Tax avoidance is back on the political agenda with a vengeance, creating the sort of uncertainty and headlines that make large corporations with complex tax structures nervous.

In Britain last week, Margaret Hodge, chairwoman of the public accounts committee there, told Google’s northern Europe boss, Matt Britton, his company’s behaviour on tax was “devious, calculated and, in my view, unethical”.

This week, Apple made a lengthy statement to the US senate, explaining its global tax strategy. The core of the statement was that tax is a cost and that Apple needs to minimise costs to remain competitive. It also made the point it does not use tax havens to reduce taxes on US sales, but made no such argument in respect of non-US sales, which is where the use of its Irish companies comes into play.

For companies such as Google and Apple, the attraction of Ireland is less about our low corporate tax rate and more about the fact that companies can structure arrangements to pay significant royalty fees on valuable intellectual property. These fees are paid to a low-tax jurisdiction (or tax haven if you prefer) effectively reducing taxable profit in Ireland to negligible levels relative to the declared revenues. As the valuable intellectual property is not owned by an Irish tax-resident company, it follows that the significant profits should not be earned in Ireland. Provided the royalty payments to the tax haven jurisdictions are at arm’s length, the structure is tax-compliant.

Commentary on the US senate’s findings has highlighted that Apple “has negotiated a tax rate of less than 2 per cent” in Ireland, instead of the usual 12.5 per cent. It would be unusual for an Irish company to obtain agreement in advance from the Irish Revenue as to what level of payment would be acceptable as we operate a self-assessment regime. However, “deals” were sometimes done in the past and some companies may still be operating under such arrangements. The shifting of profits to the low-tax intellectual property jurisdiction is what the OECD has been looking at with its broad conclusion being that taxable profits should more closely follow the operations of a company (as opposed to its intangible assets). If housing intellectual property in a tax haven becomes less effective from a tax perspective, companies will rethink the structures they use to minimise tax. Where their substantial operations are located will also be part of that reassessment.

Devastating
Apple and Google, among others, have substantial real operations in Ireland and any change in their operational structure would have devastating consequences for Ireland. They contribute large amounts in tax revenues, particularly payroll taxes and VAT, while also supporting significant indigenous Irish jobs through the purchase of local goods and services.

Ireland, therefore, needs to be ready for a seismic shift in global tax policy and come up with a plan B. The obvious solution is to attract the intellectual property and related functions to Ireland. Ireland already allows companies write off the cost of intellectual property against their taxable profits, while also granting a generous R&D tax credit. However, we will need to up the ante if we are to compete successfully against countries such as the Netherlands, Luxembourg and even the UK, which already have intellectual property-friendly tax regimes well-placed to benefit from any transfer of intellectual property to jurisdictions with more substance and operational capacity.

We also need to respond quickly. Big corporations do not like uncertainty, and planning is undertaken at an early stage in terms of assessing alternative jurisdictions to locate intellectual property and related functions.

Ireland will always hold itself out as having a benign, low-tax jurisdiction. While we can do little to control the tax policies of other countries, we need to make sure there is no tax reason not to locate in Ireland.

Given Ms Hodge’s assault on “evil” Google, it is ironic that the UK has been active in increasing its attractiveness as an intellectual property holding location, recently introducing a 10 per cent tax rate on certain intellectual property related-income. British prime minister David Cameron has said he will make tax and transparency the key themes when he chairs next month’s G8 summit in Co Fermanagh. Momentum for change is building. The positive for Ireland is that the focus is likely to be on substance and many large multinationals already have significant operations here. We need to make the case to retain those operations as compelling as possible.

Non-tax factors such as access to markets and our pool of talented labour are important, but let's not kid ourselves that on their own these will protect us when companies make their long-term investment plans.
Peter Vale is a tax partner with Grant Thornton Ireland