Showing posts with label Irish corporation tax. Show all posts
Showing posts with label Irish corporation tax. Show all posts

Monday, February 10, 2020

9/2/20: Ireland: More of a [reformed] Tax Haven than Ever Before?..


With the demise of the last Government and the uncertain waters of Irish politics stirred by the latest election results, let me take a quick glance at the Government's tenure in terms of perhaps the most important international trend that truly threatens to shake the core foundations of the Irish economy: the global drive to severely restrict corporate tax havens.

In Ireland, thanks to the CSO's hard labours, there is an explicit measure of the role played by the international tax avoiding corporations in the country economy. It is a very imperfect measure, in so far as it significantly underestimates the true extent of the tax arbitrage that Ireland is facilitating. But it is a robust measure, nonetheless, because it accounts for the lore egregious schemes run in capital investment segments of the corporate tax strategies.

The measure is the gap between the official Irish GDP and the CSO-computed modified Gross National Income, or GNI*. The larger the gap, the greater is the role of the tax shifting multinationals in the Irish national accounts. The larger the gap, the more bogus is the GDP as a measure of the true economic activity in Ireland. The larger the gap, the poorer is Ireland in real economic terms as opposed to the internationally-used GDP terms. You get the notion.

So here are some numbers, using CSO data:


When Fine Gael came to power in 2011, Irish GNI* (the more real measure of the economy) was 26.03 percent lower than the Irish GDP, in nominal terms. This, effectively, meant that tax shenanigans of the multinational corporations were de facto running at at least 26% of the total Irish economic activity.

Fine Gael proceeded to unleash and/or promise major tax reforms aimed at reducing these activities that (as 2014 Budget, released in October 2013 claimed, were harmful to Ireland's reputation internationally. The Government 'closed' the most notorious tax avoidance scheme, the Double Irish, in 2014, and introduced a major new 'innovation', known as the Knowledge Development Box (aka, replacement for the egregious Double Irish) in 2016. In September 2018, the Government published an ambitious Roadmap on Corporation Tax Reform (an aspirational document aiming to appease US and European critics of Ireland's tax avoidance platform).

So one would expect that the gap between Irish GNI* and GDP should fall in size, as Ireland was cautiously being brought into the 21st century by the FG government. Well, by the time the clocks chimed the end of 2018, Irish GNI* was 39.06 percent below the Irish GDP. The gap did not close, but instead blew up.

Over the tenure of FG in office, the gap rose more than 50 percent! Based on 2018 data (the latest we have so far), for every EUR1 in GDP that Irish national accounts claim to be our officially-declared income, whooping EUR0.391 is a mis-statement that only exists in the imaginary world of fake corporate accounts, engineered to squirrel that money from other countries tax authorities. Remember the caveat - this is an underestimate of the true extent of corporate tax shifting that flows through Ireland. But you have an idea. In 2011, the number was EUR0.260, in 2007, on the cusp of the Celtic Garfield's Demise, it was EUR0.1605 and in 2000-2003, the years of the Celtic Garfield's birth when Charlie McCreevy hiked public expenditure by a whooping 48 percent, it was averaging EUR0.1509.

Think about this, folks: McCreevy never waged a battle to get Irish tax system's reputation up in the eyes of the critically-minded foreigners and yet, his tenure's end was associated with the tax optimisation intensity in the Irish economy being whooping 24 percentage points below that of the 'reformist' Fine Gael.

This is mind-bending.

Tuesday, February 2, 2016

2/2/16: MNC Ireland: A new Documentary


A new and well-worth watching documentary on the power of multinational companies in Ireland and Ireland's status as a corporate tax haven is available here: https://vimeo.com/137175562.


Note: Strangely enough, the documentary cites me as a Chairman of the IRBA (which I was at the time). It is worth repeating again that I never speak on behalf of any organisation I am involved with and the IRBA never had a corporate opinion on any policy-related issues. I only express my own personal views.

Thursday, November 12, 2015

12/11/15: Can't Get That Tax Haven Genie Back Into the Bottle


For the massive industry of Irish analysts, economists and experts working hard on denying that there is a problem with our corporation tax regime, behold this view: "Ireland ... is one of the world’s most important tax havens or offshore financial centres."

And as I noted on numerous occasions, our beggar-thy-neighbours policy or strategy for economic development is no longer a matter of esoteric academic considerations: "It is true that the tax offering did help attract large amounts of investment, ...and European membership helped keep Ireland off tax haven blacklists that apply to classic tax havens such as Cayman and Bermuda... ...What is more, Ireland has triggered ‘beggar my neighbour’ competition from other nations, meaning it has to constantly offer new and larger subsidies to mobile capital, just to keep up. ... [Ireland's] corporate tax haven strategy (and the financial centre strategy, below) have transmitted harmful spillover effects onto other countries, notably the U.S. which has seen Ireland help facilitate a massive transfer of wealth from ordinary taxpayers to mostly wealthy shareholders."

Read the full report here: http://www.taxjustice.net/2015/11/11/how-ireland-became-an-offshore-financial-centre/. And prepare for a choir of deniers to start their song again tomorrow, aided and funded by the lobby groups and, in some cases, by the state.

Wednesday, October 7, 2015

7/10/15: Two Reports, One Ireland, Hundreds of Billions in MNCs' Profits


Two interesting headlines in recent days brought back the memories of recent hot-flash splashes of news regarding Ireland's position as a corporate tax haven. These are:

  1. Irish response to the completion of the OECD review of the options for addressing the imbalances in the global corporate taxation systems: http://www.independent.ie/business/world/new-oecd-global-tax-proposals-target-corporation-tax-avoidance-31583371.html, and
  2. A less publicised in Ireland study from the U.S. estimating to volumes of corporate tax optimisation/avoidance with honourable place reserved for Ireland in it: http://www.reuters.com/article/2015/10/06/us-usa-tax-offshore-idUSKCN0S008U20151006
Have fun tying them together... but here are some choice quotes from the Citizens for tax Justice study referenced in the Reuters article:

"The Congressional Research Service found that in 2008, American multinational companies collectively reported 43 percent of their foreign earnings in five small tax haven countries: Bermuda, Ireland, Luxembourg, the Netherlands, and Switzerland. Yet these countries accounted for only 4 percent of the companies’ foreign workforces and just 7 percent of their foreign investments."

"For example, a 2013 Senate investigation of Apple found that the tech giant primarily uses two Irish subsidiaries — which own the rights to some of Apple’s intellectual property — to hold $102 billion in offshore cash. Manipulating tax loopholes in the U.S. and other countries, Apple has structured these subsidiaries so that they are not tax residents of either the U.S. or Ireland, ensuring that they pay no taxes to any government on the lion’s share of the money. One of the subsidiaries has no employees."

"Google uses accounting techniques nicknamed the “double Irish” and the “Dutch sandwich,” according to a Bloomberg investigation. Using two Irish subsidiaries, one of which is headquartered in Bermuda, Google shifts profits through Ireland and the Netherlands to Bermuda, shrinking its tax bill by approximately $2 billion a year"

A handy graph:
And another one:

Do note that per above table, Ireland is a conduit for the U.S. corporates' tax activities that amount to 42% of our GDP, while Switzerland (the country we so keenly like to tell the world is a 'real' tax haven) facilitates activities amounting to 'only' 9% of its GDP. 

You can read the entire report and see associated data here: http://ctj.org/pdf/offshoreshell2015.pdf

And while you are at it, here is a little Bloomberg piece from back 2014 on another whirlwind of activities: corporate inversions. http://www.bloomberg.com/news/articles/2014-05-04/u-s-firms-with-irish-addresses-criticized-for-the-moves What is notable in this article is that we are now having inversions of inverted companies, whereby new re-domiciling firms buy into previously re-domiciled companies to land themselves a PO Box presence in Ireland.

So back to that OECD reform proposal, therefore, that involves addressing the issue of the Base Erosion and Profit Shifting (BEPS) and is apparently of no threat to us in Ireland... You can try reading all the legalese here http://www.oecd.org/tax/beps-2015-final-reports.htm, or just give it a thought - tax optimisation by U.S. (only U.S.) MNCs via Ireland amounts to up to 42% of our GDP and likely less than 1-2% of the companies workforce is present here. How much of that 42% booked via Ireland is 'base erosion & profit shifting'? Ah, yes... let's not ask questions we don't want answered. Let's just have a breakfast at Tiffany's while repeating that "Ireland has a low rate transparent system and IDA insist on substance for any companies that it supports and I think those are the three pillars that supports our offering and I think Beps is about moving all international systems to a more transparent, clear system."

Don't laugh...


Thursday, March 6, 2014

6/3/2014: Defending Ireland's Tax Regime Requires Reforms


This is an unedited version of my Sunday Times article from February 16, 2014.


Last week, Irish Government delegation to the OECD's Paris-based headquarters was all smiles and photo-ops at the front end, with lunches and joint press conferences at the back. In-between, there were speeches and statements extolling the virtues of our economic recovery and the Government leadership through the crisis.

Only one cloud obscured the otherwise sunny horizon of the trip: our corporate tax regime. Mentioned in the context of Yahoo’s decision to shift all of its European tax affairs from the ‘high tax’ Switzerland to ‘fully transparent’ Ireland, it required a high level intervention. Aptly, the Taoiseach was standing by to point that our effective corporate tax rate (the average tax rate that applies to companies here) is almost 12 percent, higher than France's 8 percent. Ireland 1: Tax Begrudgers  0.

Case closed? Not so fast.

In recent months, Irish corporate tax regime has featured prominently in international debates about European tax reforms, corporate earnings and multinational investment. G20 and G8 mentioned it, as did German, Finnish, Italian, French, the US and the UK leaders. As financial repression sweeps across the OECD member states in the wake of the sovereign debt crises, this debate is far from over.

This week, Professor James Stewart of TCD School of Business produced an insightful and well-researched analysis showing that the effective tax rate for the US MNCs in Ireland was 2.2% back in 2011. Methodologies bickering aside, Professor Stewart study challenges the core research used to support our corporate tax regime – the PWC studies that focus on domestically-trading SMEs.

The problem of course, is that the official discussions of Irish corporate tax regime are nothing more than a tactic of diffusing the issue by deflecting the real debate. Professor Stewart's research hints at this forcefully. The real issue with our corporate tax is not the headline rate, nor its transparency, but a host of loopholes that riddle the system and that allow companies here to dramatically reduce their global tax exposures well below the 12.5 percent rate.

Some of these loopholes, such as the notorious Double Irish scheme, are the subject of the EU Commission and OECD scrutiny as potentially anti-competitive, subsidy-like measures. Contrary to what public exhortations by our Ministers suggest, the threat is so real, the last Budget saw a closure of one of the more notorious features of our tax law that allowed companies to be registered here without having a tax residency anywhere on the face of Earth.

The core focus of the EU analysis, discussed by the Commissioner Almunia this week, centres on an even more worrisome feature: tax base shifting by the ICT Services MNCs. The practice basically permits MNCs to book vast revenues earned elsewhere in Europe into Ireland in order to move these revenues to tax havens. The issue is non-trivial to Ireland: tax-optimising MNCs currently underwrite virtually all growth officially registered in our economy. Not all of their activities are driven by tax optimisation alone, but our tax regime does serve as a major attractor and does generate significant uplift to our economy. Absent their activities, Irish economy would be in a recession, the Exchequer would be in an unenviable position worse than that of Portugal, and our GDP would be at least one fifth lower than it is today.


Instead of the headline rate of corporate taxation, two core questions about the entire tax regime operating in the Irish economy should be at the heart of our public debates. One: Can Irish economy afford the current tax regime in the long run? Two: Is our tax regime sustainable given the direction of European integration in fiscal, monetary and corporate policies development?

Let's deal with these questions in some details.

Current system of taxation in Ireland is directly contradictory to the core growth and development drivers in our economy. Since the collapse of the property lending and public spending bubbles of the 2000s, our sources of growth have rapidly shifted from domestic investment in real estate and infrastructure toward the skills-dependent ICT services, international financial and professional services, and specialist agrifood and manufacturing sectors.

All of these sectors share two fundamental features. They employ large number of highly skilled and internationally mobile specialists. And, they rely on new value creation via innovation. These features are based on investments in human capital, rather than traditional bricks and mortar or physical machinery. And human capital gets its returns either from entrepreneurial returns or wages. The latter dominate the former across the economy.

Faced with an option of having to pay huge direct and indirect tax rates on their labour income, while receiving virtually no services in return for these outlays, the highly skilled workers tend to run out of Ireland within 1-2 years of arriving here. Forced to compete for talent with tax optimizing MNCs, indigenous entrepreneurs are struggling to generate returns on their own investments. And both, innovation-based MNCs and indigenous producers are facing high and rising costs of recruiting key employees.

In 2013, corporation tax receipts totaled EUR4.27 billion, or 11.3 percent of total tax receipts. This compares to 15.3 percent on average in 2000-2004. Over the same period of time, the share of income tax in total tax receipts rose from 31.4 percent to 40.0 percent. VAT receipts share slipped only marginally from 29.3 percent to 28.9 percent.  Thus, the rate of extraction of tax revenues from households’ incomes rose dramatically. Burden of corporate taxation befalling rapidly growing MNCs, meanwhile, declined in relative terms.

Great Recession only partially explains this trend. Instead, the Government policy consciously shifted tax base away from activities with low economic value added, such as property and transfer pricing-driven corporate profits, and onto the shoulders of the households. Given the changes in 2010-2013 in the composition of our exports of goods and services, Ireland-based MNCs are now paying less in taxes per unit of exports than in the 1990s.

With the tax extraction hitting hard the professional and higher skilled workers earnings, our tax regime is damaging our core source of competitiveness. You don't have to troll the depths of datasets to spot this one. Every Budget since 2009 attracted numerous proposals for attempting to address the problem of income tax costs across ICT services, international financial services and R&D intensive activities. These proposals come from both the indigenous sectors and exporters and MNCs, highlighting the breadth of the problem.


In the longer run, Irish economy's reliance on tax arbitrage is similar to the 'curse of oil'. Low effective corporate tax rate accompanied by a very high upper marginal income tax and sky-high indirect levies are driving investment, as well as financial and human capital, away from well-anchored indigenous sectors and toward foot-loose MNCs.

This, in turn, exposes us to cyclical changes in MNCs global production patterns. We have already experienced such events in the late 1990s - early 2000s when ICT manufacturing and dot.com sectors evaporated from this country virtually overnight. And today we are witnessing global re-allocation and re-shaping of pharmaceutical industry. We got lucky in the 2000s when domestic economy bubble replaced deflating MNCs presence. We also got lucky this time around, with pharma patent cliff being compensated for by growing exports of ICT services. With every iteration of these risks, levels of employment in the MNCs per euro of export revenues have been falling. Next time around, things might not turn out to be as easy to manage.

Double-Irish and other loopholes are also costing us in terms of reputational and institutional capital - two major contributors to making Ireland an attractive location for international business and key environmental factors supporting indigenous entrepreneurship. While many MNCs for now have little problem dealing with tax havens, they tend to locate little but shell presence in these jurisdictions. Ireland, not being an official tax haven, offers an attractive alternative for them to both create tax optimising structures and put some real activity on the ground. However, should our reputation continue to suffer from the publicity our tax regime receives around the world as of late, this acceptability of Ireland as a real platform for doing business can change. Reputations, not made overnight, can fall in an instant, and Ireland has plenty competitors in Europe hoping for such an outrun.

Which brings us to the question of whether our tax regime is sustainable in the long run given the current policy climate in the EU and across the Atlantic. The answer to it is a ‘no’.

As this week’s comments by Commissioner Almunia and the numerous previous statements from G20, G8 and the OECD clearly indicate, governments across the advanced economies are moving to curb excessive tax optimisation strategies by the multinationals. In doing so, they are not about to sacrifice their own long-established economic systems. The main driver for this global resurgence of interest in tax avoidance and optimisation is the ongoing process of long-term structural deleveraging of public debts. Another key driver is a long-term restructuring of unfunded pensions and social welfare liabilities accumulated by the advanced economies now staring into the prospect of rapid onset of demographic ageing. Put simply, over the next 16 years, through 2030, advanced economies around the world will be facing a need to fund fiscal and retirement systems gaps of between 9 and 25 percent of current GDP. This funding is unlikely to materialise from growth in GDP alone, and will require significant restructuring of tax revenues.


One way or the other, Irish tax system will have to be reformed. The longer we resist an open and constructive debate about the entire tax system, the more likely that these reforms will be imposed onto us by the EU dictate.  To enhance our reputational and institutional capital, we need to aggressively curb tax optimisation schemes. To develop a domestically-anchored innovation-based economy, we need to shift some burden of income-related tax measures onto corporates. The best way to achieve these objectives is to protect our low corporate tax rate and close the egregious loopholes.




BOX-OUT:

Earlier this month, the EU Commission published a report into public perceptions of corruption across the EU. The findings were described by the EU Home Affairs commissioner Cecilia Malmstroem as exposing a "breathtaking" spread of corruption across the everyday lives of the European citizens. For starters, total annual cost of corruption to the European economy was estimated at EUR120 billion or roughly 10 percent of the EU GDP. According to Ms Malmstroem, the true costs are "probably much higher".

Ireland fared relatively well in the report findings, compared to the worst offenders – the member states of Eastern and Central Europe and the Mediterranean. Still, one third of Irish respondents expressed concern that officials awarding public tenders and building permits are corrupt. More than one fifth of Irish people surveyed thought that various inspectors serving the state are on the take – hardly a solid vote of confidence in our systems.

Spain and the Netherlands were the only two countries where a majority of respondents thought that corruption is widespread among banks and financial institutions, but Ireland was a close third with 48 percent.

The good news is that 13 percent (a relatively high proportion by European standards) of Irish respondents felt that corruption has decreased in the past 3 years. Bad news is that the vast majority believes that there was no improvement at all.