Changes to Transfer Pricing arrangement

There is an expectation that changes to the (lucrative from the Exchequer’s point of view) current Transfer Pricing arrangement will be announced in the Finance Bill.

Considering somewhere in the region of 20% and 30% of Irish GDP during the pre-crash years may have been accounted for by TP activities*, it will be interesting to see how far the government will bow to US and EU pressure to ‘regularise’ the arrangements here.

irishtimes.com/newspaper/fin … 33200.html

Blue Horseshoe

*The figure is based on the revenue of a sample of ‘shell’ business used for the purpose and registered at the offices of one Dublin law firm.

Is it really 20-30% of GDP during the tiger years? That would amount to somewhere in the region of 36-54bn per annum. Presumably very little by way of expenses are set off against this income, so most of that would have been profit, which was paying corporation tax at 12.5%. So in the region of 4-6bn in tax revenue is at stake.

In addition, “exports” have been growing in the last year, which is probably attributable to increased transfer pricing operations moving here from the UK (I think there’s a thread on these companies). So closing this has a very good chance of reducing our GDP, increasing the budget deficit and blowing the deficit/GDP ratio out the roof. Deficit ~30bn GDP ~120bn = 25%. Significantly higher than europe allows.

On the other hand, given FF’s deluded thinking on everything else, they probably believe that closing this loophole will make all those manufacturing jobs in Poland move to Ireland. 8DD

Johnny

Just by way of an indication; one such company alone, Round Island One, had sales of €11bn in 2004.

Blue Horseshoe

finfacts.ie/irelandbusinessn … 5150.shtml

The point I’m trying to get at is that if there is between 36 and 54 bn in transfer pricing activites each year, shouldn’t our corporation tax take be a lot higher?

It seems to me that a brass plate company which has sales of 11bn will have low purchases (the raison d’etre of TP companies) and nominal expenses (what’s 1 million operating costs when turnover is 11bn). So most of the 11bn would be booked profit. Otherwise it makes no sense. So would it be reasonable to assume that with sales of 11bn they have maybe 9-10bn in profit?

If so, and we take the same margin on the above quoted figures, this would mean that of the 36-54bn, 29-43bn is pure profit. At 12.5% corporation tax, this would mean 3.6-5.3bn paid in corporation tax each year from these operations alone. Our corporation tax take at the moment is in the region of 3.2-3.8bn down from highs of c. 6.8bn in 2006/07.

So if we are to assume that TP is an area which is growing, it would suggest that the total corporation tax paid by non-TP companies is negative i.e. Irish companies were refunded more corporation tax than they paid.

Thus, my assumption that they book a large percentage of the profits is incorrect, the figure of 20-30% in the boom times is not correct, non-TP only companies are making overall losses, or else TP activities have declined since 2006.

Just something that I can’t quite square off between the figures.

Simply because, as you already mentioned, tax is paid on the profit. So, with no one really examining the costs in the TP exercise (for fear of spooking the goose laying the golden egg) and an Exchequer just so happy to get the free cash, no one asks ackward questions.

Besides, the sales figures boosted GDP and helped fuel the Celtic Tiger myth.

With TP accounting for 20-30% of GDP and a construction bubble of similar magnitude, just how productive and competitive were we in the decade(excluding the clever accountants and solicitors)?

Blue Horseshoe

You’re missing a step - practically 100% of MNCs with trading operations in Ireland set up an Irish incorporated non-resident parent company at the same time in a tax haven (Cayman, Bermuda, Jersey etc.) and pay a “cost of sales” fee or royalty to the parent in exchange for the territotial distribution rights which reduces the profit taxable at 12.5% in Ireland and increases the profit taxable at 0% in the haven. Obama’s US tax reform proposals may change all this however.

The TP law being introduced now is an attempt to restore Ireland’s reputation and make it easier to negotiate new tax treaties with certain countries.

Or just transferred the patents to a holding company to ireland and licensed them to themselves at a ‘reasonable rate’ - since patent income is taxed at 0% in ireland as well.

Partly, and partly to unruffle some feathers on the path to an EU bailout - for every euro which ireland collected in ‘transfer priced CT’, other european countries lost ~3.

The game is up on the transfer pricing scam, and even FF knows it.

Patent income is taxed at 0% only on the first €5,000,000 after 1 January 2008.

Ah so they closed this loophole too - didn’t know that.

Bloomberg explain the “Double Irish” (Long article)

bloomberg.com/apps/news?pid= … td7E8_4EeI

The other thing I don’t quite get is that if a bermuda operation is used to get the 0% corporation tax, why go through Ireland at all?

Is it possible that the companies are set up in Ireland not because of the low corporation tax rate but instead because of the lax regulation i.e. it looks for all the world like they pay their taxes in Ireland, but they really just send it to Ireland, ship it off to bermuda then bring it back to make it look like it went through Ireland all along? The Irish subsidiary tells the US government that the tax was paid in Ireland and produces government paper to show that this is so, but really they have just acted as a middleman?