Close political scrutiny of how multinational companies minimise their corporate tax bills has greatly increased in recent months, as governments struggle to expand tax revenues to contain their budget deficits. In France, Google’s tax status in Ireland has been challenged vigorously. The French authorities claim the internet company’s use of transfer pricing – routing profits from high tax to low tax countries - enables Google to benefit from the 12.5 per cent Irish corporate tax rate, depriving France’s exchequer of tax revenue.
In Britain, a parliamentary committee last week accused Google of “immoral” tax policies - engaging in legal tax avoidance rather than illegal tax evasion. Google, which has its European headquarters in Dublin and employs almost 2,000 people in Ireland, insists that it is fully compliant both with the tax laws of the countries in which it operates, and with European rules. Other multinationals – Amazon and Starbucks - that were called to account by House of Commons MPs, were also criticised for their questionable tax management practices in paying minimal taxes on their British earnings.
Germany’s finance minister, Wolfgang Schäuble and his British counterpart, George Osborne, have called for “concerted international co-operation” to make corporate taxation more effective. The European Commission is finalising draft proposals to try and achieve that. And next month, the EU’s tax commissioner, Algirdas Semeta, will make recommendations at a meeting of Europe’s finance ministers.
At the same time, the Organisation for Economic Co-operation and Development is reviewing its own guidelines on where multinationals book cross-border profits. How all this activity might affect Ireland’s financial interest, as yet, remains unclear.
But for the Government, such developments are a major concern. They add to its difficulties on EU proposals for a common consolidated corporate tax base. The Government, a reluctant participant in those discussions, has clearly indicated its involvement is solely on the basis that taxation remains a matter of national competence, and that member states fully respect the principle of unanimity in tax matters. Retention of the 12.5 per cent rate of corporate tax is seen as essential if Ireland is to maintain its international competitive position. Just how important is illustrated by recent OECD research, which ranked taxes by their impact on economic growth. The OECD found raising corporate tax was most harmful to economic growth.
Nevertheless, as the EU moves towards deeper political integration among its 27 members, this will involve greater harmonisation of economic and fiscal policies. And that process will present the Government with new challenges and difficult choices.