TAX BREAKS AND incentives that support one section of society or one economic sector over another are political choices – and as with any choice, there will always be winners and losers.
A report from economic think-tank TASC, commissioned by Christian Aid, concluded that in Ireland the big winners have been those who earn enough to reap the full benefit of the relief in question. The winners are those who have sufficient funds or access to funds to invest in a tax-incentivised scheme. And the winners are those who can afford to pay for professional advice on how to exploit our tax breaks and rates.
The losers are the rest of society – those without the means to to avail of tax breaks. The losers are those who are paying more in other taxes such as VAT, to make up the shortfall in revenue foregone through tax breaks. And the losers are those bearing the brunt of public spending cuts to pay for tax breaks – children, the elderly, the sick and vulnerable.
But what the report also identifies is that Ireland may be an important conduit country in the mass tax avoidance schemes of multinational companies, resulting in billions being lost to the poorest countries of the world.
Multinationals may be shifting profits earned in countries of the global south through a network of subsidiaries to low-tax-rate countries that may well include Ireland. Without getting a fuller breakdown of the activities of multinational companies in each of the countries in which they operate – something they are not currently obliged to do – it is impossible to say with certainty that this is not the case.
The OECD acknowledges that every year countries of the global south are losing more money to corporate tax dodging than they receive in aid. Christian Aid put that figure as high as $160billion each year.
Ironically, the characteristics that have crippled the Irish economy – light touch regulation, a lack of financial transparency and tax arrangements that are skewed in favour of the wealthy – are the same ones that are allowing some companies to shift billions out of developing countries to the benefit only of stock holders and the accountancy and law firms that advise them.
So just how do they do it? For many decades multinational subsidiaries have been able to sell goods and services to others parts of the parent company based in a different country using a system called transfer pricing. This covers everything from nuclear reactors to cornflakes to management services or insurance. When a company based in a developing country sells goods at deflated prices to a related company elsewhere in the world, or buys goods at inflated prices, money is shifted out of the country. The company can then declare lower profits and pay less tax in that country. With 60 per cent of the world’s trade now taking place within, rather than between, multinationals, there is ample opportunity for this type of abusive transfer pricing to go on.
The tax take lost to countries of the global south means even fewer schools, fewer hospitals, weaker government, less money to supplement basic foodstuffs in times of food crisis like we are seeing today – and continued dependence on aid from countries like Ireland.
To address this injustice, Christian Aid has been advocating for the introduction of much greater levels of company disclosure, and exchange of information between countries. We have argued that multinational corporations should be obliged to provide a full breakdown of their activities, including profits made and taxes paid, in each of the countries in which they operate. Such information would be invaluable to countries in identifying where possible cases of profit shifting have occurred.
We have also been calling for the introduction of automatic information exchange between all jurisdictions, in particular those countries currently seen as tax havens. Finally, the administrative capacity and expertise of developing countries needs to be strengthened so that they can effectively process the additional information that automatic information exchange and country by country reporting would produce.
Ireland, as a member state of the EU and the OECD, has a role to play in ensuring that these efforts to promote greater transparency and exchange of information are supported. As a country that has been subject to much international criticism for maintaining a low corporation tax rate, there is perhaps an obligation on us to take a much more proactive role in advocating for the highest levels of corporate disclosure.
Sorley McCaughey is a policy and advocacy officer at Christian Aid. For more information, visit the Christian Aid website.
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