Citing fears of harming his country’s reputation, Ireland Finance Minister Michael Noonan announced a plan Tuesday that would put a stop to one of the most flagrant corporate tax avoidance strategies that relies on his country’s business tax laws. While the change would prevent Apple and other companies from completely avoiding taxation on revenue routed through Irish subsidiaries by deeming those companies “stateless,” business tax experts were quick to note that most companies rely on other forms of tax evasion that would continue.
The scheme Noonan wishes to stop became famous this spring when a Senate investigation found that Apple had paid nearly zero taxes on around $100 billion in sales revenue. Apple’s arrangement, which even critics say is a completely legal exploitation of a poorly designed global tax system, relied upon three subsidiaries incorporated in Ireland but not “resident” there for tax purposes. Noonan said Tuesday that his budget proposal would “ensure that Irish-registered companies cannot be ‘stateless’ in terms of their place of tax residency,” adding that “we don’t want to incur any reputational damage.”
While Noonan’s move would end this particular form of tax evasion, a more common form that uses shell companies registered in Ireland will go untouched. A company can still register in Ireland but avoid paying its 12.5 percent corporate tax rate by declaring tax residence in some other country with lower corporate rates, Bloomberg reports. While Apple-style tax statelessness is relatively rare, Irish subsidiaries registering to pay taxes in Bermuda, Luxembourg, and other tax haven countries is not. Google, Yahoo!, LinkedIn, eBay, and Microsoft all use such schemes to avoid taxes by moving global revenues from points of sale to Ireland, and then from Ireland to another tax haven. Ireland’s proposal is therefore “a very small step” and “relevant only to Apple,” former Joint Committee on Taxation chief of staff Edward Kleinbard told Reuters.
There are few big steps available to individual countries, however. The current system of international business taxation gives small countries with low industrial output substantial incentive to pursue tax haven status and lure corporate money. The resulting race to the bottom is hard to reverse, with even well-intentioned efforts likely to exacerbate the bad incentives. Most of this summer’s high-profile efforts at tax reform in the U.S. and Europe were premised on maintaining the system that creates those bad incentives, but a more fundamental shift in the global approach to business taxes could eliminate companies’ ability to shuffle profits from the country where they’re earned to one where they will go untaxed.