferral you would definitely see less US investments overseas you would still see some because it makes good commercial sense but it would remove this subsidy really to overseas investments and you can be quite sure the US State Department views US investments overseas as a form of soft power or soft US policy so the State Department would not like to see the major change on deferral that Democrats sometimes talk about but that as I say they've been talking about for 50 years and is never going to happen because of because you really need bipartisan support in the US to change this stuff ok hybrid entities the hybrid entity basically is the kind of corporation tax structure sorry the multinational structure that we here talked about with respect to the double Irish so the double Irish is a tax loophole not a tax loophole in Irish law but a loophole that arises because no two jurisdictions laws with company law or tax law are the same we write our tax laws the US write their tax laws clearly we have different tax laws in place so any time you have two different jurisdictions writing their own tax laws there are going to be loopholes that arise in the gap between the two that's where these hybrid entities emerge so why have these hybrid entities and this is again the double Irish that's frequently talked about now and was talked about by the Senate subcommittee and so on that really only started when the IRS the US tax authority introduced new regulations in 1997 called check the box regulations I'll need to explain that a little bit now but that paved the way for the creative tax avoidance options that every US multinational since then has begun to explore from a legal article in the US this towards the application of subpart F so subpart F again said you can defer payment of US taxes but this doesn't work in the case of intellectual property because it's too easy to shift US intellectual property offshore so to prevent that tax avoidance subpart F said royalty payments on intellectual property can't be deferred the US tax is triggered when those royalty payments are erin check the box wipes out the meaning of subpart F now Senator Levin is the chairman of the Senate subcommittee that was in the news last month for calling Ireland a tax haven and so on this is a screen grab because I want to show this is exactly this is from a memo that he personally wrote well presumably one of his aides wrote it but he signed it check the box tax regulations issued by Treasury in 1997 have reduced the effectiveness of the anti deferral rules of subpart F have further facilitated the increase in offshore profit shifting which has gained significant momentum over the last 15 years so he is recognizing that was internal revenue service rules themselves that allowed these loopholes to be exploited by US multinationals he mentions beside check the box he says the look through rule these are really the same thing the internal revenue service once it realized the loopholes that had opened up by the check the box regulations he wrote back on them corporate lobbying prevented it instead it got written into law as the look through rule so amongst the two senators who voted in favour of the look through rule were Senator Levin and Senator McCain even though Levin himself there on the previous screen admitted that this opens the door for these creative tax avoidance procedures by US multinationals so the hypocrisy either makes you laugh or cry whichever so how this worked then check the box rules the IRS was inundated with tax statements every year so to cut down the work they introduced these rules that said say you have two foreign entities same country same firm but they are just different entities more the difference between them we will allow them to submit one tax return to us the IRS the American Tax Authorities so this is where the double Irish came in so for example the US corporation sets up a holding company in Ireland and this holding company owns the corporation's operating company in Ireland check the box says they only need to submit one tax return to the US they are regarded in the US as the same company now of course the holding company in Ireland owns the intellectual property so that should be subpart F income that should be the US tax liability should be triggered immediately on that but because they are allowed, regarded as the same company as the operating company in Ireland then subpart F is not triggered that money can be earned and kept offshore and treated as though earned by the holding company now this is the interesting bit the holding company and the operating company are both incorporated in Ireland so US tax law defines them as Irish Irish tax law is different as I say every country's tax law is different the US don't write our tax laws for us we have a different set of tax laws and company laws derived from our own history so Irish law is different the two companies we define as American because that's where ownership and control resides they're both subsidiaries of an American corporation by our law the operating company is tax resident here because it has substantive operations here the holding company has no substantive operations here and so it's not Irish, we don't regard it as Irish so that's what our tax law says so this is the gap between US tax laws and our tax laws so to US tax laws these two companies are incorporated in Ireland therefore their Irish rules are different the company doing substantive activities is tax resident in Ireland because that's what our tax rules insist on the company that has no real presence in Ireland the holding company is not there for tax resident in Ireland it doesn't have real operations in Ireland it can be tax resident elsewhere typically Bermuda or the Caribbean now I'm almost done now so I'm making reasonably good time I think so where do our tax laws come from now so the US tax laws say companies are incorporated in Ireland therefore they're Irish our tax laws derive from Britain's this is just a little bit of British history here virtual residency derives there was a long series of court cases up through the Victorian era and so on culminating in 1929 a case held that went I think to the Privy Council or whatever you call it in the UK that found that a company registered in London but without any UK activities was not subject to British taxation those sorts of precedents are recognised in Irish law so that laid down the rule for jurisdictions whose legal framework derived from the UK so our tax laws derived from the UK that's where our tax laws come from that's what the companies are exploiting the difference between non US tax law and US tax law so the big question then I suppose is did we actually change our tax laws to take advantage of check the box rules in the US and the answer we didn't relax our rules we actually strengthened them we hardened them or we firmed them up the Finance Act 1999 tightened our rules now it didn't go the American route we didn't say that simply because a company is incorporated in Ireland it's tax resident here but we went far enough in that direction we said that companies that are able to use this hybrid form they need to have a direct relationship with a company with substantive activities in Ireland otherwise we're not going to recognise them otherwise we're going to tax them in Ireland so we strengthened our rules but you can see that the companies and their corporate lawyers have their eyes out all the time for gaps between different tax rules that are instituted in different jurisdictions and they make use of this these hybrid companies these are not just an Irish phenomenon I was reading recently the tax treaty between the US and Canada that has clauses about hybrid companies and so on our tax treaties with the US are negotiated every so often if the US wanted to close this down they could do so we need our tax treaty with the US the US can close these things down overnight if they want to the fact that they don't close them down means that there are very powerful interests in the US who do not want them closed down those interests politically are reflected in the Republican Party economically they're the multinationals so the multinationals clearly don't want the tax rules changed okay my final slide then so I've talked about the double Irish there as it's called you know so you set up two companies in Ireland one both incorporated in Ireland one with substantive activities that's tax resident in Ireland the other one without substantive activities that is not there for tax resident in Ireland it's tax resident in the Caribbean that's where the hybridicity comes from so my final slide here then is that if you've heard about the double Irish you've probably also heard about the Dutch sandwich so I just want to explain to you and there's not just one Dutch sandwich there are thousands if not millions of Dutch sandwiches this is one anyway that was applied in Ireland so Ireland we don't have tax treaties with the Caribbean tax havens so typically if royalty payments on intellectual property located in the Caribbean were being paid out of Ireland withholding taxes would have been kept on those royalty payments that were going to the Caribbean the Netherlands has a much more liberal royalty withholding tax regime it doesn't impose withholding taxes on payments to the Caribbean so what the multinationals would do they would set up a Dutch company at the intersection between the Caribbean holding company and the Irish operating company so we have a tax treaty with the Netherlands so we don't impose withholding taxes on the royalty payments that go to the Dutch company Holland doesn't impose withholding taxes on those royalty payments when they then go to the Caribbean so it's a circuitous route to get the money from Ireland to the Caribbean bypassing it through the Netherlands in order to avoid tax this is what multinational companies do this is why their tax lawyers I guarantee you earn more than anybody in this room that's what it's all about so I'm done thank you