Government to close tax avoidance loophole

THE GOVERNMENT intends to use the Finance Bill to close a loophole that allows multinationals to maximise the profits they make from the Republic’s low corporate tax rate.

Minister for Finance Brian Lenihan will publish the Bill today. It will include measures designed to regulate transfer pricing, a practice regularly used by multinationals to exploit the benefits of countries with low corporate taxes.

The Republic does not tax the practice, which means it is out of line with key trade partners in the US and Europe, who fear that multinationals could use operations here to siphon revenue away from those jurisdictions.

Any changes to the regime could spark fears about competitiveness, and tax advisers say some multinationals operating here are “spooked” by reports that the Government is moving to tighten the law.

Transfer pricing is where one branch of a company in a high-tax jurisdiction sells goods at a low or heavily discounted price to a branch in a low-tax location, which then sells them on the open market at a profit.

This means that the company can record the bulk of its profit in the lower-tax jurisdiction, thus reducing its overall tax bill.

Along with finished goods, it can apply to components, patents, services or anything else that forms part of a product that is then sold on.

Companies in key businesses such as pharmaceuticals and IT, which regularly trade ingredients and components between operations in different companies, can benefit from transfer pricing.

The Republic’s low corporate tax rate means it is seen as a net beneficiary of the practice, particularly given the fact that its biggest mobile investor, the US, charges 35 per cent on company profits against 12.5 per cent here.

The Department of Finance recently sought outside professional advice on the provisions, which sources say will be characterised by a “light touch”.

The department has also sought the advice of IDA Ireland, the State agency which sells the Republic as a location to multi-nationals.

The Government is planning to introduce a regime based on what a company would charge on the open market for the goods in question. The approach is known as the “arm’s length” principle and is already used in the US and the UK.

The key to controlling the practice lies with the country that loses out on such transactions, but it can only enforce its laws if the low-tax jurisdiction has similar controls in place. It is understood that this is what the Government intends to do.

Tax advisers say a regime which reflects those of our trading partners should be enough to satisfy them. “It is effectively about our image and ensuring that we are not seen as a tax haven,” one said yesterday.