The European Commission is certainly not letting up easy on Ireland. In addition to the investigation into Apple’s tax arrangements with the Irish Revenue Commissioners, it was reported last night in the FT that the Commission is now investigating the ‘Double Irish’ tax structure.
This highly controversial measure allows companies to significantly reduce their tax bills and funnel profits to tax havens by virtue of a mismatch in residency rules. In the US, residency is based on place of registration, whilst in Ireland corporate residency is determined by “central management and control”. To exploit this mismatch, US multinationals merely need to place assets, such as intellectual property, with an Irish registered company which is controlled from a tax haven, such as Bermuda.
For Ireland, this mismatch is relatively unintended but nevertheless incredibly surreptitious, given the number of people employed by multinationals. The Irish residency rule owes its genesis to the bygone days of the British Empire. In 1906, an issue came before the House of Lords as to the corporate residency of a South African incorporated mining company, De Beers Consolidated Mines Ltd. The Court ultimately decided that the company was resident in London as “real business is carried on where the central management and control actually abides”. This was a question of fact and the court was satisfied of London residence on the basis that the majority of directors lived in England; that the directors’ meetings in London were the meetings where the real control was exercised; and that London controlled the negotiation of the company’s contracts.
This is just one of many archaic rules which are no longer fit for purpose. It serves to highlight just one of the many difficulties which we face in the reform of International Tax Law.
For the time being however, it is the European Commission which is unilaterally seeking reform of the way in which companies are taxed and indeed, this is its modus operandi. One wonders however whether politically this attack is prudent on the part of the Commission, given the rise of Euroscepticism and the fact that direct taxation is a field in which EU Member States are thought to have retained competence.