Tax, finance and development
Skype’s tax ruling had some a big surprises. When Ireland appears in tax avoidance schemes of multinationals, it is usually because the country actively, or at least knowingly, facilitates tax doding. And usually Ireland gets something in return as well. For example, Google uses a “Double Irish” to completely avoid taxes on billions of profits. The Irish government knew this perfectly well, but mainly cares about the jobs created by Google.
So when I was asked to analyse Skype’s tax tricks, which involved an Irish entity too, I expected something similar. Yet it was completely different from anything I’d seen before. It seemed that Skype had tricked the Irish tax authority. The company should have booked profits in Ireland, but it didn’t. Probably the Irish tax authority was unaware about this and Ireland did not gain anything form Skype’s tax tricks.
Skype is one of the most interesting Luxleaks files. The Guardian provides an excellent explanation how the company dodged taxes, which was documented in the leaked tax ruling from Luxembourg. Most media attention focussed on the transfer of Skype’s intellectual property from Luxembourg to Ireland for what seems to be a ridiculously low price. As I commented in the Danish newspaper Politiken, that low price seemed contradictory with the fact that Skype’s founders hired Morgan Stanley to find a buyer for the firm. They were clearly expecting that someone was willing to pay a lot of money for Skype. Indeed, months after the IP transfer, eBay bought Skype for USD 2.6 billion.
The tax ruling itself mainly deals with the situation after the transfer. Skype’s subsidiary in Ireland licensed the IP to its company in Luxembourg, which in turn collected income from paid Skype services all over the world. The Luxembourg tax authority agreed to treat 95% of that income as if it had been paid onwards to the Irish subsidiary. However, the income was never paid onwards. It stayed in Luxembourg. This is really some of the most absurd tax planning I’ve ever seen: the Luxembourg tax authority simply agreed to treat millions of income as if it had been paid as a license fee to a subsidiary in another country and received back as a dividend. Completely fictitious. Never mind about the other country.
If the income would really have been paid onwards, the Irish subsidiary would have made a profit, which would have been taxed in Ireland at 12.5%. The net profits of the Irish subsidiary, after tax, would have been insufficient to pay out a dividend exactly equal to the income it received from its parent. In reality, the Irish subsidiary that owned the key assets generating Skype’s worldwide income was not making a profit at all, but booking losses, because – ironically – the Luxembourg parent did pass on some costs. Ireland never got to tax the income (and it didn’t get jobs either). Apparently Luxembourg had cheated on Ireland.
Obviously, Skype’s tax dodging had much broader consequences. It affected many countries. The possiblity to secretly pay almost no tax on income booked in the Grand Duchy provided a strong incentive for Skype to shift profits there from all over the world. Part of the remedy is simple: end the secrecy.
If all tax rulings would be published right after they are concluded, Luxembourg might never have issued such a ruling in the first place. The European Commission and the OECD made proposals to exchange rulings between tax authorities, in secret, but that will not have the same effect as making them public.
Some say that tax rulings should remain confidential because they contain sensitive commercial information, but the Luxleaks files suggest this is simply not true. Skype’s ruling did not contain any commercial secrets or detailed business information, apart from the tax dodging strategy itself. The transfer value of Skype’s IP was not even mentioned in the ruling itself, that info comes from publicly available Irish accounts. In fact, it seems that none of the hundreds of tax rulings disclosed by Luxleaks contained commercial secrets.
So it’s time to bust the myths about tax rulings and end the secrecy!