Transfer Pricing Report's Alex M. Parker explores Ireland's plans, announced Oct. 15, to change its tax laws regarding "stateless" income.
The Republic of Ireland got a bit of press this week after its Finance Minister announced plans to tweak its tax laws so that Irish corporations can no longer be "stateless."
The issue got notice because many corporations manipulate the differences in Irish and U.S. laws to become, effectively, tax residents of nowhere--their profits never land, and thus are never taxed. Computer manufacturer Apple Inc. was one of the pioneers of this strategy, although it is now used across many industries.
But despite the headlines, many practitioners doubt that the new Irish laws will be much more than a cosmetic change. In all likelihood, Ireland will continue to be a very desirable place for technology firms to do business.
Right now, the U.S. taxes all companies incorporated within its borders. Ireland, however, has a tradition, going back more than a century, of basing its taxation on where companies are headquartered. Multinational corporations have taken advantage of this discrepancy by creating subsidiaries that are incorporated in Ireland but managed in the United States. Neither country sees a taxable company within its borders, and voila--it's a stateless corporation.
The details of the plan have yet to be revealed, but many tax practitioners and experts speculated that the Irish government would propose a law that would consider any company incorporated in Ireland, but without a declared tax residency, to be an Irish corporation--and subject to Ireland's tax.
As always, the devil will be in the details. What test will Ireland apply to determine whether a company has a declared tax residency? There are countries with very low corporate tax rates, and several with none at all. If companies can get around the new law merely by incorporating in, say, Bermuda, then it would be little more than a paperwork change. In fact, many users of these strategies are already incorporated in so-called tax havens.
“I don't believe it will have a major impact,” said Conor O'Brien of KPMG in Dublin. “As long as you're a resident somewhere, I think you'll comply with the rules.”
It's possible that the rules will be meatier--they could, for instance, require companies to be incorporated in a country having a signed tax treaty with Ireland. That would set a higher bar--for obvious reasons, Ireland doesn't have tax treaties with countries that don't have an income tax. But Ireland does have treaties with countries such as the Netherlands and Jersey, which have been accused of using favorable tax regimes to lure business.
Irish and U.S. tax practitioners await release of the language, expected Oct. 24.
From the perspective of the U.S. government, it's not clear why any of this should matter. Whether income is stateless or not, if it's not brought home to the United States, it's not taxed. True--avoiding tax altogether might provide a stronger incentive for U.S. companies to keep their profit overseas. But Ireland's low corporate tax rate--12.5 percent, compared with the U.S. rate of 35 percent--is probably incentive enough. And some Irish commentators point out, not unreasonably, that the mismatch in tax residency definitions between the U.S. and Ireland is just as much a fluke in U.S. law as in Irish law.
As we say in America, it takes two to tango.
Alex M. Parker, Staff Writer, Transfer Pricing Report
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