How do vulture funds manage to pay practically no tax in Ireland?

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The three key mechanisms for tax avoidance that have been used by multinational corporations (MNCs) in the Irish state over the past decade have been the Double Irish, inversions, and the use of Special Purpose Vehicles (SPVs) under the Irish state’s lax securitisation regime introduced in Dublin’s International Financial Services Centre (IFSC) under the Taxes Consolidation Act 1997.

Bloomberg reported in February this year that a survey by the Financial Stability Board found that the Irish state’s shadow banking sector ranked third with China as the largest in the world after the US and Britain, and at more than 2.3 trillion euros it was 10 times the size of the Irish economy. Half a trillion euros were held by unregulated SPVs, the FSB found. A Financial Vehicle Corporation (FVC) is a securitisation instrument as defined by the European Central Bank FVC Regulation, but while SPVs share many of the same features they are outside the Regulation.

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The Central Bank estimated that in 2015 there were 779 FVCs holding €415 billion – required by the ECB to report quarterly data since 2009 – and 600 SPVs in 2012 holding €150 billion. In its Macro-Financial Review published in June this year, the Central Bank said there was, as of December last year, 820 SPVs holding €322 billion in assets. SPVs were not required by the Central Bank to file reports until last year. SPVs are generally used for loan origination but can also carry out securitisation activities.

Section 110 companies

The Central Bank says that tax provisions introduced in the 1991 Finance Act aimed at allowing the creation of structures that were broadly profit and tax-neutral in order to facilitate the securitisation of mortgages. This was then expanded beyond the IFSC with Section 110 of the Taxes Consolidation Act 1997, which came into effect in 1999.

The assets that could be held, managed or leased by a Section 110 company was extended by the Finance Acts of 2003, 2008 and 2011. SPVs and FVCs use “orphan companies” usually held by a charitable trust in order to keep assets off the balance sheet of their true parent companies. The originating companies of the majority of SPVs in Ireland are from the US, Britain, Germany, France, Italy and Russia. The collapse of two Dublin-based SPVs that originated from German bank Sachsen Landesbank in 2007 led to a €17 billion emergency banking bailout by the state of Saxony.

To qualify under Section 110 the company must be resident in Ireland; acquire qualifying assets of at least €10 million; and notify Revenue that it wants to fall under the Section 110 framework. The qualifying assets can include shares, bonds, securities, insurance and reinsurance contracts, hire purchase contracts, money market fund investments and more. Since 2012, qualifying assets can include commodities, carbon credits, plant and machinery.

While an SPV is a taxable entity, and should be taxed at the non-trading corporation tax rate of 25 per cent, under Section 110 its taxable profit will be measured according to the rules of a trading company – so the SPV is entitled to a tax deduction for all trade expenses, such as interest paid. As a result, SPVs “can utilise various techniques to strip profit out on its underlying investments and can reduce or eliminate the tax it is required to pay” according to law firm Dillon Eustace. The International Tax Review states that Section 110 companies are “typically structured so that income earned is matched with its expenditure resulting in minimal taxable profits”.

The result is that SPVs, in particular vulture funds buying up distressed mortgages in Ireland, are earning millions of euros annually from mortgage-holders and shifting it offshore but are paying as little as €250 in tax to Irish Revenue. According to various media reports, between 2011 and April 2016, vulture funds in the Irish state purchased loan portfolios worth €62.9 billion against the backdrop of a mortgage arrears, housing affordability and homelessness crisis.

Banks are increasingly selling off distressed mortgages to vulture funds at reduced prices, who have proven to pursue repossessions of homes even more aggressively, fuelling the housing and homelessness crisis. In May Ulster Bank announced the sale of 900 family homes with distressed mortgages as part of a €2.5 billion property loan portfolio to vulture funds. This follows the purchase in March of 200 family homes by a Goldman Sachs vulture fund in Tyrellstown, Dublin.

It has been reported that the largest purchasers were Goldman Sachs, Cerberus, Deutsche Bank, Lone Star, CarVal and Apollo. In 2014 the Irish arm of US vulture fund Lone Star, which holds distressed German mortgages, generated €1.24 billion but paid less than €1 million in tax. Cerberus’s 2014 accounts show it generated more than €140 million of revenue on its Irish assets, but paid less than €2,500 in tax.

Goldman Sachs subsidiary Beltany’s 2014 accounts show that it generated income of €44 million – but paid just €250 in corporation tax. Cayman-linked Mars Capital generated revenue of €14 million in 2014 but also paid just €250, as did Launceston Property Finance, which originates from Luxembourg-registered CarVal and generated €16 million. Some of these banks are under the direct supervision of the European Central Bank, leading Sinn Féin MEP Matt Carthy to write to the ECB in June to request it to investigate the relationship between these banks, their associated vulture funds, tax avoidance and evictions in Ireland.

SPV structure

Source: Grant Thornton law firm, ‘SPV taxation’, 30 September 2015

Irish tax law enables tax avoidance by Section 110 companies

The specific features of Irish tax law that enable Section 110 companies to do this include the fact that there are no ‘thin capitalisation’ laws in Ireland (there is no minimum profit required for a company for tax purposes, so an SPV can strip out all of its taxable profits if it chooses). Any costs of raising finance are tax-deductible under Section 110.

The most important provision of the law has been Section 110(4) which permits a Section 110 company to take a deduction for “profit participating interest” if certain conditions are met. The Finance Act 2011 introduced anti-avoidance provisions that sought to deny deductibility for that profit element of interest, but included exceptions that made the measures meaningless.

The anti-avoidance provisions do not apply (so interest is fully deductible) where the recipient of the interest or other distribution is either a person resident in Ireland, or a person (resident in an EU Member State or tax treaty country who is not “connected” with the SPV) who is a pension fund, government body or other person who is exempted from tax which generally applies to profits, income or gains in that jurisdiction. Just in case any of those exemptions do not do the trick, the Finance Act 2011 also introduced an exemption on withholding tax on interest paid through quoted eurobonds.

The Finance Act 2011 also expanded the list of qualifying assets from only financial assets to also to include commodities, carbon credits and plant and machinery, aimed at making Ireland more an attractive site for the aircraft leasing industry. Tax treaties can be used to reduce withholding taxes on inbound payments for lease rentals, and Irish-resident SPVs can receive incoming investment management services without being subject to Irish VAT.

Section 110 companies are allowed to calculate profits according to the old Irish generally accepted accounting principles (GAAP 2004) instead of the new Irish GAAP or International Financial Reporting Standards (IFRS). Dillon Eustace law firm, which advises Ireland’s National Asset Management Agency and Lone Star, among others, says the legislation was amended after industry successfully lobbied Revenue over concerns that International Accounting Standards “could compromise the profit neutrality of an SPV”.
The 2010 transfer pricing rules do not apply to Section 110 companies.

Total return swaps, where the SPV swaps all of its receipts with another company in its group in return for enough funds to discharge liabilities, should be liable to tax but apparently are not in practice and are used as a profit-extracting mechanism. Dillon Eustace advises clients: “There may be a technical liability to Irish income tax for recipients (i.e. the swap counterparty) who are not resident in a country with which Ireland has a double tax treaty but, in practice, this liability is not enforced by the Irish tax authorities.”

Ireland’s membership of the EU and OECD (and its ‘white-listed’ status) and the listing of securities on the Irish Stock Exchange are further incentives for SPVs to domicile in Ireland.

SPVs generally use an orphan entity ownership structure that ensures the entity is not owned by its originating bank or hedge fund but by a charitable trust. Revenue have raised concerns about the use of charities for this purpose as revealed through Sinn Féin TD Pearse Doherty‘s Freedom of Information request last month. Dublin’s corporate law firms generally establish the charitable trust or provide the use of their existing charitable trusts to SPVs.

For example, Matheson has established its own charity, the Matheson Foundation, which it regularly uses to help incorporate SPVs for its clients. Its website says: “The Matheson Foundation has two clear goals: to help children in Ireland to fulfil their potential; and to encourage corporate philanthropy in Ireland.” The Central Bank has found that most FVCs and SPVs incorporated in Ireland have no employees.

Qualifying Investor Alternative Investment Funds

A second key instrument used by international banks and hedge funds to avoid paying tax in the Irish state is the Qualifying Investor Alternative Investment Fund (QIAIF), which replaced the Qualifying Investor Fund (QIF), which was originally established by NAMA in 2012. The QIAIF is primarily a structured fund for real estate investment and is often used together with an SPV to ensure access to double tax treaties. QIAIF assets in Ireland are valued at €302 billion. They require a minimum subscription per investor of €100,000 and are subject to almost no other requirements.

QIAIFs are entirely tax-exempt from income tax and capital gains tax regardless of where the investors are resident, as well as being exempt from withholding tax for any payments made to non-Irish resident investors. Irish Real Estate Investment Trusts (REITs), a vehicle with a collective ownership structure for real estate investment established in 2013, are also exempt from income and capital gains tax from rental payments in most conditions.

The Irish Collective Asset Management Vehicle

The Irish Collective Asset Management Vehicle (ICAV) Act 2015 came into effect in March last year. It introduced a fifth type of corporate fund structure, alongside the investment company, unit trust, common contractual fund and investment limited partnership, and appears to have been established with the explicit goal of facilitating tax avoidance by US investors.

Matheson law firm describes the ICAV as “the culmination of a joint government and industry project to make available to promoters a legal framework for a corporate fund vehicle that is specifically designed for investment funds. Matheson partners were extensively involved in the industry project to introduce the ICAV.” It adds that “it is expected to become the vehicle of choice for UCITS and Alternative Investment Funds in Europe”. If the government’s reaction to accusations it was facilitating tax avoidance by SPVs was disingenuous, its claims to be unaware of the use of the new ICAV structure for tax avoidance is ludicrous.

The ICAV has several features that distinguish it from other fund vehicles:
*An ICAV can classify itself as transparent under the US check-the-box rules in order to avoid taxation that may apply in the US to passive foreign investment companies.
* An ICAV has its own legislative code that will allow it to avoid compliance with several Irish and EU company law requirements.
* It is not required to spread risk, unlike an investment company.
*An existing Irish investment company can convert to an ICAV easily, and a foreign corporate investment fund can domicile in Ireland and convert to an ICAV without incurring Irish tax in either case. Matheson suggests the jurisdictions where migration to Ireland will occur are the British Virgin Islands, the Cayman Islands and Jersey.

Despite the Irish government’s formal support for the OECD-BEPS process and its limited moves to respond to international pressure since 2014, there are a large number of significant legislative gaps that remain in place in the Irish state that not only allow tax avoidance by MNCs and global financial giants, but actively encourage it. Each step forward has been accompanied by “exemptions” that serve to make the reform ineffective, and appear to have been directly designed by the US Chamber of Commerce, the Big Four accounting firms and the major Dublin corporate law firms: Matheson, Arthur Cox, William Fry, Dillon Eustace and others, in a stark illustration of the “captured state” concept applying in Ireland.

Some of these legislative problems will be addressed to a certain extent by the transposition of the European Anti-Tax Avoidance Directive over the next period (though certain provisions, such as exit taxation, won’t take effect until 2020). There are a number of issues that will not be addressed by the ATAD, and a number of glaring loopholes that need to be closed in the meantime – Section 110 being the most urgent of all.

Ireland’s IP ‘Knowledge Box’ – another tool for tax dodgers

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This is the third article in a 4-part series on tax avoidance in Ireland.

1.Irish state marketed for tax avoidance since 1950s

2.Yes, we’re still a tax haven for tech giants

3.Ireland’s IP Knowledge Box – another tool for tax dodgers

4.How do vulture funds manage to pay practically no tax in Ireland?

US technology and pharmaceutical giants in the Irish state have benefited from varioustax credits, incentives and loopholes specifically relating to intellectual property and research and development, in addition to the low Irish corporation tax rate. But very little actual R&D is carried out in Ireland as a result of FDI, with US MNCs preferring to base R&D centres in Israel, China and India.

R&D tax credits against corporation tax were introduced in 2004 and expanded in Budget 2015 as the news that the Double Irish was to be phased out was announced. A 25 per cent tax credit is available on all qualifying R&D expenditure in addition to a 12.5 per cent tax deduction – so, a total of a 37.5 per cent tax deduction on such expenditure, or in other words, a corporate tax rate on R&D activity of around 3.3 per cent. Any company which trades in the Irish state and carries out R&D activities in Ireland or in the European Economic Area and incurs expenditure is eligible.

Before 2015, a base year of 2003 was in place – ie, a company could only claim credit for expenditure over and above what it incurred in 2003. This was to be a rolling base year in order to incentivise companies to spend more but the year didn’t change, and the base year was abolished altogether in Budget 2015. Under a Freedom of Information request, the Irish Times found in January 2015 that Department of Finance officials “expressed concern that changes to tax breaks in Budget 2015 would cost at least €50 million in foregone taxes annually and reward a relatively small number of companies” – just 15 firms, in fact, including one that would benefit by €14 million. The names of the companies were blacked out in the FOI release, but according to the Irish Times, “records indicate many of the firms that stood to benefit lobbied in favour of the move”.

There were no audits carried out on the tax credit scheme for the first decade of its existence. It was reported in September 2015 that 200 audits carried out in 2013 found “several multinational firms have been found to be aggressively and improperly claiming tax credits for research and development to lower their corporation tax bills” and resulted in firms being made to repay €21 million in back taxes. Revenue has identified the tax credit as a “significant risk” and used scientists and technical experts in its audits to determine if the companies were genuinely carrying out R&D.

The OECD modified-nexus regime

Also announced in Budget 2015 (with the phasing out of the Double Irish), and introduced in Budget 2016, was the Knowledge Development Box, a corporate tax rate of 6.25 per cent for profits arising from certain forms of IP. Ireland had already introduced the first “patent box”, a lower rate of tax on IP-related profits, in 2000 before the introduction of the 12.5 per cent corporate tax rate. A British patent box with a rate of 10 per cent from British and/or European patents was introduced in 2013. Luxembourg, the Netherlands, Cyprus, Spain, France, Portugal, Belgium and Malta have all introduced special low tax rates for profits from patents.

Patent boxes have been described as mechanisms for tax avoidance. The OECD-BEPS project proposed action to reduce the potential for profit-shifting abuse through patent boxes by ensuring there was a genuine link, or nexus, between the lower tax rate and R&D that was initially developed in the home state. A German-British compromise in November 2014 resulted in the so-called modified nexus approach being adopted by the OECD, which retained requirements for genuine local initial IP development but added concessions for Britain including a transition period and a 30 per cent “uplift” in what counts as qualifying expenditure to reflect outsourced intra-group research activities and costs.

While the Irish government initially opposed the modified nexus approach publicly during the German-British negotiations, and actively sought the advice of US MNCs in drafting its own legislation, Finance Minister Michael Noonan clearly saw the writing on the wall. Part of the OECD agreement was that all new entrants into existing patent box schemes that did not comply with the modified nexus approach would have to cease by 30 June 2016 and be abolished by 2021. When introducing the KDB in Budget 2016, Noonan stated that it would be the first and only patent box in the world to be fully compliant with the OECD’s modified nexus approach. Following the adoption of the German-British modified nexus approach, the European Commission withdrew its investigation into patent boxes.

Ireland’s Knowledge Development Box

The Irish KDB took effect on January 1 this year. It will apply a 50% allowance in tax relief to “qualifying profits”, resulting in a 6.25% tax rate. Qualifying profits arise from specified trade in “qualifying assets”, being intellectual property resulting from research and development carried out in Ireland or an EU member state. The intellectual property forms that can be qualifying assets are defined as being copyrighted computer software, inventions protected by patents and supplementary protection certificates, and plant breeders’ rights. The formula for calculating the qualifying profits under the KBD is below:

Qualifying Expenditure + 30% Uplift Expenditure  x  Qualifying Asset = Qualifying Profit
Overall Expenditure

Qualifying expenditure is expenditure incurred in R&D activities that lead to the development, improvement or creation of the qualifying asset. Cost-sharing agreements where costs are outsourced to intra-group parties are excluded, but such intra-group expenditure and acquisition costs can be added as uplift expenditure up to 30 per cent. The overall expenditure is the full amount of costs incurred in the R&D and acquisition of the IP, so the qualifying expenditure is measured as a proportion of this. The qualifying asset is the profits made by the specified trade in the IP product and can include any royalty or other sum received in respect of the use of that qualifying asset – including sales income attributed to the qualifying asset on a “just and reasonable basis”.

The specified trade in the qualifying asset can include:
– the managing, developing, maintaining, protecting, enhancing, or exploiting of the IP;
– the researching, planning, processing, experimenting, testing, devising, developing or other similar activity leading to an invention or creation of intellectual property; or
– the sale of goods or the supply of services that derive part of their value from the activities described  above.

KBD open to abuse

The corporate lobby initially expressed disappointment about the government’s use of the modified nexus approach, with one lobbyist saying: “What the Government could have done is waited longer to produce it. If they waited a few years more the temperature could have dropped and there would have been less focus on international tax, and they may have been able to pick up ideas from other countries… It has certainly impacted on how effective the KDB will be for the future in terms of an incentivisation vehicle.”

The Big Four accountancy firms and some corporate law firms have been more optimistic – while they have criticised the “onerous” tracking and tracing provisions that require a separate profitability stream to be accounted for each asset, they have nevertheless welcomed the KBD as a means to reduce tax bills that will specifically benefit the technology and pharmaceutical MNCs provided they jump through a few extra hoops. For example, the pharmaceutical sector generally uses “serialisation” features that correspond with the tracking and tracing provisions, but these would need to be developed in the technology sector.

Deloitte stated: “In our view, the introduction of the Irish KDB regime is welcome, although the narrow scope of IP assets that will qualify for the regime ultimately will result in limited uptake [ie, not trademarks] outside of the pharmaceutical and technology sectors.” William Fry law firm has said: “Overall, the KDB is to be welcomed as it bolsters Ireland’s competitive tax regime and complements existing tax benefits for IP such as research and development relief and the capital allowances available in relation to intangible assets. Given the limitations where research and development is carried out by group companies, in the first instance, the KDB relief may be more beneficial to indigenous companies. However, with proper planning, the relief may also prove to be of benefit to multinational enterprises.”

There is no doubt that the KBD will benefit MNCs disproportionately and that the KBD is wide open to abuse. The definition of R&D activities is identical to the definition in the R&D tax credit legislation, and it too can be self-reported by corporations when filing their accounts. The hugely problematic nature of measuring the value of intangible assets remains. The weak existing transfer pricing regulations on the arm’s length principle from the 2010 legislation will be applied. There is a right for Revenue to consult with experts on the R&D being claimed if it wishes to, as under the R&D tax credit regime, but a corporation can appeal against such consultation on the grounds that disclosure would be prejudicial to its business.

Put simply, there is nothing in the KBD legislation to prevent it from being used to concentrate profits offshore. The Double Irish system where all non-US sales pass through Irish subsidiaries to dramatically reduce the tax bill can continue but in a simplified way, with both Irish subsidiaries being tax-resident in Ireland, with one that can collect sales profits and another that holds IP rights and receives royalties that are taxed at the 6.25 per cent rate.

Inevitable profit-shifting – a theoretical example

Here is just one theoretical example of how the KBD can be exploited: a technology MNC, Pear Inc, is headquartered in Silicon Valley where 90 per cent of its overall R&D is carried out. It has two subsidiaries in Ireland called Pear Ireland Ltd and Pear Ireland Holdings. Pear Inc develops a software programme, called iThing, with 100 per cent of the R&D carried out in San Francisco. Pear Ireland Ltd then works on the next generation of the product – iThing 2.0.

It could claim to spend 70 per cent of the relatively small amount of R&D expenditure needed to make a few changes or improvements to the original iThing programme in Ireland, resulting in the creation of iThing 2.0. The new programme would not need to be patented with the Irish Patent Office because computer programmes are generally excluded from patentability but are specifically included in the qualifying asset IP definition in the KBD.

Because the new variation of the programme is in itself a qualifying asset, the overall expenditure does not necessarily need to include the original expenditure incurred in San Francisco, only the 30 per cent of expenditure not attributed to Ireland. As intra-group cost-sharing agreements are not allowed under the KBD, Pear Ireland Ltd can under certain circumstances add 30 per cent uplift, equaling 100 per cent of overall expenditure.

To be sure, Pear Ireland Ltd can simply obtain an advanced opinion from the compliant Irish Revenue to affirm its calculation that it incurred 70 per cent of the R&D costs, as the track and trace provisions are only required to be checked by the home state. Pear Ireland Ltd then licenses the IP to Pear Ireland Holdings, which collects all of the non-US sales profits from iThing 2.0 but reduces its taxable income through paying royalties and/or licensing fees to Pear Ireland Ltd under the clearly ineffective existing arm’s length legislation.

Then 100 per cent of the royalties and licensing fees received are attributable to the R&D expenditure carried out in Ireland, calculated as qualifying profit under the KBD and taxed at 6.25 per cent (this is on top of the 37.5 per cent tax deduction available for R&D expenditure through the combined R&D tax credit and the 12.5 per cent R&D tax deduction). This is an extremely simplistic example of a structure but it could obviously be improved in terms of tax avoidance through the more creative use of royalty payments and subsidiaries around the world including in tax havens.

No evidence that patent boxes stimulate R&D

There is little evidence that patent boxes do anything to increase genuine R&D or attract FDI in the productive economy in the states they exist in. Speaking in Dublin in March this year, the head of the OECD’s centre for tax policy Pascal Saint-Amans, said the development of knowledge or patent boxes does little to actually foster innovation and the creation of intellectual property.

This was followed by an OECD report in June this year which said Ireland’s public financial support to R&D businesses was “skewed” towards R&D tax credits that benefited MNCs, and explicitly called for public resources to be redirected away from MNCs to local SMEs, where there was little growth, in order to develop indigenous enterprise and increase productivity. Despite more than a decade of generous R&D tax credits and other tax incentives to promote FDI, less than one-third of IDA Ireland companies invest in R&D at all.

But despite its limitations and potential for abuse, a system of R&D tax credits, targeted towards SMEs and indigenous enterprise, has a broader economic and social value if implemented correctly – whereas there is no such corresponding social and economic benefits arising from a patent box regime. A research paper on patent boxes in 2014 argued: “Tax incentives for R&D expenditure reward firms for the societal benefits from innovation that they themselves are unable to appropriate. It is hard to make the argument that a patent box serves the same purpose: patent boxes introduce a preferential rate for income from innovations that are already protected by Intellectual Property Rights (IPRs). IPRs enable firms to capture a large part of the societal benefits, such that the need for a tax incentive for protected innovations becomes unclear.”

The supposedly limited opportunities the modified-nexus compliant KBD presents for US MNCs to reduce their tax bills makes it all the more likely that it has been introduced in the full knowledge that it will be exploited, while the government will turn a blind eye. Based on the form of successive Irish governments in relation to tax avoidance, we can guess that the government had two goals with introducing the KBD: to send a political message to US MNCs that the Irish government remained committed to ensuring the Irish state could continue to be used as a conduit for tax avoidance despite the phasing out of the Double Irish; and to introduce yet another mechanism that is wide open to abuse in order to please MNCs.

In the context of the phasing out of the Double Irish and an international crackdown on the use of offshore tax havens, the Irish KBD is an attractive mechanism for creative “onshore” tax avoidance. Matheson law firm advises its clients that offshore tax havens such as Bermuda and the Cayman Islands don’t have “the necessary economic infrastructure to which value and ultimately profits can justifiably be attributed”, whereas Ireland on the other hand can construct “profit-generating centres defensible by reference to functions, risks and tangible assets of the Irish operation,” advice that has become all the more relevant in the post-BEPS context.

Continued: How do vulture funds manage to pay practically no tax in Ireland?

Yes, we’re still a tax haven for tech giants

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Irish Taoiseach Enda Kenny with Apple CEO Tim Cook

This is the second article in a 4-part series on tax avoidance in the Irish state.

1.Irish state marketed for tax avoidance since 1950s

2.Yes, we’re still a tax haven for tech giants

3.Ireland’s IP Knowledge Box – another tool for tax dodgers

4.How do vulture funds manage to pay practically no tax in Ireland?

The Double Irish is the most notorious way that the Irish tax regime has facilitated tax avoidance over recent decades, but it is far from the only way. The MNCs engaged in the most blatant and aggressive tax avoidance in Ireland are technology giants Apple, Google, Microsoft and Facebook, and pharmaceutical corporations. Use of the Double Irish has relied on Irish-incorporated companies in tax havens including Bermuda, the Netherlands and Luxembourg, which are the top three locations for both outward and inward Irish direct investment.

A Moody’s report released on May 20 this year shows that US companies have accumulated $1.68 trillion in cash, with 72 per cent of it held in offshore tax havens. This sum has increased by almost $1 trillion since 2007. Apple, Microsoft, Google, Cisco and Oracle were the five multinationals holding the largest amount of wealth, with $504 billion combined.

The top three, Apple, Google and Microsoft, have all used Ireland as the center of their tax avoidance strategy, and can continue to do so until 2021 – while the government announced in 2014 that the Double Irish was to be scrapped (by changing residency rules to make companies that are incorporated in Ireland Irish-resident for tax purposes), it will remain in place for existing companies until 2021. Transfer pricing, cost-sharing agreements, inversions and tax rulings are some of the key ways MNCs avoid tax in Ireland, and unlimited liability status under Irish law has provided them with a cloak from public scrutiny. These mechanisms are complemented by failures in the US tax code. The top three US MNCs engaging in tax avoidance in Ireland are Microsoft, Google and Apple.

Microsoft

Microsoft established a plant in Ireland in 1985 following the introduction of a 10 per cent rate on software export profits in 1983. Its operations remained minor until the tech boom in the 1990s. Microsoft may not have been the first US MNC to exploit the Double Irish and other tax loopholes but it was the first to be comprehensively exposed, in the Wall Street Journal’s 2005 report. The investigation revealed how Dublin law firm Matheson Ormsby Prentice’s offices hosted a letterbox subsidiary of Microsoft Corporation which was established by Microsoft Ireland Operations Ltd in 2001, called Round Island One Ltd. (Matheson Ormsby Prentice, now called Matheson, also represents Google.)

In 2005 Round Island was controlling $16 billion in Microsoft assets and had gross profits of $9 billion in 2004. Another Dublin-based subsidiary, Flat Island One – a holding company of Round Island – was used to license rights to software throughout Europe, the Middle East and Africa. The revelation of the scheme posed several questions regarding the valuing of IP contributed by offshore units. To try to meet the US arms-length requirement, US MNCs rely on cost-sharing agreements, which Flat Island had with a US-based Microsoft unit called MELLC. In 2006 the two Irish subsidiaries applied for private unlimited liability company status, which exempts companies from filing detailed public accounts.

In hindsight, the scheme revealed in 2005 actually seems naïve – it apparently only relied on exploiting a cost-sharing agreement and Ireland’s 12.5 per cent tax rate. The establishment of letterbox companies in Bermuda, Singapore and Puerto Rico soon followed. Another subsidiary was later created in Ireland, Microsoft Ireland Research (MIR). The US Senate Subcommittee inquiry into tax avoidance by Microsoft in 2012 showed that the company had avoided paying at least $6.5 billion between 2009-2012 through the use of its subsidiaries in Ireland, Bermuda, Singapore and Puerto Rico. While it was estimated that more than 85 per cent of the research and development was carried out in the US, and MIR carried out one per cent of R&D, a cost-sharing agreement gave MIR 30 per cent of the credit for R&D. The Senate inquiry memorandum stated that MIR reported making $4.3 billion profits in 2011, about $11 million per employee in Ireland, with an effective tax rate of 7.2 per cent.

These days Microsoft routes its European, Middle Eastern and African sales through three separate subsidiaries, all registered in Ireland, before the profits finally end us in Bermuda (in an Irish-registered letterbox company). The first company where sales income arrives is Microsoft Ireland Operations Ltd. MIO Ltd is owned by MIR, which is part of the cost-sharing agreement with the US parent, and licenses products to MIO Ltd. Then profits move in the form of royalties to Round Island One, which although it is Irish-registered is now based in Bermuda. Finally the profits end up in another Irish-registered Bermuda letterbox company, RI Holdings. In February 2014 it was reported that an unidentified foreign government was investigating Microsoft’s three Irish-registered Bermuda letterbox companies for tax avoidance and tax evasion through the OECD’s 2005 Tax Information Exchange Agreement.

Google

In 2010, Bloomberg reported that Google had reduced its tax bill by $3.1 billion in the previous three years by using the Double Irish and moving profits through Ireland and the Netherlands to Bermuda. By first passing through the Netherlands, the profits were exempt from an Irish withholding tax for outgoing royalties as Irish law exempted royalties flowing to the Netherlands (and other EU-registered companies) from this tax. Google Inc. had secured an advanced pricing agreement (APA) with the IRS in 2006 after three years of negotiations, in which its intangible property for Europe, the Middle East and Africa was licensed to Google Ireland Holdings. Google Ireland Holdings owns Google Ireland Ltd, which has tangible property and employees in Dublin. Google Ireland Ltd is the entity through which the vast majority of non-US sales pass.

But while in 2009, 88 per cent of its $12.5 billion worth of non-US sales went through Google Ireland Ltd, it reported pre-tax profits of less than one per cent of these sales in 2008 because it shifted the profits to Google Ireland Holdings through royalty payments. While Google Ireland Holdings was incorporated in Ireland it was not tax resident there but in Bermuda where it based its ‘effective centre of management’. In reality it is a letterbox company with no employees located in a tax haven with a corporate tax rate of zero.

The ‘Dutch Sandwich’ aspect of the strategy – sending money first through the Netherlands and then to Bermuda or another tax haven – was used to prevent patent royalty profits from being subject to a 20 per cent withholding tax by Irish Revenue through a tax treaty but it became no longer even necessary for MNCs to use the Netherlands in this way after July 2010 when the US Chamber of Commerce successfully lobbied the Irish government to amend its tax code to get rid of the withholding tax. As revealed by the Financial Times in May 2013, the US Chamber of Commerce submission to the Irish government suggested Ireland’s attractiveness as a location for IP investment could be “significantly improved” by scrapping the withholding tax on patent royalties.

In 2012, Google Inc. transferred all of its foreign income – $8.1 billion – through Ireland and paid an effective global tax rate of 4.4 per cent, a total of $358 million, including $22 million to Irish Revenue. The British HMRC struck a deal with Google in January this year in which Google agreed to pay £130 million in back taxes that it had avoided paying on British sales through routing the money through Google Ireland Ltd. This was a fraction of the amount Google actually owed, and ending the practice was not part of the agreement. French authorities began investigating Google’s transfer pricing arrangements in 2011 and in January this year the French government announced it was seeking €1.6 billion in back taxes. In May this year French police and tax inspectors raided Google Ireland Ltd’s headquarters in Paris, as part of an investigation into “aggravated financial fraud and organised money laundering”. The French authorities also said they are seeking to prove that Google Ireland Ltd has a “permanent establishment” in France which would be subject to paying French taxes.

Apple

Apple has gone above and beyond all other MNCs in using Ireland to avoid paying tax – for a period of five years its main European, Middle East and Africa subsidiary didn’t just reduce its tax bill but avoided paying any tax anywhere. The scheme was outlined comprehensively by US Senator Carl Levin in the Senate Subcommittee inquiry into offshore profit-shifting by Apple in May 2013, in a concluding speech accompanied by a detailed memorandum.

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The Senate report outlined how through the use of three Irish-registered letterbox companies, Apple Inc could claim they existed nowhere for tax purposes. Apple Operations International, or AOI, is solely owned by Apple Inc and in turn owns most offshore entities. AOI is incorporated in Ireland but not tax resident there. The second company, Apple Sales International (ASI) holds IP rights to sell Apple products in Europe, the Middle East and Asia. The third, Apple Operations Europe, is also registered in Ireland but not resident there. Sales income for ASI from 2009-2012 was $74 billion.

In 2011, ASI paid tax of 0.05 per cent – $10 million of $22 billion income – to Ireland. Levin said: “[These three ghost companies’] decision makers, board meetings, assets, asset managers, and key accounting records are all in the United States. Their activities are entirely controlled by Apple Inc. in the United States. Apple’s tax director acknowledged to the Subcommittee staff that it was his opinion that AOI is functionally managed and controlled in the United States. The circumstances with ASI and AOE appear to be similar.”

More than 95 per cent of Apple’s R&D is carried out in the US. Levin outlined how through a cost-sharing arrangement on R&D between Apple Inc and ASI, from 2009-2012 ASI paid $5 billion to Apple Inc, while Apple Inc paid $4 billion under the cost-sharing agreement over the same period. But while Apple Inc declared profits of $38 billion (subject to the US corporate tax rate of 35 per cent), letterbox company ASI declared profits of $74 billion and paid less than one per cent in tax to Ireland. “Common sense says Apple would never have offered such a lucrative arrangement in an arm’s-length deal with an unrelated party.”

The Apple case demonstrates not only exploitation of the Double Irish residency rules, but also the use of supposedly informal ‘advanced opinions’ – private tax rulings – issued by Revenue to certain MNCs. In Levin’s words: “Why Ireland? Another highly successful but, until now, hidden tax strategy: Apple has quietly negotiated with the Irish government an income tax rate of less than 2 percent, well under the Irish statutory rate of 12 percent as well as the tax rates of other European countries and the United States. And as we’ve seen, in practice Apple is able to pay a rate far below even that low figure.” Apple representatives told the Senate Subcommittee: “Since the early 1990’s, the Government of Ireland has calculated Apple’s taxable income in such a way as to produce an effective rate in the low single digits …. The rate has varied from year to year, but since 2003 has been 2% or less.”

The Senate Subcommittee memorandum examines the relationship between Irish tax law on residency and loopholes in the US tax code (subpart F), specifically the ‘check-the-box’ and ‘look-though’ rules. The check-the box loophole was introduced in the 1990s and allows companies to literally check a box on its declarations to the IRS stating what kind of entity they are for tax purposes – meaning MNCs can declare offshore subsidiaries as part of one single corporation and therefore not taxable. The look-through loophole introduced in 2006 provides relief from the anti-deferral rules for Controlled Foreign Companies in the US tax code.

The European Commission opened an investigation in June 2014 as to whether the tax rulings, or advanced opinions, provided by Irish Revenue to Apple subsidiaries in 1991 and 2007 constitute illegal state aid that selectively preferenced the companies. The key points of the Commission’s preliminary findings in September 2014 were that the 1991 tax ruling appeared to have been “reverse engineered”, and that the 2007 amended tax ruling which calculated a 10-20 per cent increase on AOE’s costs was “meaningless in relation to the computer industry”. Unlike most tax rulings, which usually last for three to five years, the 1991 ruling had no end date. The Commission said there was evidence the tax rulings was “motivated by employment considerations”, and that the terms of the tax rulings did not comply with the arm’s length principle for setting conditions between companies of the same corporate group.

Three figures have been estimated regarding what amount Apple would owe in back taxes to the Irish state if the Commission finds the tax rulings were illegal. Bloomberg Intelligence has estimated $8 billion, while JP Morgan Chase & Co has estimated it may owe $19 billion. Pro-corporate lawyers reported in the media have estimated Apple will face just $200 million in back taxes.

One of the most important facts to come to light in the US Senate Subcommittee inquiry’s 2013 report, and highly significant for the European Commission’s investigation, is that the last accounts that had been filed for AOI (then called Apple Computer Inc Ltd) was in 2005 for fiscal year 2004. As Finfacts founder Michael Hennigan points out: “Irish Revenue officials must have been aware of the change of status of AOI from a tax-paying company in Ireland to a tax-exempt status?” As evidence of the “reverse-engineered” nature of the advanced opinion issued by Revenue in 1991, the Commission released the following excerpts of a note of a meeting between Apple and Revenue in 1990, where a figure of taxable profit was agreed upon without reference to the actual profits of the company, shifted to the manufacturing category with a corporate tax rate of 10 per cent (which did not expire in Irish law until the end of 2010), and then left in place until 2007 despite the massive rise in Apple’s profits over this period:

[The tax advisor’s employee representing Apple] stated that the company would be prepared to accept a profit of $30-40m assuming that Apple Computer Ltd. will make such a profit. (The computer industry is subject to cyclical variations). Assuming that Apple makes a profit of £100m it will be accepted that $30-40m (or whatever figure is negotiated) will be attributable to the manufacturing activity. However if the company suffered a downturn and had profits of less than $30-40m then all profits would be attributable to the manufacturing activity. The proposal essentially is that all profits subject to a ceiling of $30-40m will be attributable to the manufacturing activity.

[The representative of Irish Revenue] asked [the tax advisor’s employee representing Apple] to state if was there any basis for the figure of $30-40m and he confessed that there was no scientific basis for the figure. However the figure was of such magnitude that he hoped it would be seen to be a bona-fide proposal.

Continued: Ireland’s IP Knowledge Box – another tool for tax dodgers

Irish state marketed for tax avoidance since 1950s

Revenue

This is the first in a 4-part series on tax avoidance in the Irish state, and focuses on the history of the relationship between corporation tax rates, avoidance and foreign direct investment.

1.Irish state marketed for tax avoidance since 1950s

2.Yes, we’re still a tax haven for tech giants

3.Ireland’s IP Knowledge Box – another tool for tax dodgers

4.How do vulture funds manage to pay practically no tax in Ireland?

The Irish state has pursued an economic development policy based on attracting foreign direct investment since the 1950s. A low rate on corporate income and profits tax and loose financial regulation have been features of the state since this time, though for decades they were unsuccessful at attracting FDI. In 1956, the Export Profits Tax Relief provided a rate of zero corporation tax for manufactured exports. This system of tax exemptions for certain areas and industries developed over the following two decades. In the 1970s, the Industrial Development Authority (IDA) “started aggressively marketing Ireland’s tax system internationally, under slogans such as ‘no tax’ and ‘double your after-tax profits’.”

After the Irish state joined the European Economic Community in 1973 it was forced to turn this system of specific exemptions into a single rate across the whole manufacturing sector to comply with EEC rules on non-discrimination. As a result, the Fianna Fáil government introduced a corporate tax rate of 10 per cent for all manufacturing companies in 1981, followed by a 10 per cent rate for financial services in 1987, with the creation of the International Financial Services Centre (IFSC) in Dublin’s docklands. Other sectors of the economy lobbied for a reduction in the corporate tax rate applicable to them, and in 2003 the single corporate tax rate of 12.5 per cent for all companies’ trading profits was introduced, while passive income and company capital gains were to be taxed at 25 per cent.

A significant part of the debate surrounding Ireland’s corporation tax regime has centered on the role of the 12.5 per cent rate in generating the Celtic Tiger economic growth spurt in the 1990s and 2000s. The dominant narrative expounded by establishment political parties, media and state institutions is that the introduction of the 12.5 per cent rate was the single biggest factor that contributed to the boom. But the surge in growth in GNP began in 1993, a decade before the introduction of the 12.5 per cent rate, and more than a decade after the introduction of the 10 per cent rate in manufacturing. This was the year the Irish state joined the European Single Market, with Irish citizens gaining easy access to housing finance with no exchange rate risk from the mobile financial capital available for the first time. The resulting property boom and spike in consumption were the key factors contributing to the sharp rise in GNP from 1993 onwards. Barry Eichengreen wrote: “Claims on the Irish banking system peaked at some 400 per cent of GDP… It reflected the freedom with which Irish banks were permitted to establish and acquire subsidiaries in other EU countries.”

The graph below from the Fools Gold blog (by the Tax Justice Network and Warwick University) is a visual illustration of the timing and factors associated with the boom.

Ireland-GNP-graph

Irish GNP from 1955-2012

FDI inflow into Ireland expanded on a huge scale during the 1990s. It rose from 2.2 per cent of GDP in 1990 to 49.2 per cent of GDP in 2000. There were many contributing factors to this, with accession to the single market – and the growth in GNP and consumption that this prompted – being the most crucial. Other often-cited factors include Ireland’s joining of the single currency in 1999, its geographical location and its skilled, low-waged and English-speaking workforce. Currently foreign (mainly US) multinational corporations (MNCs) account for around 90 per cent of ‘exports’ and employ an estimated 150,000 people, around 8 per cent of the workforce. There is no doubt that FDI has since the 1990s played a dominant role in the Irish economy. The low corporate tax rate has certainly contributed significantly to this inflow of FDI, in addition to the factors outlined above. The two policy factors that have been equally or even more important than the low corporate tax rate are the large number of other ‘peculiarities’ of the Irish corporate tax regime, and the creation and promotion of the IFSC in Dublin as a centre for global finance that is almost totally unregulated.

Public debate on the corporate tax regime in Ireland

There are extreme economic and social costs associated with this model of economic development, in Ireland and internationally. The costs associated with the lack of regulation in the IFSC, and its promotion of the shadow banking system, have been demonstrated clearly and painfully in the €70 billion financial collapse of the Irish banking sector of 2008. The costs associated with Ireland’s corporate tax regime are also enormous. Public policy debates around Ireland’s corporate tax regime in recent years have centered on two key issues: domestically, whether the 12.5 per cent rate is sufficient, and whether it is in fact the effective rate paid by US MNCs; and Ireland’s role in the global chain of tax avoidance. A third, more neglected, issue of debate is economic over-dependence on US MNCs and the long-term poor performance of Irish indigenous industry, though this has now come into the public domain to a certain extent with the publication of this year’s 26.3% growth in GDP as a result of distortions largely caused by MNCs’ inversions and other accountancy tricks.

Throughout the 2000s it became clear that the nature of Ireland’s corporate tax regime meant mainly US-based MNCs were using the state in conjunction with offshore tax havens to massively reduce their global tax bills. A study by tax expert Martin Sullivan published in Tax Notes in 2004 showed that Ireland was the most profitable country in the world for US corporations. The following year, an investigation by the Wall Street Journal revealed that Microsoft was using a subsidiary based in the offices of a Dublin law firm to reduce its annual tax bill by at least $500 million. In 2009, in response to plans by the incoming Obama administration in the US to tackle tax avoidance, state agency Industrial Development Authority (IDA Ireland) hired a lobbying group in Washington DC to support the status quo.

Since the rise in international tax justice activism in 2010, successive Irish governments have been at pains to insist, “Ireland is not a tax haven”. Government representatives have stated that Ireland’s low tax rate is the “cornerstone of our economic policy”; that it is statute-based and effectively enforced. A still-running debate on the effective rate paid by US-based MNCs was sparked in 2011 when Finance Minister Michael Noonan claimed the effective rate of tax in Ireland was 11.9%, while in France it was (he claimed) only 8.1 per cent. Speaking in France in 2014, Taoiseach Enda Kenny quoted a PriceWaterhouse Coopers/World Bank report (2014) that stated Ireland’s effective corporate tax rate was 12.3 per cent. He was speaking in response to questions over Yahoo’s decision to transfer finance operations to Ireland from France. Kenny also claimed that the effective rate in France was 8 per cent (in fact, this rate refers only to SMEs and the effective corporate tax rate for MNCs in France is 33 per cent). A paper from Prof Jim Stewart from Trinity College Dublin pointed out that the PwC study was based on a small, domestic company that makes ceramic flowerpots and has no imports or exports. He wrote: “These assumptions automatically rule out tax planning strategies which are widely used by subsidiaries of MNCs.”

Using data from the US Bureau of Economic Analysis, Stewart showed that: “US subsidiaries operating in Ireland have the lowest effective tax rate in the EU at 2.2%. This tax rate is not that dissimilar to effective tax rates in countries generally regarded as tax havens such as Bermuda at 0.4%.” The Department of Finance commissioned an official study later in 2014 by economists Kate Levey and Seamus Coffey to reject Stewart’s findings, which excluded in their calculations the $144 billion in profits that US MNCs move through Ireland to other jurisdictions, saying it was not taxable in Ireland as though these entities may have been incorporated in Ireland they were not ‘resident’ and therefore the money was not taxable. Tax justice activists said this was precisely the point. Meanwhile, the Irish Times carried out a survey of the top 1,000 corporations operating in Ireland that found an average effective tax rate of 15.5 per cent – which has no bearing on the debate as it was a measurement of the companies’ overall global effective rate. Finfacts has reported that the largest corporate law firm in Ireland, Arthur Cox, said in a 2011 briefing on ‘Uses of Ireland for German Companies’: “The effective corporation tax rate can be reduced to as low as 2.5% for Irish companies whose trade involves the exploitation of intellectual property… A generous scheme of capital allowances as well as a tax credit for money invested in research and development in Ireland offer significant incentives to companies who locate their activities in Ireland.”

It was of course not only tax credits that provided for the low effective rate for US MNCs but massive transfers of wealth using IP-related mechanisms. Even Coffey, author of the government-commissioned refutation of Stewart’s claim of a 2.2 per cent tax rate of US MNCs, separately explained that the relatively low rate of taxable profits made by Irish subsidiaries of US MNCs resulted from profit-shifting from Ireland to Bermuda and the Cayman Islands through the payment of massive patent royalties, which amounted to nearly €30 billion in 2011. The US BEA “attribute these profits to Ireland as the holding companies are Irish incorporated”. The Tax Justice Network reports that studies using various ways of calculating the overall effective corporate tax rate in the Irish state found rates of between 2.5 per cent and 4.5 per cent. In 2014, a study by Eurostat on the implicit corporate tax rate (a backward looking measurement of the average effective tax burden) found an effective rate in Ireland of 6 per cent in 2012, down from 9.3 per cent in 2002, while the implicit tax rate on labour was 28.7 per cent in 2012, up from 26 per cent in 2002.

Continued: Yes, we’re still a tax haven for tech giants

Social dumping and the revision of the Posting of Workers Directive

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The current proposal from the European Commission to revise the Posting of Workers Directive will not establish ‘equal pay for equal work in the same place’ nor effectively combat social dumping, and it needs to be significantly strengthened in order to have any impact.

The European Commission adopted a proposal for a Directive amending the 1996 ‘Directive on the posting of workers in the framework of the provision of services’ (Posted Workers Directive) on 8 March 2016. This ‘targeted revision’ of the PWD was announced as part of the Labour Mobility Package in the Commission’s Work Programme for 2016. The other two items in the Labour Mobility Package are a Communication on labour mobility and the revision of the Regulation on social security coordination – and the latter has now been postponed until after the British referendum on EU membership scheduled for 23 June 2016.

The Commission proposal for a Directive amending the PWD was referred to the European Parliament’s Employment and Social Affairs Committee. Since then, the ’yellow card’ procedure has been invoked by certain Member States against the revision of the PWD.

The stated goal of the 1996 PWD, which came into force in 1999, was to combat social dumping and prevent distortions of competition in the context of expanded European integration and increased posting of workers. Its central principle was that the pay and working conditions in effect in a Member State should be applicable both to local and posted workers.

The limitations of the original PWD, together with a very narrow interpretation of the rights it conferred by the European Court of Justice (ECJ), combined to make sure that the PWD only provided posted workers with a legal right to the basic minimum rights and conditions, and was largely ineffectual as a measure to combat social dumping.

Campaigns, in particular by the ETUC, for a revision of the PWD in light of the ECJ rulings were long ignored by the Commission, which eventually proposed an Enforcement Directive containing only marginal improvements to reduce abuse of posted workers in 2014. The deadline for the transposition of the Enforcement Directive by Member States is 18 June 2016.

A push in 2014 by several Member States for a revision of the PWD to establish the principle of ‘equal pay for equal work in the same place’ led to the current Commission proposal for a Directive amending the PWD.

Yellow card procedure invoked

By 10 May 2016 – the deadline for the ‘subsidiarity’ check by Member State parliaments on the Commission’s legislative proposal to amend the PWD – enough Member States had objected to the proposal on the grounds of subsidiarity for the ‘yellow card’ procedure to be invoked.

Under the yellow card system introduced as a protocol to the Lisbon Treaty, each Member State parliament can review draft EU legislation within eight weeks of receiving a proposal and produce a “reasoned opinion” objecting to the draft legislative act if it is believed the proposal breaches the principle of subsidiarity.

One-third of the total votes (at least 19 out of the total 56) is the threshold required to invoke the yellow card. In this case 11 Member States cast 22 votes for a review of the proposal. These were: Bulgaria, Croatia, Czech Republic, Denmark, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Slovakia. Five of these states also claimed the proposal was in breach of the principle of proportionality. Their submissions can be read here.

The Commission as the author of the draft legislation is now required to review the proposal, after which it may proceed to maintain, amend or withdraw the draft, and it must provide reasons for its decision. The EP’s rules of procedure mean it cannot move forward with the proposal until the author has stated “how it intends to proceed”. There is no time limit on the review.

Posted workers and social dumping

A ‘posted’ worker is one sent by his/her employer to work for that employer on a temporary basis in an undertaking the employer has established in another Member State.  The Commission claims that these are citizens “providing a service” in another Member State, and that they do not integrate into the labour market of the host state. A posted worker is paid by the company they were recruited by in their home state, and their social security contributions continue to be paid to their home state.

According to the Commission’s 2014 figures, there are more than 1.9 million posted workers in the EU, up by 10% from 2013 and up by 44% since 2010. Germany, France and Belgium were the top three destination states, receiving more than half of all posted workers, with EU-15 Member States the destination for 86% of all posted workers.

Poland, Germany and France are the top three states posting workers to other Member States. Construction accounts for more than 40% of all postings. There are three cross-border situations that the PWD covers: subcontracting, intra-corporate transfers and posting of temporary agency workers.

There is not an agreed definition of social dumping in the EU institutions but Eurofound (2012) defines it as “a practice involving the export of goods from a country with weak or poorly enforced labour standards, where the exporter’s costs are artificially lower than its competitors in countries with higher standards, hence representing an unfair advantage in international trade”. An alternative definition from the ETUI (2014) defines it as “the practice, undertaken by self-interested market participants, of undermining or evading existing social regulations with the aim of gaining a short-term advantage over their competitors”.

The tendency is for companies to use posted workers for labour-intensive jobs in low value chains, particularly in construction and transport, and for the company to pay only the minimum rate of pay legally required in the host Member State (or to illegally avoid observance of the host state’s labour laws and standards). As well as wage dumping, companies reduce other working conditions to make savings and require employees to pay high charges, for example for housing.

Concerns over the use of posted workers for social dumping within the European market became a political issue in the late 1980s and early 1990s as cross-border service provision expanded following the incorporation of Greece, Spain and Portugal. The first major ruling issued by the ECJ on the rights of posted workers versus the right to provide services was Rush Portuguesa, in which a Portuguese company posted workers to France under Portuguese pay and conditions, and was challenged by the French government for doing so without its authorisation.

The court ruled that the Company had the right to post its own workers to France under the ‘freedom to provide services’ contained in the Treaty of Rome, but also that France had the right to enforce the application of French labour laws.

Posted Workers Directive

The 1996 Directive was introduced as a result of the public debate and concerns of trade unions and some Member States regarding unfair competition on wages and working conditions arising from the posting of workers. It established a set of regulations aimed at ensuring minimum protection in destination Member States. Specifically, it guarantees the application of the host Member State’s statutory and regulatory provisions relating to:

*maximum work periods and minimum rest periods;
*minimum paid annual holidays;
*the minimum rates of pay, including overtime rates (excluding supplementary occupational retirement pension schemes);
*the conditions of hiring-out of workers, in particular the supply of workers by temporary employment undertakings;
*health, safety and hygiene at work;
*protective measures with regard to the terms and conditions of employment of pregnant women or women who have recently given birth, of children and of young people; and
*equality of treatment between men and women and other provisions on non-discrimination.

There are exceptions to the right to these minimum provisions for postings lasting less than a month, for the crew of merchant ships, for staff involved in the initial assembly, and where the amount of work to be done is “not significant”. The “temporary” nature of the posting was not defined by a time limit in the Directive.

In the construction sector “collective agreements or arbitration awards which have been declared universally applicable” must also be applied.

Interpretation of PWD as a maximum directive

While the 1990 Rush Portuguesa ruling suggested EEC members could actually extend all employment laws and regulations to posted workers, the ‘minimum’ rights outlined in the PWD and subsequent rulings by the ECJ in the 2000s enabled companies to exploit “the difference between minimum and standard levels of protection”.

The court has held that host Member States cannot require posting employers to comply with standards that go beyond the terms of the PWD – ie, posting employers cannot be required to pay wages at rates higher than the legal minimum, and cannot be required to adhere to standards not included in the minimum list of provisions above. It has also held that the right of workers and union to take collective action, including the right to strike, is subject to the right to freedom to provide services and freedom of establishment.

Some of the most significant cases include:

Laval: In 2004, Latvian firm Laval posted Latvian construction workers to Sweden and refused to acknowledge the existing collective agreement with the Swedish Building Workers’ Union. As Sweden had a well-functioning collective bargaining and agreement system and did not have an across-the-board minimum wage bound in law, Laval claimed that it was not obliged to pay the rates collectively agreed in the building sector.

The Swedish building union took collective industrial action. Laval claimed to the ECJ that it was being discriminated against on the grounds of nationality and that the Swedish union was infringing upon its right to provide services.

The court found that companies or “service providers” from another EU state are obliged to abide by the host agreement but collective action must be “proportional”. This means that the ECJ believes workers do have the right to take industrial action – but only when the minimum wage or conditions of the host country, or the minimum working conditions set out in the Posting of Workers Directive are being breached by the employer. The Laval case is viewed as the moment the PWD switched from being viewed as a minimum to a maximum directive.

Viking: In order to cut costs, the Finnish shipping company Viking Line attempted to re-flag its ships as Estonian and operate out of Estonia. When two Finnish maritime unions organised a blockade of Viking Line, Viking took its case to the ECJ: again, the claim was that the company’s right to freedom of movement was being restricted by the industrial action of the workers. In December 2007, while the court found that collective action to protect posted workers from exploitation was legal, the unions had restricted Viking Line’s right of establishment.

Rüffert: German company Objekt und Bauregie employed a Polish sub-contractor to employ Polish building workers, posted to Germany, on less than half the minimum wage agreed by German trade unions and employer associations. In 2008, the ECJ ruled that O&B should not be bound by the local Lower Saxony law that states public building contractors must abide by the existing collective agreements.

The court found that while member states may impose minimum pay rates on foreign companies posting workers in their state, the local law restricted the “freedom to provide services” and was not justified by the aim of protecting the workers because workers in the private sector were not covered by such protections.

In essence, this ruling prevents above-minimum wages and conditions being included in public tender contracts, conflicting with ILO Convention 94, which takes the approach that  public procurement contracts should not be used to exert downward pressure on wages or conditions.

Luxembourg: The European Commission took Luxembourg to the ECJ claiming that by imposing its labour law provisions – especially the mandatory indexation of wages – on all workers, including posted workers, the Luxembourg government was going beyond what was allowed under the PWD. The Luxembourg government argued that the application of these laws to posted workers was in the interests of ‘public policy’.

The court held that for public policy reasons to justify enforcing above-minimum standards, such standards must be “crucial for the protection of the political, social or economic order (in such a way) as to require compliance by all persons present on the national territory, regardless of their nationality”.

However, in February 2015 the ETUC welcomed the ruling in Sähköalojen ammattiliitto ry, which diverged from Laval and found that a host Member State can require posting companies to pay holiday allowances, daily flat-rate allowances to compensate workers for posting, and compensation for travelling time, on equal terms as local workers; and that if binding collective agreements set different pay levels for different groups of employees, these should be considered as being in line with the PWD.

Impact of ECJ’s PWD case law on right to take collective action

Overall the case law (with the exception of the more recent Sähköalojen ruling) highlights the following problems with the PWD in relation to collective action:

The right to take collective industrial action, including the right to strike, is not in fact guaranteed in the EU as it is subject to “Community law and national laws and practices”, which means it can be restricted.

The right to take collective action to prevent the exploitation of posted workers by foreign service providers is subject to the company’s right to freedom of movement and establishment under the EU Services Directive – a right which the ECJ has repeatedly and consistently upheld as being superior to workers’ rights. The Court now says that the freedom of establishment “may be relied on by a private undertaking against a trade union or an association of trade unions”. This means employers can take unions to court for any collective action by arguing it is violating their economic freedoms.

The collective action of workers and unions taken against posting companies is only deemed legitimate if it is “proportional” – that is, in defence of the most basic minimum conditions agreed on by EU bodies or set in law by the host country. The higher-than-average conditions that may be included in public sector agreements are an infringement of the right to establishment.

Enforcement Directive 2014

In response to calls for a revision of the PWD in light of the ECJ jurisprudence, the Commission claimed up until 2014 that such a revision was not necessary due to the introduction of Better Law-Making and REFIT, and that an Enforcement Directive on the PWD would resolve outstanding issues. The deadline for transposition of the Enforcement Directive is 18 June 2016.

The Enforcement Directive:

*lists criteria characterising the existence of a genuine link between the employer and the Member State of establishment (to combat ‘letterbox companies’)
*defines Member States’ responsibilities to verify compliance with the rules on posting of workers
*lists national control measures that the Member States may apply when monitoring compliance with the working conditions applicable to posted workers
*sets requirements for posting companies to facilitate transparency of information and inspections
*empowers trade unions and other parties to lodge complaints and take legal and/or administrative action against the employers of posted workers, if their rights are not respected
*ensures the application of administrative penalties and fines across the Member States if the requirements of EU law on posting are not respected.

The Enforcement Directive partially addresses a key problem with the application of the PWD in relation to subcontractors by introducing joint liability on the main contractor. This will set out who can be held liable for payment of wages, but does not determine what the wage of posted workers within a subcontracting chain should be.

The fundamental problems with the design of the PWD and its interpretation by the ECJ that have been outlined above were not addressed in the Enforcement Directive, which limited its scope to addressing fraud, circumvention of rules, and exchange of information between the Member States.

Commission’s new proposal has many limitations

In 2014, a group of Member States led by France campaigned for a revision of the PWD. Austria, Belgium, France, Germany, Luxembourg, the Netherlands and Sweden  signed a joint letter to the Commission calling for such a revision in order to establish in EU law the principle of ‘equal pay for equal work in the same place’, a demand supported by the ETUC and most European trade union federations. In response to this pressure, the Commission brought forward its proposal for a targeted revision of the 1996 Directive in March.

In doing so, the Commission finally admitted the existence of social dumping in the EU and its relationship with the PWD. In its Impact Assessment on the new proposal for a Directive amending the PWD, the Commission admits: “The 1996 Posting of Workers Directive establishes a structural differentiation of wage rules applying to posted and local workers which is the institutional source of an un-level playing field between posting and local companies, as well as of segmentation in the labour market,” and states that “the existing Directive has an in-built structural wage gap between posted and local workers”.

The key aspects of its proposal are:

*The ‘limited time’ a posted worker counts as a posted worker is defined as being 24 months or less, after which s/he will be covered by the labour law of the host state.
*The same rules on remuneration will apply to local and posted workers – but only if these are set by law or by universally applicable collective agreements.
*The rules set by universally applicable collective agreements become mandatory for posted workers in all economic sectors.
*Within sub-contracting chains, Member States will have the option to apply to posted workers the same rules on remuneration that are binding on the main contractor and even if these rules result from collective agreements that are not universally applicable.
*The principle of equal treatment with local temporary agency workers will also be applied to posted temporary agency workers, aligning the current legislation on domestic temporary agency work.

The key limitation of the Commission’s proposed revision is that it will not establish equal pay for equal work in the same place. The ‘same rules’ on remuneration will apply only when the standard is enshrined in law or in a universally applicable collective agreement, which is some Member States excludes the vast majority of collective agreements.

The two-year period before assimilation into the local labour market means most posted workers will be excluded as 90 per cent of posted workers are posted for less than 24 months at an average of 4 months.

It does not address the conflict between the right to take collective action and the right to freedom to provide services.

It also does not address the tension on the role of public procurement contracts between the Rüffert  case, the Public Procurement Directive  and ILO Convention  94, which states that conditions  under  public procurement contracts should not be less favourable than those established  for  the  same  work  in  the  same  area  by  collective agreement  or  similar  instrument.

The proposal does not make the general contractor liability at all stages of the subcontracting chain binding, and it does not require adequate proof of a pre-existing labour relationship before posting providing a service of similar nature.

All of these issues should be addressed through the process of revising the PWD in order to ensure it actually finally becomes an effective instrument to combat social dumping.

Ongi etorri, Arnaldo Otegi!

Sinn Féin welcomes release of Basque pro-independence leader

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Arnaldo Otegi leaving prison this morning, 01/03/16

Sinn Féin representatives have warmly welcomed the release of Basque pro-independence leader Arnaldo Otegi from prison in Logroño this morning after six and a half years.

Otegi’s release has also been welcomed by Spanish left parties Podemos and Izquierda Unida, as well as Catalan pro-independence forces Popular Unity Candidacy (CUP) and Esquerra Republicana de Catalunya (ERC).

Pat Sheehan, Sinn Féin MLA, said that the release of Otegi is an opportunity to advance the peace process in the Basque country.

“Arnaldo Otegi was one of the main architects of the peace strategy developed by the Basque pro-independence movement and should never have been imprisoned,” he said.

MEP Martina Anderson added her congratulations, saying: “I am delighted that today Arnaldo Otegi is being welcomed home by his family and community, and I send warm congratulations to him from Sinn Féin.

“We also welcome the news that Arnaldo Otegi has confirmed he will take part in internal party elections later this month seeking to stand as a candidate for EH Bildu.

“But I’m appalled that he received this sentence in the first place. The fact that Otegi was jailed for more than six years solely for his ideas and political activism is an indictment of the Spanish authorities.”

Since the 1990s, Arnaldo Otegi has been acknowledged as the leader of the Basque pro-independence political movement – and he has also faced unrelenting political persecution by Spanish authorities. Already the Spanish authorities have sought to restrict rallies welcoming Otegi’s release from prison.

Among the political charges that have been brought against him include being sentenced to jail in 2006 for participating in a commemoration marking the murder of an ETA leader by a Spanish death squad in 1978, and being jailed again in 2010 for comparing a long-term ETA prisoner to Nelson Mandela.

In 2005 Otegi was sentenced for ‘insulting the king’ after he commented at a press conference held on the torture of Basque journalists that the King bore ultimate responsibility for this torture as the official head of the armed forces. In March 2011, the European Court of Human Rights ruled that Spain had infringed Otegi’s right to freedom of expression in this case.

In October 2009, 10 central leaders of the Basque pro-independence movement including Otegi were arrested as they met to discuss a new peace initiative, and five of them were jailed. Despite such provocation, this peace initiative has led to the permanent ETA ceasefire of 2011 and its move in 2014 to begin the process of disarmament. It has also led to the legal registration of new pro-independence party Sortu in 2013, which has rejected violence and reached unprecedented levels of popular support in the Basque Country.

Martina Anderson spoke at the launch last March of the international campaign to free Otegi, which was endorsed by several former Latin American presidents, and Nobel Prize winner Nobel Peace Prize winners Desmond Tutu, Adolfo Pérez Esquivel, among many others.

“As well as being acknowledged as the leader of the Basque pro-independence movement, Otegi is also indisputably the leader of the Basque peace process, and that is why he was jailed in 2011,” she said.

“I warmly welcome the release of Arnaldo Otegi and offer him our full support in his efforts to develop the Basque peace process. The Spanish government should finally engage with this process. It should release all seriously ill prisoners and those who have been jailed for purely political work, and immediately repatriate all Basque prisoners to prisons within the Basque Country as the first step towards an early-release programme.”

Sheehan added: “Sinn Féin are convinced the release of Arnaldo Otegi will invigorate efforts to create a lasting peace and self-determination for the Basque people, and we will continue to provide assistance in bringing that about.”

Background: https://emmaclancy.com/2015/03/28/global-campaign-demands-free-otegi-bring-basque-prisoners-home/

Erdoğan views Kurds as stepping stone to total power

A PKK checkpoint in Silvan, southeast Turkey, on August 19. (Reuters)

A PKK checkpoint in Silvan, southeast Turkey, on August 19. (Reuters)

Kurdish pro-independence activists have erected barricades, and elected representatives have declared self-government in several towns and villages across northern Kurdistan (southeast Turkey) since August 10. The declarations come in response to renewed attacks on Kurdish militants and civilians by Turkish security forces.

According to Kurdish media outlets, the towns, villages and districts that have declared self-government include Silopi, Cizre, Lice, Varto, Bağlar in Batman, Sur and Silvan in Diyarbakir, Bulanik, Yüksekova, Şemdinli, Edremit and Doğubeyazit, among others. Significantly, the Gazi neighbourhood in Istanbul declared self-government on August 18.

Mayors and elected representatives of the People’s Democratic Party (HDP) and the Democratic Regions Party (DBP), together with neighbourhood assemblies, have supported the declarations of self-government, saying the Turkish regime “did not represent them”. Four mayors in Diyarbakir were arrested on August 18.

The Turkish government, led by President Recep Tayyip Erdoğan’s Justice and Development Party (AKP), has given unlimited powers to the security forces and declared a state of emergency in the areas of resistance over the past week.

The Turkish army has backed up Special Forces and police in carrying out attacks, which have included aerial bombardment, the burning of homes, raids, and the shooting of combatants and civilians. Military curfews have been declared, and the affected districts are besieged by the army.

Kurdish protesters hold placards with Ekin Wan's face on August 19.

Kurdish protesters hold placards with Ekin Wan’s face on August 19.

One of the first towns to declare self-government on August 13 was Varto in Muş province, where Kurdish combatant Kevser Eltürk (with the nom de guerre Ekin Wan) was killed in a gun battle with Turkish Special Forces on August 10. Ekin Wan was a fighter in YJA-STAR (Free Women’s Units), the women’s military wing of the Kurdistan Workers Party (PKK).

After her death, Ekin Wan’s bloodied corpse was stripped naked and dragged through the streets by Special Forces who photographed the desecration and uploaded it onto the internet, sparking protests across Turkey.

Kurdish media reports that in the days following the declaration of self-government, Varto was attacked by tanks, helicopters and Special Forces soldiers. A PKK graveyard was bombed while military helicopters opened fire on villagers in Varto and several surrounding villages. Special Forces entered to conduct house raids and make arrests, while soldiers are reported to have set fire to houses and forests. The operations in Varto have been replicated in Kurdish towns and villages across southeast Turkey.

Turkish author and former war correspondent Cengiz Çandar described the developments of the past week as a “mass youth uprising by the PKK” that surpasses the scale of similar urban uprisings during the 1990s.

Kurdish activists too have said the security forces’ aggression is reminiscent of attacks on Kurdish communities during the 1990s, in which around three millions Kurds were displaced and thousands were killed. Since the PKK-led Kurdish insurgency began in 1984, an estimated 40,000 people have been killed in the conflict – the majority Kurdish civilians.

Erdoğan ended a two-year ceasefire on July 24 when his government resumed attacks on Kurdish communities in Turkey, as well as launching airstrikes against PKK bases across the border in southern Kurdistan (in Iraq).

By August 19, Turkish officials claimed that more than 50 security force members, around 400 PKK members and “at least seven” civilians have been killed in the recent violence. The PKK have rejected the claim regarding their casualties and say they have lost 30 members. The official figure for civilian deaths appears to be patently false, given that Amnesty International has verified that eight Kurdish civilians were killed in one Turkish airstrike alone in the village of Zergele in the Qandil mountains in Iraq on August 1.

After Suruç

The July 20 attack by an Islamic State supporter on a group of socialist youth activists in the Kurdish town of Suruç inside Turkey, near the Syrian border, was the spark for the collapse of the two-year ceasefire and peace talks between the Turkish government and the PKK.

Activists on the bus to Suruç before the bombing. (Victim Hatice Ezgi Sadet's Instagram)

Activists on the bus to Suruç before the bombing. (Victim Hatice Ezgi Sadet’s Instagram)

The activists who were killed were members of the Federation of Socialist Youth Associations (SGDF), the youth wing of the of Socialist Party of the Oppressed – a founding member of the People’s Democratic Party (HDP) coalition. The leftist, pro-Kurdish HDP won 13 per cent of the vote in general elections in Turkey in June; its co-leader, Figen Yüksekdağ, is a former chairperson of the Socialist Party of the Oppressed.

The youth activists were preparing to travel to Kobanê, the Kurdish city across the border in Syria, to build a library and playground, and assist in the general rebuilding of the town after the siege and conflict between the Kurdish People’s Protection Units (YPG) and Islamic State. In a crowd of around 300 people who had gathered for a public declaration to farewell the delegation in Amara Cultural Centre, a young Islamic State supporter blew himself up, killing 32 people; another later died from injuries.

The Islamist suicide bombing against the pro-Kurdish left has somehow been used by the Turkish government as a pretext to launch an all-out attack – against the pro-Kurdish left.

As international leaders sent their condolences to Erdoğan’s AKP government over what they referred to as “Islamic State’s attack on Turkey”, Kurds accused the government of collusion in the bombing. Specifically, they believe the Turkish National Intelligence Organisation (MIT) was directly involved.

Survivors asked the question: how was the bomber able to freely walk into the Amara Cultural Centre when there was a strong security presence surrounding it, and the activists had all been searched on their way in? Later, the funeral processions of almost all of the victims were attacked by Turkish security forces. The rapid pace of political developments in the days following the bombing appear to confirm the Kurds’ belief of government involvement.

Kurdish militants from the Patriotic Revolutionary Youth Movement (YDG-H), an armed youth movement associated with the PKK, claimed responsibility for the killings of two Turkish police officers on 22 July, who they said had collaborated with Islamic State.

Ankara-Washington deal

Three days later the bombing – after providing both tacit and practical support to various Islamist forces fighting against the Syrian regime of Bashar al-Assad during the civil war since 2011 – Erdoğan struck an agreement with the US on July 23. Under the deal the US can use Turkish air bases to launch airstrikes across the border against Syria, and Turkey has agreed to contribute directly to the war on Islamic State in Syria by carrying out its own strikes.

A “safety zone” along part of Syria’s border with Turkey is to be made free of both Islamic State and Kurdish militants, according to the terms of the agreement. This is the most significant element of the agreement as far as Erdoğan is concerned. There are three cantons in Rojava, the Kurdish area in Syria that runs along a large part of the border with Turkey. Following the recent victory of the Kurdish People’s Protection Units (YPG) over Islamic State in Tal Abyad, two of the three cantons, Kobanê and Cizere, were joined contiguously for the first time.

The precise area the “safety zone” is proposed to cover will ensure the YPG cannot join the two Kurdish cantons with the third, Afrin, as the US-Turkish joint “clear and hold” operation aims to rid the area of both Islamic State and Kurdish fighters. The absurdity of the US agreeing to limit the operations of the most effective military force fighting Islamic State in Syria in this way has been pointed out by many.

Announcing the agreement domestically, Erdoğan said his government would carry out a “synchronised war against terror” that would target both Islamic State and the PKK.

As of August 19, Turkey had launched airstrikes against just three Islamic State targets, and more than 300 against PKK bases in Iraqi Kurdistan. In the first three weeks of the campaign of repression, 1,300 “terrorism suspects” were arrested – 137 alleged to be linked to Islamic State, and 847 were accused of PKK membership. The Islamist suspects were quickly released; the Kurds were not. The total number of alleged activists now detained since July stands at more than 2,600, almost all of them Kurds.

‘Your silence is killing Kurds’

Yet most of the Western mainstream media has parroted the lines that Erdoğan has joined the war against Islamic State and the PKK are a secondary target in a broader crackdown, and the PKK has initiated the latest round of violence and caused the breakdown in peace talks.

A PKK member collects pieces of metal at a crater caused by Turkish air strikes on July 29 in the Qandil mountains, northern Iraq. (AFP)

A PKK member collects pieces of metal at a crater caused by Turkish air strikes on July 29 in the Qandil mountains, northern Iraq. (AFP)

The report by the New York Times on August 18 was typical of this coverage: “Mr Erdogan’s government decided to move more forcefully against the Islamic State last month after a suicide bombing in the southeastern district of Suruc that killed at least 34 people.”

The Wall Street Journal reported on August 3: “In parallel with its new military strikes against Islamic State, Turkey has targeted bases in northern Iraq used by the outlawed Kurdish separatist group PKK. The deadly airstrikes came in response to increased attacks by the PKK against Turkish security forces that are threatening a fragile peace process.”

The Huffington Post, however, reported on August 19 that Turkey pays US lobbyists and public relations firms around $5 million a year to win public and political favour. Among the lobbyists on the payroll is Porter Goss, who was CIA director from 2004-2006. Within days of renewing attacks on Kurds, Turkey hired the Squire Patton Boggs lobby group, which includes retired senators and White House officials, to propagate its version of the conflict.

There has been an almost-total media blackout in relation to the attacks on Kurds within Turkey and the urban warfare that has engulfed a major part of the country, prompting social media campaigns to target Western media with the hashtag, #YourSilenceIsKillingKurds.

In Turkey, where for decades the media has been prevented from reporting on PKK attacks and casualties among security forces, the media is now beaming a constant stream of “stories of those who were killed, kidnapped policemen, attacked government buildings and assets, along with bomb threats,” according to Pinar Tremblay, writing in Al-Monitor. “Turkish audiences have not seen this many funerals since the early days of the conflict in the late 1980s.”

Putting power before peace

The Turkish president has invested a significant amount of political capital in achieving a lasting peace settlement with the Kurds of Turkey, who number 15 million, around one-fifth of the total population. Before becoming president, Erdoğan served as the prime minister from 2003-2014. In 2005, he admitted the existence of a “Kurdish problem” in Turkey, and under his government secret peace talks were held between the PKK and the Turkish National Intelligence Organisation in Oslo.

The process eventually led to the declaration from jail of a ceasefire on Newroz day (Kurdish New Year) in March 2013 by PKK leader Abdullah Öcalan, imprisoned since 1999. The ceasefire proved durable, and in February this year a more comprehensive agreement was announced by HDP and AKP representatives, including the Interior Minister and the deputy prime minister. The 10-point Dolmabahçe Agreement dealt with conflict resolution issues including disarmament, human rights and constitutional reform.

Turkish President Recep Tayyip Erdoğan

Turkish President Recep Tayyip Erdoğan

On July 17 Erdoğan said: “I do not recognise the phrase ‘Dolmabahçe Agreement’… There cannot be an agreement with a political party that is being supported by a terrorist organisation.”

What changed? In general elections in June, the AKP lost its parliamentary majority for the first time in 13 years. The pro-Kurdish left-wing HDP won 13 per cent of the vote, meaning it met the 10 per cent threshold a political party must reach in order to sit in the Turkish parliament. This threshold was imposed with the aim of silencing voices of political opposition by the constitution adopted in 1982 following the 1980 military coup. It has meant Kurds have been largely excluded from the democratic process ever since, making the result in June historic.

The party, its candidates and campaign workers were harassed and physically attacked, sometimes lethally, throughout the election campaign. On June 5, its major pre-election rally in Diyarbakir was bombed. Four people were killed and dozens more were injured. Other HDP election rallies were attacked by fascists; its offices were shot at and bombed; and campaign worker Hamdullah Öğe was assassinated while driving a HDP vehicle.

Despite the violence and intimidation, voters turned out in large numbers to support the HDP – which also attracted votes from non-Kurdish communities on the basis of its secular, feminist and left-wing positions.

One the HDP's mass election rallies (Piczard)

One of the HDP’s mass election rallies. (Piczard)

The AKP required 276 seats to form a majority government in the 550-seat parliament; it won 258, dropping from around 50 per cent of the vote to just above 40 per cent. The social-democratic Republican People’s Party (CHP) won 132 seats, while the HDP and the fascist Nationalist Movement Party (MHP) each won 80 seats. Of the 80 HDP candidates elected, 32 were women, bringing the number of female MPs in the Turkish parliament to a record high of 98. All leadership positions in the HDP are co-chaired by a woman and a man.

The current government is an interim government; if no coalition is formed by August 23, Prime Minister Davutoglu must dissolve the cabinet. If this happens, an all-party ‘election government’ will be formed until the new elections – which must be within 90 days.

The HDP rejected the AKP’s overtures for a coalition government from the beginning, and AKP talks with the CHP, then the MHP, have broken down. But it’s highly likely that Erdoğan had no intention of forming a coalition government, and would prefer to hold snap elections in November in which he believes the AKP can regain its majority.

Erdoğan wants an executive presidency

The election results also blocked plans Erdoğan had made for constitutional reform that could only be made through the parliament if the AKP won a two-thirds majority, or 367 seats. After ruling as prime minister for 11 years, he is clearly dissatisfied with what he calls the “ceremonial” role of the president, and he intended after the election to create an “executive presidency” that would dramatically extend his personal power.

The president had formerly been appointed by the parliament, but a 2010 referendum allowed for direct election of the president, and the first such election was won by Erdoğan last August.

Immediately after his election, Erdoğan opened an opulent new 1,000-room presidential palace that cost Turkish taxpayers well over $600 million to construct. In May this year, the AKP-majority parliament granted Erdoğan a “discretionary fund” for “discreet intelligence and defence services” not subject to any form of judicial, administrative or parliamentary oversight – in other words, his own private army.

HDP co-leader Selahattin Demirtaş responded to the establishment of the discretionary fund by calling it a “civil coup”.

“The palace has its own special army authorised to collect intelligence, its own discretionary budget. That is, it has created a one-man, separate state,” he said.

On August 13, AKP leader and Prime Minister Ahmet Davutoğlu said he had failed to reach a coalition deal with the CHP. The following day, Erdoğan indicated that he will attempt to achieve an ‘executive presidency’ without the required two-thirds majority if the AKP wins a simple majority in snap elections – or perhaps even before then.

“There is a president with de facto power in the country, not a symbolic one,” he said. “Whether one accepts it or not, Turkey’s administrative system has changed. Now, what should be done is to update this de facto situation in the legal framework of the constitution.”

Demirtaş called for a referendum to be held on the proposed change, which the HDP opposes, saying: “The state regime cannot be changed with a fait accompli.”

CHP leader Kemal Kılıçdaroğlu described the statement as the “acknowledgement of a coup”.

New elections

The general election was held on June 7; from June 8 the AKP has been planning a new snap election and a way to rapidly diminish the HDP’s support base. If the HDP were to drop below the 10 per cent threshold and be excluded from parliament, then in all seats where a HDP candidate topped the poll the seat would go to the runner-up – in most cases, an AKP candidate.

In anticipation of a new election, Erdoğan and the AKP are making a concerted effort to link the HDP with the PKK, and to alienate conservative Kurdish voters from supporting the HDP, in the belief that this will result in the party failing to meet the 10 per cent threshold. At the same time the AKP is appealing to right-wing nationalists to reward its hardline position.

Many analysts have predicted that the move may backfire and drive the entire Kurdish population in Turkey to vote for the HDP. The head of polling company Metropoll, Özer Sencar, said on CNNTurk on August 18 that the HDP is likely to become the third-largest party in Turkey if fresh elections are held in November, and could win up to 17-18 per cent of the vote – an outcome he was at pains to explain he believed would be “extremely wrong” for Turkey.

HDP co-chairs Selahettin Demirtaş and Figen Yüksekdağ

HDP co-chairs Selahattin Demirtaş and Figen Yüksekdağ (AP)

Of course, the caretaker government led by the AKP may attempt to outlaw the HDP and prevent it from participating in fresh elections. On July 31, Turkish media reported that a criminal investigation has been opened into both HDP co-chairs, Demirtaş and Figen Yüksekdağ, for “inciting violence” and “propagandising for terrorist organisations” respectively, over speeches they have given in support of Kurds in Kobanê and the rest of Rojava. In Demirtaş’s case, if the case is prosecuted and he is found guilty, he faces up to 24 years in prison.

Eight opposition MPs from the CHP and HDP have also had an ‘investigation authorisation report’ sent to the parliament by the deputy prime minister, which provides legal authority to open an investigation into an MP’s activities.

The current indications are that the government will continue to target individuals and not attempt to outlaw the HDP itself – but this could change in response to the declarations of self-government across Kurdish districts.

Erdoğan’s renewed aggression against the PKK should not only be understood in domestic terms. It is also shaped significantly by the major advances made by Kurdish forces in Syria and Iraq. The dismal repercussions of attacking the most effective resistance to Islamic State in the region have yet to fully play out. But his decision to walk away from an historic opportunity to end decades of conflict, in a cynical and transparent grab for personal power, may have unleashed a rebellion by Kurdish youth in Turkey that he will not be able to contain.

Kurdish pro-independence forces are stronger now – better organised, with more territory and more international support – than they were in the 1990s.

A second article examining the Kurdish struggle against Islamic State in Rojava, and the impact of the US-Turkey deal to establish a safety zonealong the Turkey-Syria border, will follow shortly.