Headlines about Apple’s ‘tax haven’ has little impact on Irish bonds
Speaking to lawmakers in Dublin two days ago, Finance Minister Michael Noonan insisted the country is no tax haven, a day after a congressional hearing in Washington focused attention on Apple’s manoeuvres to minimise its tax bill through its operations in Cork.
“Maybe there was a magician,” said Mr Noonan, adding that Ireland didn’t “want to be a whipping boy for misunderstandings” over Apple’s tax liabilities. “But the magician wasn’t resident down in Cork.”
At stake is Ireland’s model of attracting overseas companies with the lowest company tax rate in western Europe to drag the economy out of its worst recession on record. So far, investors are unmoved. Yields on two-year Irish securities are close to a record low, while those on 10-year bonds are near their lowest relative to benchmark German bunds in three years.
“It’s lots of bluster so far, with no actual suggestion as to what the US is going do,” said Owen Callan, an analyst at Danske Bank in Dublin, a primary dealer in Irish government debt. “Bad headlines, but nothing behind it.”
After Apple chief executive Tim Cook appeared at a congressional hearing on May 21, the yield on two-year Irish notes was little changed at 0.78%, the least since 2003.
The yield on Ireland’s 10-year bonds fell one basis point this month to 3.54% today. That narrowed the premium the nation pays to borrow compared with Germany to 2.08 percentage points from 11.5 percentage points in Jul 2011.
In part, the decline in borrowing costs has been driven by ECB president Mario Draghi’s pledge last year to do whatever it takes to defend the euro.
It also reflects Ireland’s strategy of protecting its 12.5% corporate tax rate, which had come under threat from European leaders following the country’s Nov 2010 bailout.
To an extent, it’s paying off, as companies making goods to ship abroad help propel the economy back to growth. In a country of 4.4m people, 115,000 work for US companies.
Yet, the Government’s focus on wooing overseas companies has put them in the sights of US politicians.
Apple negotiated a tax rate of less than 2% with Irish authorities, a Senate report said this week, citing the company. Mr Cook told lawmakers Apple had done nothing wrong.
“When Irish politicians get into the realms of having to defend the country against these accusations, much damage has already been done,” said Dermot O’Leary, an economist at Goodbody Stockbrokers.
Apple reduced its tax bill by setting up a unit in Cork, which didn’t declare tax residency in Ireland because it’s neither managed nor controlled in the country, according to the hearing. As the unit is incorporated in Ireland, it’s not a US tax resident either.
The phenomenon of “stateless companies” may not survive, said Feargal O’Rourke, tax and legal services leader at PricewaterhouseCoopers. Even that probably won’t hamper the Government’s ability to attract investment, he said.
Ireland’s tax rate compares with 35% in the US, 33% in France and 23% currently in the UK. Companies are able to reduce their taxable income in Ireland by subtracting large royalty payments, said Seamus Coffey, an economics lecturer at UCC.
“There’s merit in some of the complaints, but most of it is political posturing,” said Mr Coffey.
