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Abstract
The use of tax havens is a pervasive part of modern economic activity. Treasury management subsidiaries who are key conduits in the global intra-firm movement of funds are often located in tax havens or in countries with tax haven type features. This paper shows how two recent European Court of Justice cases dealing with treasury management firms located in Ireland, have helped secure the legal and tax benefits of such operations. The paper examines financial flows and other financial characteristics of 46 treasury management firms based in Ireland for the period 1998–05. While financial flows are large, they are highly variable from period to period. These firms are highly profitable, but median employment is zero. The paper concludes that while recent court cases have supported the existence of both low tax regimes and treasury management type operations within the EU, their continued existence is opposed by many EU and non EU countries as being at variance with legislation to counteract tax avoidance.
Acknowledgements
The author would especially like to thank the editor, and two referees for their valuable comments. The author would also like to thank Paul Byrne, Anthony Cullen and especially the late Peter Coyne, all of ICC (Ireland), for generously granting access to the ICC data base of Irish registered companies. An earlier version of this paper was presented at a workshop on Tax, Poverty and Finance for Development, held at the University of Essex 6 and 7th July 2006. The author is very grateful for several helpful comments received at this workshop.
Notes
1 CitationPalan (2002) argues that the existence of tax havens is unavoidable as they are a direct outcome of the principle of national sovereignty and mobile capital (financial assets and intellectual capital – patents, trademarks). They provide the essential requirement for international tax planning, that is the choice of location of all or part of a corporations activities (Palan, p. 172).
2 Source: US Bureau of Economic Analysis, Selected financial data on non-bank US parents for 2005, and USDIAp, Table III.k.1. Taxes paid for the Netherlands Antilles were not published but are likely to be minimal. Data available at http://www.bea.gov/.
3 New York Times editorial 25 July, 2007. In particular drug companies repatriated $100 billion. Rather than creating jobs in the US, many of these companies shed jobs. Source: Alex Berenson, New York Times, 24 July, 2007. Other data shows that foreign net corporate dividends by industry, paid to US residents rose from $121 billion in 2004 to $348 billion in 2005 and then fell to $167 billion in 2006. The share of foreign retained corporate earnings by industry, owned by US residents fell from $195 billion in 2004 to $10 billion in 2005, and then increased to $252 billion in 2006. Source: National Income and Product Accounts, Tables 6.20D and 6.21D. Available at http://www.bea.gov/national/.
4 See L. Kovacs, taxation Commissioner, “Tax Harmonisation versus tax competition in Europe”, speech by given 10 Oct 2005, available at http://europa.eu/rapid/press.
5 One reason for this is exemption from- profits tax on income from royalties and patents held in Ireland. Because of this exemption several firms in ‘hi-tech’ sectors located in Ireland report low or zero corporate tax. For example, Symantic International Limited reported zero tax on profits of $252 m. for the year ending April 2004; Scandisk Ireland reported zero tax on profits of $106 million for the year ending January 2006, and Forest Laboratories reported paying tax of $15.5 million on profits before tax of $669 million for the year ending March 2007. Round Island One (Microsoft operations in Ireland) reported pre tax profits of $3.848 billion and tax of $324 million or approximately 8% of pre-tax profits, for the year ending June 2004.
6 See Financial Times, 21 September, 2007 for the UK. Several commentators have emphasised the value to Ireland of a ‘light touch regulation’ in relation to financial services, for example Commissioner McCreevy in a speech to the European Affairs Institute, Dublin, 30 June, 2006. A report to the IDA recommended amongst other things a “speedy legislative developments in response to industry demand” (CitationDeloitte, 2004, p. 58) and identified a current source of competitive advantage for the location of insurance companies in Ireland as a reputation for being the Bermuda of Europe” (CitationDeloitte, 2004, p. 65).
7 Source: http://www.idaireland.com. Another web site sponsored by the Industrial Development Authority in Ireland states: “Corporate treasury is one of the most active sectors in the Irish financial services industry”. See http://www.ifsconline.ie/welcome.html.
8 See for example CitationBartlett, Ghoshal, and Beamish (2007, 5th ed.), CitationBall and McCulloch (1996, 6th ed.).
9 The data base used consists of all Irish registered legal entities (see http://www.cro.ie/en/downloads-corporate.aspx). The data base was searched with software developed by Inter Company Comparisons (ICC http://www.iccinformation.ie/). The data base is updated on a daily basis.
10 Of the 46 firms included, 43 made some reference in their accounts to the provision of intra group financing, in most cases using the term ‘treasury management’ services. One of the three remaining firms described themselves as being a vessel broker, one firm the “provision of financial services to or for persons not ordinarily resident within the state”, and one firm had no statement All three were included as they had most or all of the characteristics of treasury management firms. CitationStewart (2005) used data for 43 treasury management firms. This paper omits three from the original list, on the basis that treasury management activities were a small part of their overall activities and includes six additional treasury management firms that were identified from newspaper reports and from IDA Ireland web pages (http://www.idaireland.com).
11 Parmalat is suing the Bank of America and others for fraud for Euro several billion. In contrast Bank of America which is seeking to appoint a liquidator is owed just €2.76 million. The assets of Eurofood largely consist of amounts owed by fellow subsidiaries of Parmalat and likely investments in Parmalat subsidiaries and are unlikely to be recoverable.
12 The initial opinion by the Advocate General in this case was welcomed in Ireland by amongst others KPMG and PWC who stated that it would lead to more UK firms establishing group financing operations in Ireland (Irish Times 2/5/06). KPMG UK, argued that “companies will be able to enjoy far more freedom in establishing commercial operations in low tax jurisdictions” (Tax 02 2.5/06 available at http://www.kpmg.co.uk). A more neutral view was expressed by the head of the Institute of Taxation in Ireland (Irish Times 15/5/06) who considers that the opinion would result in uncertainty as to whether subsidiaries could avail of a lower tax rate and potentially considerable administrative cost in defending a claim to exemption from CFC rules.
13 See the reply of the Minister for Finance, to a parliamentary question 14 October, 2004, Dail debates vol. 590, 14 October, 2004. US subsidiaries, particularly those in hi tech sectors who declare large profits in Ireland such as: Apple, Boston Scientific, Google, Microsoft, Scandisk, and Yahoo, are also in favour of this policy (See also Irish Times, 24/2/07). Even though corporate tax rates are low because of high profits declared in Ireland, corporate tax revenues and in particular revenues from IFSC based companies are an important source of tax revenue. For the year 2003 Ireland had the second highest proportion of corporate tax revenue as a % total tax within the EU at 12.9%. Luxembourg had the highest at 19.1% (Source: OECD Revenue Statistics 1965–2004, OECD 2005, Table 13). For the years 2004 and 2005 the ratio of corporation tax to total tax in Ireland was 12.5% and 11%, respectively and IFSC companies accounted for 11.6% of total corporate tax payments in 2004 (Source: Frank Daly speech to KPMG conference, Dublin, 4 November 2005) and 14.9% in 2005 (Source: Building on Success, CitationDepartment of Taoiseach, 2006, 8 and Revenue Commissioners Annual report, 2005). More recent data indicates that IFSC companies may account for an even higher proportion of corporate tax revenues for 2004 (13.8%) and 2005 (16.2%). Although this increase in the share accounted for by IFSC companies may be partly accounted for by a wider definition of IFSC companies to include companies located outside the original IFSC (Dublin Docklands) area. In addition since 2005 most tax paid by IFSC companies is paid at the standard rate (12.5%) meaning that it will not be possible to separately identify for the same firm, tax paid on IFSC activities from non-IFSC activities (Finance, Dublin, February 2007).
14 The opinion relates to Eurofood a subsidiary of Parmalat (Case C 341/04) delivered on 27th September 2005 and the final ruling on 2 May 2006 No 36/2006: Judgment of the Court of Justice in Case C-341/04 Eurofood IFSC.
15 One exception is Delpha Bank which moved its place of incorporation from Wiesbaden, Germany to the IFSC Dublin in 2001/2, – in response to lower tax rates, as well as what is described as a more ‘efficient’ corporate governance regime. Source: Financial Times, June 6, 2002, 33. Depfa Bank shares were amongst the top 30 traded on the Frankfurt Stock Exchange (Source: http://www.depfa.com). Another example is the demerger of GUS (a UK stock market quoted company) involved a complex structure for one of the resulting entities, which will have its headquarters in Dublin, but its holding company in Jersey which will be tax resident in the Republic of Ireland; Source: GUS Plc, 2006, 13. The motivation for this structure appears to be the more favorable taxation of dividend income to shareholders (CitationGUS, 2006, 384). The CBI in the UK has also argued that many UK based companies could move their headquarters abroad in order to benefit from lower tax rates (Source: Financial Times, October 10, 2006, 4). There are also examples from the US of companies moving their place of incorporation to a tax haven, for example Tyco and Accenture which moved their headquarters from the US to Bermuda (CitationGeneral Accounting Office, 2002). Schefenacker a German firm undergoing restructuring is also reported as considering moving to the UK because of the greater ease of reaching creditor agreements (Financial Times, 10 October, 2006). Other German companies are reported to be considering incorporating in the UK to avoid employees becoming board members. Although many German based companies have incorporated in the UK, not because of lower tax rates, but because of lower cost and relative ease of incorporation. In recent years over 30,000 small German based firms have incorporated in the UK (Source: Financial Times, 24 May, 2006). However it is also likely that many of these firms may have difficulty in complying with the legal requirements to remain UK registered entities. In contrast there is no evidence that German firms have incorporated in Ireland in order to minimize incorporation costs.
16 Source: Irish Supreme Court, In the Matter of Eurofood IFSC [2004] IESC 45, 147/04, available at: www.courts.ie/judgments.
17 This minimal presence would also seem to be at variance with the OECD model convention on income and taxes which refers to the location of ‘effective management (art 4(3)) in cases of dispute as to where a firm is located (CitationOECD, 2003).
18 See European Court of Justice case C 341/04, 2nd May 2006, Par 35.
19 In some cases it is difficult to identify whether a separate institution such as a bank is acting as the company register or that the ‘books of account’ are located at an institution such as a firm of solicitors or a bank. For example, Hellerup Finance International is included in the study although described as a “vessel broker” it has no employees and states in the accounts that the secretary is Eric B Brown and the registered office is given as Custom House Plaza, IFSC, Dublin and the books of account are stated to be kept at 18/21 St Stephens Court, Dublin, 2. However the residential address of Mr. Brown is Houston Texas, and the registered office is in fact the location of a subsidiary of the company's bankers, Anglo-Irish Bank, IFSC, and the books of account are kept at another Anglo Irish Bank subsidiary.
20 As is common with other MNC group accounts, large intra-group fund movements by a treasury management subsidiary are not discussed or referred to in the consolidated accounts of the parent, Tyco International for any of the years 1999–2002.
21 In order to prevent such distortions the Netherlands excludes the value of gross capital flows by firms referred to Special Financial Institutions (CitationVan Dijk et al., 2006, p. 21). Special Financial Institutions are subsidiaries of multinational companies designed to channel flows into and out of the Netherlands without triggering any tax charge. Most of these companies have zero employees (CitationVan Dijk et al., 2006 p. 17 and 22).