Watching guns fire in Ukraine, sabres rattle in the South China Sea, and the volatile Middle East, investors in jittery, high-priced equity markets worldwide hardly need another worry.
But nevertheless, add tensions involving Ireland to the list. Multinational companies avail themselves of Ireland’s stunningly low 12.5 percent corporate income tax rate, boosting reported after-tax profits in a way that cannot last much longer now that Western governments are so indebted and so starved for tax revenue. If you take away Ireland’s tax break, the reported profits for some actively traded, widely held companies plummet.
Go further and remove the ability that American multinationals have to “permanently reinvest” lightly taxed income that is earned abroad (without paying much higher U.S. tax rates) and justifiable valuation concerns rise significantly.
According to The Irish Times, the largest American multinational company operating in Ireland is Google, with others in the top 10 including Microsoft, Oracle, Pfizer, and Apple. Meanwhile, behemoth GE bases a much smaller pool of employees in Ireland to manage a towering pile of finance company assets.
Looking through Google’s latest Annual Report, we find that use of lightly taxed foreign jurisdictions such as Ireland chopped Google’s corporate income tax bill by 49 percent, boosting aftertax earnings in 2013 alone by almost $ 2.5 billion. Regarding GE, its 2013 filings show that use of low tax foreign jurisdictions, likely including Ireland, pared that company’s corporate income tax bill by 71 percent, increasing reported aftertax earnings by almost $ 4 billion.
These one-time benefits pale in comparison to those derived over longer periods by booking profits outside the U.S. and then reinvesting these internationally for as long as possible.
Google, founded in 1998, is not on the list of American firms that has benefited most over time. Still, since its inception, Google has kept $38.9 billion or 63 percent of its aggregate earnings outside the U.S. And GE, founded much earlier in 1892, has kept $110 billion (74 percent of its earnings) outside America.
According to an article published last year in The Wall Street Journal, research firm Audit Analytics identifies other significant long-term beneficiaries of this tax loophole as Pfizer, Microsoft, Merck, Johnson & Johnson, IBM, Exxon Mobil, Citigroup, Cisco Systems and Apple.
Economically illiterate leaders seem prepared now to find aggressive ways to punish multinationals, capturing profits in countries like Ireland and spending them at home. Alternatively, inspired leaders could actually bring their corporate income tax rates down to Ireland’s level.
But either way, Ireland loses and that nation has little margin for error.
According to the CIA World Factbook, Ireland owes $2.164 trillion in foreign debt as of Dec. 31, 2012. On a per capita basis, this means each of Ireland’s 4.8 million inhabitants lived then under the shadow of $447,423 in net borrowings owed to foreign creditors.
Should Ireland’s corporate income tax rates get forced upward, and when Ireland’s towering foreign debt gets repriced to reflect changing reality, the Irish people may suffer yet again. We approach a month when some savvy investors are susceptible, based on past practice, to “sell in May and go away.”
The sun may be setting again on Ireland’s latest boom — serious investors would be wise to consider what could soon happen inside and outside that country, then re-evaluate the traded prices of many widely held companies.
• Charles Ortel serves as managing director of Newport Value Partners (newportvalue.com), which provides economic research to executives and to investment firms.