European MEPs call for Ireland to stop free-riding

A new press release has emerged:

Fiscal rescue and EU tax policy: Cross-political MEPs call for minimum common corporate tax rate of 25% as necessary for EU solidarity

A cross-political alliance in the European Parliament has called for the introduction of a minimum European common corporate tax rate of 25%. MEPs from the Greens/EFA, ALDE, S&D and EPP groups (1) issued the declaration in the context of the ongoing Eurozone solvency crisis and the rescue measures being proposed for Ireland. Commenting on the declaration, Greens/EFA economic and finance spokesperson and co-signatory Sven Giegold said:

"Introducing a minimum common corporate tax rate in Europe is the only way to limit tax competition and the damaging effects this has had on the European economy and European solidarity. Today's declaration is a welcome development, which represents the first time that such a broad political alliance in the European Parliament has thrown its weight behind a clearly defined common corporate tax rate.

"Tax competition within the EU and the Eurozone enables cross-border businesses to avoid over €100 billion in tax payments, notably by repatriating profits to jurisdictions with lower corporate tax rates. This not only undermines the spirit of the common market, it is grossly unfair and diminishes revenues in other member states. It is particularly odious that financial institutions, which have unfairly profited from this tax competition and thereby avoided their responsibilities to their national exchequers, should now be bailed out by the same public coffers.

"Ireland will clearly need support in the painful reconstruction of its economy following the crisis. However, it is not acceptable that this support should be used to rebuild an economy based on tax dumping."

The release also contains a common declaration, at the bottom. Click here.

This is clearly influenced by the Irish situation, where Europeans have been trying to find ways to prevent Ireland free-riding on the citizens of Europe (and other jurisdictions) by poaching their tax revenues. Unfortunately, we note that in the Irish budget, the corporation tax rate of 12.5% has been preserved. As Reuters notes:

"The Government remains committed to the 12.5 percent corporation tax rate: it will not be increased under any circumstances."

The latest MEP resolution has no binding force, but it is important that it reflects the profound unfairness of the system. An editorial in the Belfast Telegraph, from neighbouring Northern Ireland, notes:

"other EU countries, as well as the UK, feel that it gives the Republic an unfair advantage as an economic investment destination. Nowhere is that advantage more keenly felt than here. Mr Robinson is not seeking to kick the Republic when it is down, but rather pointing out that it still retains a tax incentive which disadvantages the province."

Indeed.

But we should note something else. The media has been focused on the headline 12.5% rate. And, by and large, they have ignored the devious exemptions that Ireland has been offering. Remember the recent Bloomberg story about Google's 2.4% tax rate? That is a lot lower than Ireland's 12.5% tax rate. As Bloomberg notes, Google:

licensed the rights to its search and advertising technology and other intangible property for Europe, the Middle East and Africa to a unit called Google Ireland Holdings. . . That licensee in turn owns Google Ireland Limited . . . The Dublin subsidiary sells advertising globally and was credited by Google with 88 percent of its $12.5 billion in non-U.S. sales in 2009.

Allocating the revenue to Ireland helps Google avoid income taxes in the U.S., where most of its technology was developed. The arrangement also reduces the company’s liabilities in relatively high-tax European countries where many of its customers are located.

The profits don’t stay with the Dublin subsidiary, which reported pretax income of less than 1 percent of sales in 2008, according to Irish records. That’s largely because it paid $5.4 billion in royalties to Google Ireland Holdings, which has its “effective centre of management” in Bermuda, according to company filings.

(Read the story for further details, including a detour via the Netherlands.) This is not about the 12.5% rate. It is about Ireland skimming of a bit of cash from devious transfer pricing schemes to help big private companies get out of paying tax.

A last word from one of the world's top experts in international tax.

“The system is broken and I think it needs to be scrapped,” said [Reuven] Avi-Yonah, also a special counsel at law firm Steptoe & Johnson LLP in Washington D.C. “Companies are getting away with murder.”

It's just this kind of thing that the European parliamentarians are trying to stop.