Professor Frank Barry:

I throw that quote in there to make the point that it is the foundation stone of why we are so attractive to foreign direct investment. The entire infrastructure that makes us very successful at drawing in foreign industry has been built on that foundation. Initially, export profits tax relief was conceived as an incentive to indigenous firms to export. I was interviewed on National Public Radio in the US about this when the Senate sub-committee released its report. I had been researching where the ideas came from so the following irony amused the Americans to a great extent. It was a Marshall aid-funded consultancy study commissioned by the IDA that drew Ireland's attention to the case of Puerto Rico, which had developed very rapidly post-World War II because, as a US protectorate, it had tariff-free access to the US market but had control over its own corporation tax because it was not a US state. The idea really stimulated the Irish bureaucracy into the notion that there is a valuable policy to be implemented here and that policy was eventually implemented in 1956.

To bring it up to today - this story is replete with ironies - members will see that the reason I use this quote will surface again and again in my presentation. Back in 2000, the EU complained that the use of Caribbean tax havens by US multinationals gave US firms a competitive advantage. That is important to bear in mind in view of the logjam that prevents the US from coming up with policies towards its own corporation tax that satisfy everybody. The use of Caribbean tax havens gives multinational firms an international advantage and it is primarily US firms that use the Caribbean tax havens.

I know that people from the OECD have appeared before the committee and have gone through the next couple of slides, but I want to present it from my perspective because it is an important part of the story. We know the US Senate sub-committee branded Ireland a tax haven. To me, that is Alice in wonderland language, where words mean what one wants them to mean. I prefer to go with the OECD definition, under which Ireland is definitely not a tax haven. Initially, to define a region or jurisdiction as a tax haven, the OECD had four criteria. One of these is that the region must have no or very low taxes, but the OECD warns that this criterion is not sufficient. This point is really missed in most public debate. Different kinds of economy have different appropriate tax rates. It makes sense for big, centrally located and long-industrialised economies to have higher corporation tax rates for the reasons members see on this slide.

Economies with large GDP rates, such as Germany, are attractive to particular kinds of foreign direct investment that want to locate in the markets to which they will sell. Ireland does not have that advantage. Centrality, which means closeness to purchasing power, is also attractive to particular foreign firms such as car manufacturing. We have no car manufacturing in Ireland because it is to expensive to ship cars out of Ireland. Belgium and the Netherlands are centrally located not only because they are rich themselves but also because they are close to the rich regions of Germany and France. Unlike the periphery, central regions have an advantage in being able to attract foreign direct investment easily and, therefore, it makes sense for them to tax those firms at a high rate. Ireland does not have those advantages.

The next slide outlines effective corporation tax rates. The World Bank produced a report some time last year which suggested that France had a low rate of 4% or 5%. Irish politicians banged on about this in every possible forum. It is rubbish. The World Bank produced that study over the space of a few months. It was like a back of the envelope calculation. The table in the slide is derived from one of the two leading academic economists working on corporation tax issues, Mike Devereaux from Oxford University. He spent his life studying this subject so this table is much more sensible. Ireland has a rate of 11.1%, which is pretty close to the 12.5% rate. It is reduced by certain allowances for research and development. France is located near the bottom of the table with a rate of close to 30%. The US and Japan have rates that are above 30%. The logic of country ranking in the table replicates the preceding slide. The five countries with lower corporation tax rates are small and tend to be peripheral and recent industrialisers.

The second OECD criterion is lack of transparency. It is suggested this is the reason Brussels has announced that it will investigate the practices of Revenue. There is a notion that special deals might be made available to special multinationals. Revenue absolutely denied that notion but a misconception exists in this regard. The second big academic name in this area is a US economist, Jim Hines, who includes Ireland in his list of tax havens. His list was replicated in a statement from the Obama Administration in 2009. It appeared overnight and then Ireland and the Netherlands disappeared from it the following day after our Department of Finance and, presumably, the Dutch got in touch to argue it was wrong. The White House replicated Jim Hines's list of tax havens. I know Jim Hines and when I asked him why he included Ireland on his list he explained that Ireland gives tax holidays. I told him that was news to me and, as he discussed the matter further, it turned out he had misinterpreted what are called grandfathering clauses. In the late 1970s we transitioned from a zero rate on manufactured exports to a rate of 10% at the behest of the European Commission. Firms which had invested under the previous regime were given a grandfathering clause to allow them to transition to the new regime. Jim Hynes misinterpreted that as a tax holiday. I suspect that the Apple testimony to the US Senate sub-committee may have been similarly misinterpreted in its suggestion that it was promised a special rate. The IDA has a different interpretation and I think it is a plausible explanation for why Apple indicated it had a special deal. It came to Ireland in 1979 or 1980, which is the period in which the grandfathering clause was put in place as we transitioned from one tax regime to another.

Ireland's low corporation tax regime has been in place for approximately 60 years. It has changed on only three occasions over that period. We moved from export profits tax relief to the 10% rate on manufacturing in the late 1970s and the 12.5% rate in the late 1990s. That incredible history of stability is also important in attracting multinationals.

There is a tendency for tax haven blacklists to become self-referential. The White House copied the Jim Hines tax list and Venezuelan officials copied the Mexican blacklist word for word, thereby ending up blacklisting themselves because Mexico had blacklisted Venezuela. That is the problem with a list that permeates through the system and is replicated everywhere.

The third OECD criterion for a country to be deemed a tax haven is the existence of secrecy laws. Even one of the international NGOs involved in the tax justice campaign, which criticises Ireland's regime, ranked Ireland favourably in terms of secrecy. If the first column in the secrecy ranking includes the traditional tax havens, such as Bermuda, the Dutch Antilles and Bahama, Ireland is at the bottom of the third column, as one of the least secretive jurisdictions. It is less secretive than the UK or the US. We do not meet that criterion, therefore.

The fourth criterion that the OECD initially proposed for a jurisdiction to be defined as a tax haven is that companies have no substantial activities there. That proposal was vetoed by the Americans. We know from rulings of the European Court of Justice that "no substantial activities" is a meaningful legal term. The Americans insisted that the term be removed, however, because it is in the interest of a particular part of the US establishment to allow its firms to use Caribbean tax havens. Ireland is caught up in this.

The US has been paralysed on corporation tax since the Kennedy Administration. The Democrats and Republicans have differing conceptions of what a fair corporation tax regime would entail. The Democrats want to raise as much tax revenue as they can. Typically the Republicans tend to be concerned about the international competitiveness of their multinationals. There is a paralysis within the US tax system because cross-party support is needed to introduce major change. It has been paralysed for more than 50 years. The compromise reached in 1962 under Kennedy was that US multinationals making profits overseas are ultimately liable to US taxes but only when those profits are repatriated. As long as they are kept offshore they avoid US taxes. It is like giving them an interest free loan for their residual tax liabilities. However, US taxes could not be deferred on royalties and patent payments. That is where the action is happening in the US Senate sub-committee. The intellectual property is located in the Caribbean and all the global revenue coming from US multinationals pass through the Caribbean in payment for that intellectual property. Previously that revenue was taxed by the US and there would be no point in holding it offshore because it would not be subject to deferred tax treatment.

The 1962 compromise was changed in 1997, which is when the story becomes more complicated. I have tried to simplify the story for public presentation to the extent that I am able. It is genuinely the most complex subject I have ever studied in my 30 years as an academic. It is spectacularly complicated, which is why the lawyers who are paid to exploit loopholes are the best paid lawyers in the world. In 1997 the US tax authorities introduced new regulations called check the box, thereby paving the way for creative tax accounting by multinationals. I will explain briefly how this works. It is fascinating to me because of its complexity and I hope members will appreciate some of the fascination. A US parent company may have subsidiaries all over the world. Check the box allows certain of those subsidiaries to be treated as a single entity for US tax purposes. I will set out an example that I will return to in the context of the Irish regime and how we fit into the geography of tax planning. A US corporation may set up a holding company in Ireland.

That holding company owns the corporation's operating company in Ireland, where the real work is done, for example in factories. Under the check-the-box regulations any moneys paid to the holding company, for example for intellectual property, are treated as though earned by the holding company, so Subpart F is pushed aside. It becomes more complicated. It means two companies are established in Ireland which are subsidiaries of the same parent company. One company makes a payment, for example a royalty, to the other company. Formerly that would have been taxed by the US immediately, even before it had been repatriated. Under check-the-box the two companies can be regarded as a single entity and the royalties earned by the operating company in Ireland, the factory that does the real work, are treated the same as the patent payments and benefit from deferred US tax liability.

The Internal Revenue Service, IRS, introduced this by mistake, but this was the key element that the multinationals' lawyers started to exploit. The IRS very rapidly realised the multinationals were exploiting it. The state tried to row back but huge corporate lobbying pressures came to bear and, instead, it was written into law. In law check-the-box was called the "look-through" rule.

The slide I am showing is a screen shot of a memo written by US Senator Carl Levin, chairman of the Senate sub-committee that is calling Ireland a tax haven. In this memo he says check-the-box regulations issued by the treasury department, and the look-through rule enacted by Congress, have reduced the effectiveness of the anti-deferral rules and have "further facilitated the increase in off-shore profit shifting". In this memo the look-through rule is referred to as a temporary measure, but it has been put through again and again and is now permanent. Among the legislators who voted for the look through rule were the two committee chairmen who call Ireland a tax haven. This is American politicians grandstanding. Is it not shocking? That is an interesting part of the story.

This is where Ireland comes into it. The multinationals' lawyers figured out they could establish corporate structures that minimise their global tax liabilities. These are called hybrid entities. This is where they exploit differences between US and Irish law. To return to my previous example, an American parent company establishes two subsidiary companies in Ireland, a holding company and an operating company, one owning the other. The two companies are treated as one by the US tax authorities. The holding company and the operating company are both incorporated in Ireland, and as US law says the country where companies are incorporated determines their nationality, these are regarded by US law as Irish companies and can be joined together in check-the-box tax returns to the US.

Irish law has a completely different history of tax law and company law. Our tax and company law derives from British law. It has been modified on some occasions but has an entirely different logic. Under Irish law, the two companies in my example are subsidiaries of the American multinational. As Irish law says the nationality of these companies is where their ownership and control lies, under Irish law they are American companies. Both companies are incorporated in Ireland but where are they tax resident? This is the key. This is how Apple has apparently developed schemes to be tax-resident nowhere in the world, as the US Senate sub-committee found. Irish law sees the operating company as tax resident in Ireland because it has factories and real, substantive activities here. The holding company, which holds the intellectual property, does not have substantive operations in Ireland, so is not tax resident in Ireland. This is where US and multinational companies everywhere exploit differences in the company and tax laws of different jurisdictions. It is called cross-border tax arbitrage.

Most countries might like to cut down on this but it is up to the large countries. If the Americans wanted to cut down on this they could do it overnight. If the British wanted to do it they could close down the Caribbean tax havens because, other than the Dutch Antilles, they are all British overseas territories. They do not want to do it, so they are saying Ireland is to blame and so on. It is grandstanding, to my mind. The Irish law originates from a particular 1929 case in Britain, and operates by precedent.

This is my last slide. To remind members of the logic of what I am saying, the IRS changed its procedures in 1997 and made it easier for multinational companies to exploit tax loopholes around the world and make it easier for them to keep their profits off shore in Caribbean tax havens because they would not be subject to immediate US tax as they had been up to 1997. If Ireland had changed our laws after 1997 to facilitate this I would regard that as quite fishy. That is the key. I did not know if we had, so I went looking. Being an academic is like being a detective; one tries to piece things together.

I found that we had not changed our laws to facilitate this. Our Finance Act 1999 tightened our laws to prevent the exploitation of Ireland by Irish-incorporated entities. The Act stated that only Irish-incorporated companies whose parent companies are from countries with which we have a tax treaty could be deemed to be non-resident. That means primarily the EU and the US, although we have extensive tax treaties with developed countries in general. The Act also said such companies could use the non-resident status only if they had a related company in Ireland that had substantive activities here. Companies such as Apple, Google, Intel and all the big firms that we know of have substantive activities here, so they can use related companies that can be deemed to be non-resident. However a Russian computer company which has no substantive activities in Ireland cannot incorporate a company in Ireland and be deemed non-resident. We tightened our rules to ensure the only companies that could be incorporated in Ireland but deemed to be non-resident had real activities in Ireland. The IDA is very proud of this because it says the whole point of our corporation tax law is to attract real, substantive activities into Ireland.

My key theme is that Irish corporation tax law extends way back in history. Our company law is derived from British origins, so in that sense it has a different history from American tax law. Multinational companies exploit the gaps between the laws of one jurisdiction and another. The only real way to treat it is through the OECD approach, which is trying to get multilateral agreement to get tax laws changed everywhere to prevent this kind of "base erosion".

As I said, if the Americans wanted to prevent their companies exploiting this, they could do it overnight, but, politically, they cannot because they would need cross-party support. The British could close down the British tax havens but they do not. Why they do not, by the way, is because the British tax havens funnel huge amounts of funds into the City of London, which has substantial influence on the British legislature.

That is my understanding of it. I have tried to present it objectively because my purpose in this is just to try to understand what is going on.