Showing posts with label Tax haven. Show all posts
Showing posts with label Tax haven. 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.

Sunday, December 15, 2019

15/12/19: Under the Hood of Irish National Accounts: 3Q 2019 Data


CSO have released the latest (3Q 2019) data for the National Accounts. The headlines are covered in the release here: https://www.cso.ie/en/releasesandpublications/er/na/quarterlynationalaccountsquarter32019/ and are worth checking. There was a massive q/q increase in GNP (+8.9%) and a strong rise in GDP (+1.7%).

Official value added q/q growth figures were quite impressive too:

  • Financial & Insurance Activities value added was +5.7 percent in volume, all of which, judging by the state of the Irish banks came probably from the IFSC and insurance premiums hikes
  • Professional, Administrative & Support Services +5.1 percent (this sector is now heavily dominated by the multinationals)
  • Public Administration, Education and Health sector lagged with a +1.5 percent 
  • Arts & Entertainment +1.8 percent
  • Construction grew by much more modest +1.3 percent 
  • Industry (ex-Construction) fared worse at +1.1 percent 
  • Information & Communication increased by 0.8 percent over the same period
  • Meanwhile, more domestic-focused Agriculture recorded a decline of 3.2 percent 
  • Distribution, Transport, Hotels & Restaurants posted a decline of 1.0 percent.
On the expenditure side of accounts:
  • Personal Consumption Expenditure increased by 0.9 percent q/q
  • Government expenditure increased 1.2 percent.
Not exactly the gap we want to see, especially during the expansionary cycle, but public consumption has been running below private consumption in level terms ever since the onset of the recovery.

With this in mind, here is what is not discussed in-depth in the CSO release. CSO reports a measure of economic activity that attempts to strip out some (but not all) of the more egregious effects of the tax optimising multinational enterprises' on our national accounts. The official name for it is 'Modified Domestic Demand', "an indicator of domestic demand that excludes the impact of trade in aircraft by aircraft leasing companies and trade in R&D service imports of intellectual property". Alas, the figures do include intangibles inflows, especially IP on-shoring, income from domiciled intangible assets, and transfer pricing activities. Appreciating CSO's difficulties, it is virtually impossible to make a judgement as to what of these three components is real (in so far as it may be actually physically material to Irish enterprises and MNCs trading from here) and what relates to pure tax optimisation.

With liberty not permitted to CSO, let's take the two categories out of the aggregate modified demand figures.


So, this good news first: Modified Total Domestic Demand is growing and this growth (y/y) is improving since hitting the recovery period low in 3Q 2018. 

Bad news: growth in modified domestic demand remains extremely volatile - a feature of the Irish economy since mid-2014 when the first big splashes of the Leprechaun Economics started manifesting themselves (also see last chart below).

Not great news, again, is that domestic growth is not associated with increases in investment (first chart above, blue line). 

More good news: in levels terms, adjusting for inflation, Ireland's Modified Domestic Demand has been running well-above pre-crisis period peak average levels for quite some time (chart below). Even better news, it appears that much of the recent support for growth in demand has been genuinely domestic.


Next chart shows y/y growth rates in the headline Modified Total Domestic Demand as reported by the CSO (blue line) and the same, less transfer pricing, stocks flows and IP flows (grey line). 


Starting with mid-2014, there is a massive variation in growth rates between the domestic economy growth rates as reported by the CSO and the same, adjusting for MNCs-dominated IP and transfer pricing flows, as well as one-off effects of changes in stocks (inventories). There is also tremendous volatility in the MNCs-led activities overall. Historically, standard deviation in the y/y growth rates in official modified domestic demand is 5.68, and for the period from 3Q 2014 this is running at 5.09. For modified demand ex-transfer pricing, IP and stocks flows, the same numbers are 6.12 and 1.62. 

Overall, growth data for Ireland has been quite misleading in terms of capturing the actual tangible activities on the ground in prior years. But since mid-2014, we have entered an entirely new dimension of accounting shenanigans by the multinationals. Much of this is driven by two factors:
  1. Changes in tax optimisation strategies driven by the international reforms to taxation regimes and the resulting push by the Irish authorities to alter the more egregious loopholes of the past by replacing them with new (IP-related and intangible capital-favouring) regime; and
  2. Changes in the ays in which MNCs prioritise specific investment inflows into Ireland, namely the drive by the MNCs to artificially or superficially increase tangible footprint in the Irish economy (investment in buildings, facilities and on-shored employment) to provide cover for more tax-driven FDI.
Time will tell if these changes will lead to more or less actual growth in the real economy, but it is notable that the likes of the IMF have recently focused their efforts at detecting tax optimising activities at national levels away from income flows (OECD approach to tax reforms) to FDI stocks and firm-level capital activities. By these (IMF's) metrics, Ireland has now been formally identified as a corporate tax haven. How soon before the OECD notices?..

Thursday, December 8, 2016

7/12/16: Bloomberg Blows the Cover on Apple's Irish Tax Dodge, Again


So you know the $13 billion that Apple, allegedly, owes Ireland?.. It really never did owe Ireland much. Instead, it owes the money to taxpayers outside Ireland - in countries where actual business activities took place and in the U.S., where Apple tax avoidance scheme starts, ends and start again. Here's how Bloomberg explains it: https://www.bloomberg.com/graphics/2016-apple-profits/


Oh, yeah, you are reading it right: "a popular corporate tax haven"... that'll be Ireland (per Bloomberg). expect loud protests from Dublin to Bloomberg offices and, potentially, a re-drawing of the scheme to alter the wording...

But you do get an idea: 10 years, at, say $600 million payments, that'll be almost half the $13 billion 'owed to Ireland' that is really U.S. taxpayers cash...

Friday, July 29, 2016

29/7/16: Tax Regime, Apple, Fraud?


We have finally arrived: a Nobel Prize winner, former Chief Economist and Senior Vice-President of the World Bank (1997-2000) on Bloomberg, calling Apple's use of the Irish Tax Regime 'a fraud': http://www.bloomberg.com/news/articles/2016-07-28/stiglitz-calls-apple-s-profit-reporting-in-ireland-a-fraud?utm_content=business&utm_campaign=socialflow-organic&utm_source=twitter&utm_medium=social&cmpid%253D=socialflow-twitter-business.

This gotta be doing marvels to our reputation as a place for doing business and for trading into Europe and the U.S.

The same as Facebook's newest troubles: http://www.irishtimes.com/business/technology/facebook-tax-bill-over-ireland-operation-could-cost-5-billion-1.2738677.

But do remember, officially, Ireland is not a tax haven, nor is there, officially, anything questionable going on anywhere here. Just 26.3 percent growth in GDP per annum, and booming corporate tax revenues that the Minister for Finance can't explain.

Monday, April 11, 2016

10/4/16: The Real 'Panamas' Of Tax Havens... Are Not In Central America


The story of the Panama Papers leak has brought, on a 3.6 terabyte scale, the issue of money laundering and tax evasion back to the forefront of the mainstream media. However, quietly, and unnoticed by the majority of the punters, tax optimisation and tax evasion have been moving closer and closer to the homesteads of the Governments so keen on reducing it elsewhere, beyond their own borders.

Here are just a couple of links worth checking out on the matter:

  1. The role of Nevada (yes, one of the U.S. states) as an emerging tax haven of choice: http://www.bloomberg.com/news/articles/2016-01-27/the-world-s-favorite-new-tax-haven-is-the-united-states
  2. The role of the UK (yes, another - alongside the U.S. - leader in BEPS process and the driver of the G20 push to close down ‘other nations’’ tax havens) : http://www.mirror.co.uk/news/uk-news/london-now-worlds-capital-money-7729809


Of course, the shocker no one wants to highlight when it comes to Panama Papers is that Panama became a tax haven conduit for the world on foot of U.S.-approved and / or U.S.-tolerated policies choices that stretch decades after decades after decades.

Panama’s first dappling with tax haven status was in 1927, when the country accommodated first registrations of foreign ships in a move designed to shield Rockefeller's Standard Oil from U.S. taxmen. The law allowed foreign owners to set up tax-free, anonymous corporations with little disclosures, including no requirement to disclose beneficial owners.

By 1948, the country set up its first ‘free trade zones’. One of these - the Colon FTZ - became the largest free trade zone (or tax free zone) in all of the Americas, a hit spot for trading for narcos and black marketeers.

By 1980s, Panama was saturated with offshore accounts schemes and by 1980s these started to attract large volumes of drug money. By the late 1990s, the former were pushed deeper into secrecy and the top trade became politicians, wealthy individual investors and others.

A good summary of Panama's tax haven history is available here: http://www.theguardian.com/world/2016/apr/10/panama-canal-president-jp-morgan-tax-haven.

The U.S. always knew this. And the U.S. knew this when in penned and subsequently implemented the 2011 Free Trade Agreement (with both Presidents George W. Bush and Barak Obama being behind that pearl of ‘free trade’ wisdom). One side of the coin was that FTA required Panama to enter into a separate tax information exchange treaty with the U.S., on the surface, implying improved transparency. But behind the scenes, Panama gained effectively an ‘all-clear’ sign from the U.S., making the country officially ‘compliant’. This meant that Panama could operate even more brazenly in the global markets, as long as it satisfied minimal U.S. requirements on disclosures.

Worse, until February 2016, the Financial Action Task Force (FATF), an international body responsible for setting and monitoring anti-money laundering rules, had Panama on its "blacklist" of non-compliant countries. Something the U.S. knew too. It was removed from the list because the Government passed some new laws designed to curb inflows of outright criminal funds into its financial system

In February 2014, the IMF carried out review of Panama’s regulatory and enforcement regimes relating to FATF regulations. Here is the first line conclusion from the IMF: “Panama is vulnerable to money laundering (ML) from a number of sources including drug trafficking and other predicate crimes committed abroad such as fraud, financial and tax crimes” (see full report here: http://www.imf.org/external/pubs/ft/scr/2014/cr1454.pdf).

When it comes to money laundering (ML), the IMF states that “According to the [Panamanian] authorities, the largest source of ML is drug trafficking. Other significant but less important predicate offenses and sources of ML are cited to include: arms trafficking, financial crimes, human trafficking, kidnapping, corruption of public officials and illicit enrichment. With respect to predicate crimes committed outside of Panama, the authorities indicate that these would include activities related to financial crimes, tax crimes (tax evasion is not a predicate crime for ML in Panama) and fraud. These foreign offenses are likely to be linked with Panama’s position as an offshore jurisdiction. It is believed that ML related to these crimes is conducted electronically through the use of computers and the internet using new banking instruments and systems both in Panama and internationally. The authorities indicated that the diversity of foreign predicate crimes has been increasing in recent times.”

Overall, Panama laws still do not cover, even under the U.S. ‘enhanced transparency’ regime actions of lawyers, accountants, insurance companies, notaries, real estate agents or brokers dealing in precious metals and stones.

This all is now coming as a shocker for the U.S. and UK and European authorities in the wake of the Panama Papers leak? Give me a break!

The co-founder of Mossack Fonseca, Ramon Fonseca, recently accused the BEPS-leading countries, the U.S. and UK of hypocrisy. "I assure you there is more dirty money in New York, Miami and London than there is in Panama," he told the New York Times (see: http://www.bbc.com/news/business-35998801). And just in case you wonder, here are top 30 countries in terms of financial secrecy laws:

Yep. USA - Number 3... and so on...

Tuesday, September 9, 2014

9/9/2014: iPhone 6 Dilemma for Ireland?..


And so it comes... the iPhone 6 is about to be launched, and Apple has a major dilemma. Hype in the market suggests bumper sales for the new phone. But sales mean profits. And profits, for Apple, mean growing a pile of cash stashed in off-shore locations, including Ireland that the company can't do much with. Get the dilemma? The Guardian did: http://www.theguardian.com/technology/2014/sep/07/apple-iphone-6-cash-pile-tax-avoidance-us?curator=MediaREDEF.

I covered this earlier: http://trueeconomics.blogspot.ie/2014/06/2562014-imf-on-corporate-tax-spillovers.html as well as within the context of the overall position of Ireland as a corporate tax non-haven (you can track the topic from the links starting here: http://trueeconomics.blogspot.ie/2014/08/2682014-betting-on-corporate-tax.html).

Lest we forget: in the last 12 months through Q1 2014 (the latest for which data is available), Irish economy shipped out EUR26.678 billion in net factor payments abroad (these are, roughly, profits paid out to foreign entities out of Ireland, net of profits from Irish investments abroad). In the same 12 months period of 2012-2013, the amount was EUR28.517. Which means that in the 12 months through Q1 2014, cash repatriation out of Ireland was EUR1.839 billion lower than a year before. This contributed positively to our GDP. But our GDP over the same period rose by EUR1.953 billion. So if profits repatriation was running in 12 months through Q1 2014 at the same rate as in 12 months through Q1 2013, our GDP would have risen not by EUR1.953 billion (+1.13%) but by EUR114 million (+0.07%).

Let's take a look at Apple, again: the company has USD140 billion worth of cash stashed around the world, with much of this - by various reports between USD60 and USD90 billion via Ireland. Take a lower envelope and start repatriating... there can be a risk of a serious recession in Ireland were this to happen.

Ah, all the worries of the FDI-rich Ireland, the best little country to do tax business from...

Sunday, September 7, 2014

7/9/2014: The Neighbourhood We Are In: Dublin as Global Financial Centre


Look who ranks as an offshore financial centre as opposed to regional or global or niche / specialist centre? Why... of course it is...


And what a neighbourhood we occupy... Lux, Guernsey, Caymans, Bermuda and Isle of Man... all, presumably, trading on their human capital, skills, world class education, innovation, R&D, state policies for development of entrepreneurship, rigorous world class quality regulations. etc, etc, and strictly transparent benign taxation regime...

Saturday, July 26, 2014

26/7/2014: This Week in Corporate 'Not Tax Haven' News



Earlier today I wrote about the round of 'assert-deny' salvos fired across Ireland's deck by German economic policy adviser and the Department of Finance (http://trueeconomics.blogspot.ie/2014/07/2672014-of-germans-bearing-ugly-truth.html). This was hardly the only defensive that Ireland Inc had to run this week. A much larger one came on foot of the US President Barak Obama singling Ireland out as the key global player in the dirty game of corporate tax inversions.

Newsflow was not too generous to Ireland on this front (corporate tax evasion and optimisation) this week.

It started with a report by Reuters (http://www.reuters.com/article/2014/07/24/deals-taxinversions-lawfirms-idUSL2N0PK1L820140724) on how Irish legal eagles are leading the way in advertising this land of human capital and regulation arbitrage riches as a [not a] tax haven. Singled out in the report are: Arthur Cox, A&L Goodbody, and Matheson. But other firms are into this game too. And not just in the US. In fact, there are plenty 'country specialists' employed in the legal offices in Ireland and around the world, tasked with 'selling' Ireland's 'unique competitiveness points' to potential clients interested in optimising their tax exposures.

Obama weighted in later in the week and, of course, the Government had to weigh in with a hefty doses of 'we deny we do it': http://www.businessworld.ie/bworld/livenews.htm?a=3192721 and http://www.reuters.com/article/2014/07/25/ireland-tax-inversions-idUSL6N0Q03LS20140725

The problem is that denying direct Government involvement is hardly a defence. Facts are: Ireland is being promoted as a tax optimisations destination and not solely on foot of our headline 12.5% tax rate. This promotion is known, brazen and visible, and it comes via law firms with direct links - contractual and advisory - the the Government and the State.

And the stakes, relating to the above promotion, are high: http://www.independent.ie/business/irish/accountants-warn-tax-changes-could-harm-investment-30457978.html on policy side and on business side: http://www.independent.ie/irish-news/google-pays-27m-corporation-tax-on-17bn-revenue-30458696.html

In short, things are ugly and are going to get even more ugly as OECD is preparing road maps for addressing more egregious abuses, while the US, UK, EU, European member states and even Australia and Japan are now firmly in the need to 'do something' about losses of Government revenues arising from sharp tax optimisation practices. Irish Government can put as many junior ministers as it wants onto RTE to talk about Ireland being 'unfairly singled-out' or 'misunderstood' or whatever else, but

  1. Fact remains fact: tax arbitrage policies of this state are starting to cost us dearly in reputation and actual economic costs (http://trueeconomics.blogspot.ie/2014/06/2562014-imf-on-corporate-tax-spillovers.html and http://trueeconomics.blogspot.ie/2014/06/1762014-irelands-regulatory-resource.html and http://trueeconomics.blogspot.ie/2014/02/822014-yahoos-tax-base-err-optimisation.html and http://trueeconomics.blogspot.ie/2014/01/2112014-no-special-ict-services-tax-but.html)
  2. We are but a small open economy caught (due to our own fault) in between the irate giants who not only set global policies, but also control our access to markets and investment

Time for us to stop playing ostriches with our ministers, but to get into the game of leading the reforms at home and internationally.

Monday, July 14, 2014

14/7/2014: As Far As Debtor Nations Go… All That FDI


There are more interesting revelations in the IMF survey of the Euro Area when it comes to Ireland. Let's imagine what we think of the Emerald Isle… no, not Guinness and not music or the Temple Bar… let's think of FDI. 
  • It is huge, right? Right. 
  • It is a marker of huge source of our success, right? Right-ish. 
  • It is making us richer as a nation, right? Err…

Ok, IMF provides a neat table summarising euro area economies as net creditors (the ones for which Net Foreign Assets held in the economy - private and public - are positive, so the world 'owes' them and associated with this, they have a positive, with exception of Malta, current account, averaging over 1999-2013) and debtors (the ones for which Net Foreign Assets are negative and so they owe, net, to the world, with their current account balances being negative on average over long period of time).

So Ireland is FDI-rich - we have lots of foreign assets that we can call upon as ours, right? Hmm… judge by the table:



And now notice two things:
  1. Our Net Foreign Assets position is a whooping -105% of GDP, less disastrous than that of only two other countries: hugely indebted Greece and heavily indebted and less open Portugal;
  2. Our current account averages at a deficit, of -0.6% of GDP which is benign compared to all other debtor economies, but that said, even at the best performance (maximum) we have generated a current account surplus of just 3.1% of GDP which is… no, not spectacular… it is ranked tenth in the euro area.

Do tell me if this consistent somehow with the evidence that Ireland's external balances are strong indicators of our economy's structural successes, as Irish and Brussels analysts are keen claiming?

But IMF soldiers on. In the following table in the same report it shows us the Average Real Return Difference between Foreign Assets and Liabilities Euro Area Economies. Now, what should we expect from our successes with FDI? That returns to assets inside Ireland should be in excess of returns on Irish assets held abroad. We are, after all, more successful in using investment (FDI) than other countries. What do we get? Exactly the opposite:



Note per above, our real return difference is a whooping 2.8 percentage points - largest after Greece and Slovak Republic. We know what is happening in Greece's case, but what on earth is happening with Slovak Republic case? Why, the same thing that is happening with Ireland: exports of returns via FDI.

So the above simply means we pay more on our liabilities than we get from our assets. In household finances sense... we are going broke...

Is this a problem? Why yes, it is. Here's IMF: "On average, many creditor economies saw negative real return differences between their foreign assets and liabilities, acting as a drag on their net foreign asset positions and also suggesting possible gains from portfolio rebalancing, either by shifting away from foreign towards domestic assets, or by changing the composition of their foreign assets and liabilities, away from euro area debtor economies. At the same time, many debtor economies had large negative real return differences on average, reinforcing their large net foreign liability positions and making adjustment more of an uphill climb."

That said, things are improving - our current account is now in stronger position than in the 2002-2007, but that is largely because of our consumption of imported goods dropping. Still, things are improving...

Wednesday, June 25, 2014

25/62014: IMF on Corporate Tax Spillovers: Ireland one of top names

IMF just published a watershed document on Corporate Taxation - relating to the tax avoidance and aggressive tax optimisation - and its effects on emerging and developed economies. Ireland features prominently in the report.

Here's what it is about.

A new IMF Policy Paper, titled "SPILLOVERS IN INTERNATIONAL CORPORATE TAXATION" considers "the nature, significance and policy implications of spillovers in international corporate taxation—the effects of one country’s rules and practices on others."

Emphasis, throughout is mine (in italics and bold).

The paper develops further the concerns about potentially harmful spillovers from corporate tax regimes in countries with regimes permitting more aggressive tax optimisation onto other economies, in line with concerns expressed by G7, G20 and the OECD and developed under the OECD framework project on Base Erosion and Profit shifting (BEPS).

I wrote about this some time ago and covered it extensively on the blog and in the media. Here are couple of top-line links on the BEPS issues relating to Ireland and other EU countries:

  1. Link to my Cayman Financial Review paper on corporate taxation issues in Ireland: http://trueeconomics.blogspot.ie/2014/04/2242014-on-irish-taxes-quangos-trade.html
  2. My CNBC interview on Apple case: see third link here http://trueeconomics.blogspot.ie/2014/06/2062014-some-recent-media-links-for.html
  3. My WallStreet Journal op-ed on Apple case: http://trueeconomics.blogspot.ie/2014/06/1762014-irelands-regulatory-resource.html


The IMF paper starts by arguing that tax spillovers can matter for macroeconomic performance, as "…there is considerable evidence that taxation powerfully affects the behavior of multinational enterprises. New results reported here confirm that spillover effects on corporate tax bases and rates are significant and sizable. They reflect not just tax impacts on real decisions but, and apparently no less strongly, tax avoidance."

Per IMF, globally, "The institutional framework for addressing international tax spillovers is weak. As the strength and pervasiveness of tax spillovers become increasingly apparent, the case for an inclusive and less piecemeal approach to international tax cooperation grows."

In other words, prepare for a greater push toward closing loopholes and harmful practices that so far have been the cornerstone of the Irish corporate tax policy conveniently obscured by the benign headline rate.


In fact, Ireland is at the forefront of the problems identified in the IMF paper and it is also at the forefront of the table of countries that will lose should aggressive tax optimisation be curbed.

In relation to problem countries, we feature prominently as an economy heavily dependent on FDI and tax optimisation (surprise, surprise):



Here's what the IMF have to say about the above evidence: "One set of questions concerns whether international corporate tax spillovers matter for macroeconomic performance. For capital movements, at least, it seems clear that they do. Table 1, showing characteristics of the ten countries with the highest FDI stocks relative to GDP, suggests that patterns of FDI are impossible to understand without reference to tax considerations (though these of course are not the only explanation). And the point is significant not only for some individual countries (accounting for a stock of FDI extremely high relative to their GDP) but globally (with relatively small countries accounting for a very large share of global FDI). The potential economic implications of international tax spillovers thus go well beyond tax revenue, with wider implications for the broader level and distribution of welfare across nations."


On pervasiveness of corporate income tax (CIT) optimisation in the overall host economy, IMF defines ‘CIT-efficiency’ in country A as the ratio of actual CIT revenue in this country to the reference level of CIT revenue, with the latter computed as the standard CIT rate multiplied by a reference tax base… To the extent that the reference CIT base is larger than the actual ‘implicit’ CIT base [CIT-efficiency measure] will be less than unity; and the further [CIT-efficiency measure] lies below unity, the less effective is the CIT in raising revenue relative to the benchmark."

Per IMF: "Variations in [‘CIT-efficiency’ metrics across countries and time] might reflect behavioral responses that affect GOS [gross operating surplus] and the implicit CIT base in different ways. One obvious candidate is profit shifting, the incentives for which are determined by differences in statutory CIT rates: if a country has a relatively high CIT rate, outward profit shifting will likely cause an erosion of the tax base, without a corresponding reduction in GOS. Conversely, for a country with a relatively low CIT rate, inward profit shifting will tend to expand the implicit base."

Key here is that "…profit shifting would be expected to induce a negative correlation between [‘CIT-efficiency’ metric] and [Corporate Tax Rate]." In other words, to spot profit shifting into the country from abroad, we need to have low corporate tax rate and very high CIT efficiency at the same time…

And guess who's at the top of the global bottom-feeding food chain here?

CHART: Mean CIT Efficiency, 2001–2012

Note: CIT efficiency for Cyprus is 213 percent.

Just look who is second in the world in terms of mean CIT efficiency (we know we are at the top of the world distribution when it comes to low corporation tax rate)… So remember: per IMF, high CIT efficiency combined with low tax rate = a signal that profit shifting is taking place into the economy.

IMF usefully decomposes tax shifting effects for the case of US MNCs as follows.

"The calculations begin with the net incomes of U.S. parents and Majority Owned Foreign Affiliates (MOFAs) by country of affiliate, taken from Bureau of Economic Affairs data… These are adjusted by the average effective corporate income tax rate in the respective country to obtain estimates of taxable income. The average effective tax rate for global taxable income is weighted according to countries’ GDP. Country shares of U.S. MNEs’ sales, assets, compensation of employees and number of employees are obtained from the same tables, adding totals for U.S. parents and MOFAs in all countries. Shares of each apportionment key are applied to global taxable income to derive changes in taxable income."

Here is the main kicker: "Appendix Table 8 shows the country-specific estimates… Broadly, a country gains from FA [global reforms in tax if tax were to accrue in the country where the company bases its activity that generates taxable income] on the basis of some factor if its share in the global total of that factor exceeds its share in the net income of US MNEs. That Italy, for instance, gains under all factors reflects the very low share of US MNEs net income reported there: about 0.16 percent. Whether that reflects inherently low profitability or particularly aggressive outward profit shifting cannot be determined from these data."

In other words, broadly speaking, positive values in the table below are when countries will benefit from tax shifting being shut down, and negative are where the countries will lose from such reforms. Alternatively - positive values show the effective losses incurred by the country from tax shifting. Negative values represent the gains to the country from acting as a tax shifting platform.

CHART: Appendix Table 8. Reallocation of Taxable Income from Alternative Factors, U.S. MNEs Percent of change


Ireland features prominently in this table as a country with:

  • the fourth highest benefit from tax shifting in terms of sales activity booked
  • first highest in terms of assets booked, 
  • third highest in terms of compensation and employment. 

Crucially, we are in line with such tax-transparent jurisdictions as Bermuda and Luxembourg, ahead of the Netherlands and well ahead of Singapore and Switzerland.

But keep repeating to yourselves, we are not a tax haven… not a tax haven…

Thursday, December 26, 2013

26/12/2013: Italy's Illegal Measure Takes a Shot at Corporate Tax Optimisation


Just when I thought we are safe from the 'Tax Haven Ireland' stories at least until the end of holidays, the latest instalment in the saga arrived… this time from Italy.

With this in mind, let's update the string of links covering the topic. You can follow earlier links from here: http://trueeconomics.blogspot.ie/2013/12/8122013-is-ireland-also-german-federal.html (see the bottom of the post).

I wrote before about Italy's plans to curb tax optimisation by web-based MNCs. Here's the latest announcement on the topic: http://www.bloomberg.com/news/2013-12-23/italy-approves-google-tax-on-internet-companies.html

So Italy now passed the 'Google Tax'. It aims to collect USD1.35 billion or EUR1 billion in tax revenues. The tax is utterly illegal under the EU rules.

The 1957 Treaty (of Rome) establishing a European Economic Community (EEC) Part 1, Art.3(c): “the abolition, as between Member States, of obstacles to freedom of movement for persons, services and capital”.
The Treaty (of Lisbon) on the Functioning of the European Union (TFEU): Art. 26 (2) “the internal market shall comprise an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured…"

The point, however, is that the Italian parliament measure is putting added pressure on  the OECD, the EU and the national governments to deal with the problem of aggressive tax optimisation practices of some MNCs.

Sunday, December 8, 2013

8/12/2013: Is Ireland also a German (Federal) Not-a-Tax-Haven?


Irish tax system continues to percolate through international news. Here are two recent articles:

  1. ZDNet coverage of Tech sector corporate tax payments in Ireland: http://www.zdnet.com/representation-without-taxation-tech-giants-and-their-loopy-business-of-innovative-tax-avoidance-7000023539/
  2. Irish Times story on Germany official use of Irish tax system for balancing the budget: www.irishtimes.com/business/economy/german-ministers-used-irish-shell-firms-to-balance-budget-1.1613637

Which of course begs a suggestion: may be Ireland is not a corporate tax haven... afterall, Germany is not a corporation...

You can track series of articles featuring Irish tax regime in international media starting from this link: http://trueeconomics.blogspot.ie/2013/10/28102013-back-in-news-double-irish.html

Saturday, November 16, 2013

16/11/2013: Apple under fire in Italy... thanks to its Irish tax practices


More unpleasant tax news flows for Ireland: Italians continue their campaign against low tax payments by predominantly US MNCs. As I remarked before (here: http://trueeconomics.blogspot.ie/2013/11/14112013-with-banks-or-without-things.html) this is a misguided campaign based on fiscal desperation, but it does not bode well for us here in Ireland to see the country name being firmly linked with what our 'partners' in Europe are not exactly happy...
http://news.sky.com/story/1168449/apple-faces-italy-tax-fraud-inquiry

You can track series of links on the subject of Ireland's corporate tax systems starting from here: http://trueeconomics.blogspot.ie/2013/10/28102013-back-in-news-double-irish.html

Monday, October 28, 2013

28/10/2013: Back in the News: Double-Irish (non)Tax Haven

Starting the week on the right footing... Ireland's tax regime back in the news:

And note: this is not tax haven, although it is, according to the specialist behind it, going away... cause it is not a tax haven, of course...

You can track series of articles featuring Irish tax regime in international media starting from this link:


Friday, September 13, 2013

13/9/2013: Another month, another 'look into' Irish tax rules

The regular readers of this blog are aware that I try to track the more important news items concerning Ireland's corporate tax policies. The links to these stories can be successively follows from here: http://trueeconomics.blogspot.ie/2013/08/1982013-tax-haven-ireland-in-2009-news.html

Two more items from today are worth listing in addition to the above:

  1. An article from the Irish Independent (http://www.independent.ie/business/irish/state-to-lift-lid-on-us-firms-secret-tax-rulings-29575810.html). Couple of selective quotes: "Details of how multinational companies' tiny tax bills are calculated are to be revealed by the State for the first time." And per usual disclosure that the Stockholm Syndrome patients must have: "Irish authorities have always insisted that there are no special tax deals for companies. Under Irish law, all businesses are supposed to be subject to the same laws and tax rates." Alas, as article notes: "This is the first time information about how Ireland taxes big corporations has ever been shared outside of the Revenue Commissioners and the companies themselves... Tax rulings are so confidential that even the Department of Finance is never given details by Revenue of individual cases." Ok, nothing to see there, folks, it's just so we like secrets, we've just decided to have our own Area 51... cause we like it that way, not cause there's any smoking guns or something...
  2. And so we don't really have to worry about out tax policies, as the Government says we shouldn't, here's a article from the Irish Times (http://www.irishtimes.com/business/economy/eu-finance-ministers-put-state-s-tax-regime-in-spotlight-1.1525893). More selective quotes: "Ireland is likely to face tough questions about its corporate tax regime when EU finance ministers gather today in Vilnius for a two-day meeting, following confirmation that the European Commission has begun a preliminary inquiry into the country’s tax practices." Repeat with me... there is nothing in these codes to worry about. "... Ireland, Luxembourg and the Netherlands will be under pressure to defend their tax structures amid claims that all three countries may have offered tax deals to specific companies in breach of state aid rules." Clearly all G7 nations, plus all EU nations are just being taken for a ride by someone, somewhere, who got it into their heads that there is something questionable going on with Irish tax system. In case you have doubts: "Dublin moved quickly yesterday to deny suggestions that Ireland had engaged in anti-competitive behaviour, with Taoiseach Enda Kenny insisting that the State was committed to a “transparent” system. Tánaiste Eamon Gilmore said that Ireland’s tax regime was open and “statute-based”. He said his understanding was that the inquiry was part of an “information-gathering exercise which is done from time to time”." Yes, that's right folks: 'from time to time' 'routine stuff'... Would Mr Gilmore - with his wisdom and perfect knowledge of the matters suggest to us when was the last time the 'routine' thingy 'gathering' such information was done? Or when was the last time G7 and G20 discussed Ireland's tax rule before 2011-2013? Just for the record, please, Mr Gilmore?

Monday, August 19, 2013

19/8/2013: 'Tax Haven' Ireland in the (2009) news again

I've been tracking articles relevant to the debate on the tax haven status of Ireland in relation to corporation tax for some time now.

Here's the last link which sets the chain of previous links on the topic:
http://trueeconomics.blogspot.it/2013/06/1062013-corporate-tax-haven-ireland.html

And since the above, I had couple of posts relevant to the subject:
http://trueeconomics.blogspot.it/2013/06/1662013-minister-in-northern-ireland-is.html
and
http://trueeconomics.blogspot.it/2013/07/2272013-g20-spells-out-squeeze-on-tax.html

Here are couple of most recent ones:

The Guardian covers 2009 case of Vodafone in two stories:
http://www.theguardian.com/business/2013/aug/18/vodafone-tax-deal-irish-office
http://www.theguardian.com/business/2013/aug/18/tax-vodafone-dublin
while the Tax Justice Network responds to the OECD Action Plan on corporate tax avoidance, explicitly identifying Ireland as a 'tax haven'
http://blogs.euobserver.com/shaxson/2013/07/19/press-release-response-to-oecd-action-plan-on-corporate-tax-avoidance/
and lastly the editorial in the EUObserver that also labels Ireland a 'tax haven':
http://blogs.euobserver.com/shaxson/2013/05/02/the-capture-of-tax-haven-ireland-the-bankers-hedge-funds-got-virtually-everything-they-wanted/

Note 1: The Guardian article references EUR67 million rebate on EUR1.04 billion in Vodafone dividends booked into Luxembourg. The dividends were paid on underlying revenues that were booked into Irish GDP and, thus, into our GNI (netting out transfers of royalties etc).These, in turn, required a payment of 0.59% of GNI-impacting activities to the EU Budget. While is is hard to exactly assess how much Irish Exchequer unnecessarily paid into the EU budget due to Vodafone activities, the amount is probably in excess of EUR 5 million and this compounds the transfers of EUR67 million referenced by the Guardian.


Note 2: I am not as much interested in the legal definitions of a tax haven (there are none and, thus, technically-speaking no country can be definitively labeled a tax haven) or in specific groups' definitions of the tax haven (the OECD definition is so convoluted, it virtually makes it impossible for any country with any global political clout - including that acquired via membership in the EU - to be labeled one, while the Tax Justice Network definition is broad enough to potentially include a large number of countries). I am concerned with the spirit of the concept - rent-seeking via tax arbitrage, and with the potential fallout from this in terms of distortions to economic development models and risks arising from same.

Note 3: A 'thank you' is due to a number of people who reminded me - in the context of the Guardian articles linked above - that Ireland charges a 25% corporate income tax on non-trading income. TY to    

Thursday, June 6, 2013

6/6/2013: Domestic Economy v MNCs: Sunday Times 26/5/2013


This is an unedited version of my Sunday Times column from May 26, 2013



Over recent months, one side of the Irish economy – the side of aggressive tax optimization and avoidance by the Ireland-based multinational corporations – has provided a steady news-flow across the global and even domestic media. While important in its own right, the debate as to whether Ireland is a corporate tax haven de facto or de jure is missing a major point. That point is the complete and total disconnection between Ireland’s two economies: economy we all inhabit in our daily lives and economy that exists on paper, servers and in the IT clouds. The latter has a mostly intangible connection to our everyday reality, but is a key driver of Ireland’s macroeconomic performance and the Government PR machine.

Take a look at two simple sets of facts.

According to our national accounts, Ireland’s economy, measured in terms of GDP per capita, has been growing for two consecutive years expressed in both nominal terms and inflation-adjusted terms. Real GDP per capita in Ireland grew over 2010-2012 period by a cumulative 2.38% according to the IMF. Accounting for differences across the countries in price levels and exchange rates (using what economists refer to as purchasing power parity adjustment), Ireland’s GDP per capita has risen 5.7% over the two years through the end of 2012. Over the same period of time, Ireland’s GNP per capita, controlling for exchange rates and prices differentials, has grown by 3.3%.

Sounds like the party is rolling back into town? Not so fast. The aggregate figures above provide only a partial view of what is happening at the households’ level in the Irish economy. Stripping out most of the transfer pricing activity by the multinationals, domestic economy in Ireland is down, not up, by 5.2% between 2010 and 2012, once we adjust for inflation and it is down 2.7% when we take nominal values. With net emigration claiming around six percent of our population, per capita private domestic economic activity has fallen 4.2% over the last two years.

All in, Irish domestic economy is the second worst performer in the group of all peripheral euro area states, plus Iceland. Sixth year into the crisis, we are now in worse shape than Argentina was at the same junction of its 1998-2004 crisis.


What the above numbers indicate is that the Irish domestic economy, taken at the household level, has been experiencing two simultaneous pressures.

While aggregate inflation across the economy has been relatively benign, stripping out the effects of the interest rates reduction on the cost of housing, Irish households are facing significant price pressures in a number of sectors, reducing their real household incomes just at the time when the Government is increasing direct and indirect tax burdens. At the same time, rampant unemployment and underemployment have been responsible for lifting precautionary savings amongst the households with any surplus disposable income. By broader unemployment metrics that include unemployed, officially underemployed, and state-training programmes participants, Irish unemployment is currently running at 28% of the potential labour force. Adding in those who emigrated from Ireland since 2008 pushes the above broad measure of unemployment to close to 33%.

Lastly, the households are facing tremendous pressures to deleverage out of debt, pressures exacerbated by the Government-supported efforts of the banks to increase rates of recovery on stressed mortgages.

In this environment, real disposable incomes of households net of tax and housing costs are continuing to fall despite the increases recorded in GDP and GNP. The Irish Government, so keen on promoting our improved cost competitiveness when it comes to the foreign investors is presiding over the ever-escalating costs of living at home.

In 2012 consumer prices excluding mortgages interest costs stood the highest level in history and 1.2% ahead of pre-crisis peak of inflation recorded in 2008. Much of this is accounted for by the heavily taxed and regulated energy prices.

Sectoral data reveals the story of rampant annual inflation in state-controlled parts of the economy. Of ten broader categories of goods and services, ex-housing, reported by CSO, all but one private sectors posted virtually no inflation over 2012 compared to the average levels of prices in 2006-2008 period. Food and non-alcoholic beverages prices declined 1.4%, clothing and footware prices are now a quarter lower, costs of furnishings, household equipment and routine household maintenance are down 13%, and recreation and culture services charges are down more than 2.7%. Restaurants and hotels costs are statistically-speaking flat with price increases of just 0.4% on 2006-2008 average. The only private sector that did post statistically significant levels of inflation was communications where prices rose 3.5% by the end of 2012 compared to pre-crisis average. But even here postal services charges lead overall inflationary pressures.

In contrast, every state-controlled and heavily taxed sub-sector is posting rampant inflation. Alcoholic beverages and tobacco prices are up 12.3%, health up 13.4%, transport up 11.4%, and education costs are up 30.4%. Energy costs are up 32.5% and utilities and local charges are up 14.9%. While energy costs rose virtually in line with increases in global energy price indices, the state still reaped a windfall gain from this inflation via higher tax revenues, and higher returns to state-owned dominant energy market companies: ESB, Bord Gais and Bord na Mona.

The state extraction of funds through controlled charges and taxation linked to these charges is rampant. Over 2009-2012 period, indirect taxes, state revenues from sales of services and investment income – all linked to the cost base in the underlying economy rose from EUR 24.8 billion in 2009 (44.3% of total state revenues) to EUR 25.2 billion in 2012 (44.5% of total state revenues). This was despite significant declines in imports and consumption of goods in the domestic economy and declines in government own consumption of goods from EUR 10.4 billion in 2009 to EUR 8.56 billion in 2012. For those who think this extraction is nearly over now, let me remind you that IMF forecast increases in Government revenues for Ireland over 2014-2018 are set to exceed revenues increases passed in all budgets since 2008.


The price and tax hikes on Irish households leave them exposed to the risk of future increases in mortgages costs. Government controlled prices are sticky to the downside, which means that the once prices are raised, the state regulators and policymakers are unwilling to adjust prices downward in the future, no matter how bad households budgets can get. The reason for this is that semi-state companies reliant on regulated charges have significant market and political powers, especially as they act as prime vehicles for big bang ‘jobs creation’ and ‘investment’ announcements that fuel Irish political fortunes. At the same time, the state uses revenues obtained directly via dividends payouts and indirectly via taxes on goods and services supplied by the semi-state companies as substitutes for direct taxation. Absent deflation in state-controlled sectors, there is very little room left in the private sectors to compensate households for any potential future hikes in mortgages by reducing costs of goods and services elsewhere.

And mortgages costs are bound to rise over time. In 2008, new mortgages interest rates averaged around 5.2% against the ECB repo rate average of 3.85%, implying a lending margin of around 135 basis points. Since January 2013, ECB rates have averaged 0.7% while Irish mortgages rates averaged around 3.4%, implying a margin of 270 basis points. At this stage, we can expect ECB rates to revert to their historical average of around 3.1% in the medium-term future. At the same time, according to the Troika, Government and Central Bank’s plans, Irish banks will have to increase their lending margins. Put simply, current average new mortgages rates of 3.4% can pretty quickly double. Ditto for existent mortgages rates.

Based on CSO data, end of 2012 mortgages interest costs stood at the levels some 14.5% below those in 2007-2009 period and 29.6% below pre-crisis peak levels.  Reversion of the mortgages interest rates to historical averages and adjusting for increased lending margins over ECB rate would mean that mortgages interest costs can rise to well above their 2008 levels, with inflation in mortgages interest payments hitting 50%-plus over the next few years.


The dual structure of the Irish economy, splitting the country into an MNCs-dominated competitiveness haven and domestic overpriced and overtaxed nightmare, is going to hit Ireland hard in years to come. The only solution to the incoming crisis of rampant state-fuelled inflation in the cost of living compounding the households insolvency already present on the foot of the debt crisis is to reform our domestic economy. However, the necessary reforms must be concentrated in the areas dominated by the state-owned enterprises and quangos. These reforms will also threaten the state revenue extraction racket that is milking Irish consumers for every last penny they got. With this in mind, it is hardly surprising that to-date, six years into the crisis, Irish governments have done nothing to transform state-sponsored unproductive sectors of the domestic economy into consumers-serving competitively priced ones.

Chart with Argentina: GDP per capita adjusted for PPP differences (prices and exchange rates)




Box-out: 

Remember Ireland’s ‘exports-led recovery’ fairytale? The premise that an economy can grow out of its banking, debt and growth crises by expanding its exports has been firmly debunked by years of rapid growth in exports of goods and services, widening current account surpluses and lack of real growth in the underlying economy. Recent data, however, shows that the thesis of ‘exports-led recovery’ for the euro area is as dodgy as it is for Ireland. In 2010-2012, gross exports out of the euro area expanded by a massive 21.4%. Over the same period GDP grew by only 2.8%. Stripping out positive contributions from the private economy side (Government and household consumption, plus domestic investment), net exports growth effectively had no impact on shallow GDP expansion recorded in 2010 and 2011. The latest euro area economy forecasts for 2013 across 21 major research and financial services firms and five international economic and monetary policy organizations show a 100% consensus that while exports out of the euro area will continue to post positive growth this year, the euro area recession will continue on foot of contracting private domestic consumption and investment. Median consensus forecast is now for the euro area GDP to fall 0.4% in 2013 on foot of 2.1% drop in investment, 0.8% contraction in private consumption and a relatively benign 0.3% decline in Government consumption. The same picture – of near zero effect of exports on expected growth – is replayed in 2014 forecasts, with expectations for investment followed by private consumption expansion being the core drivers for the euro area return to positive GDP growth of ca 1.0%. Sadly, no one in Europe’s corridors of power seem to have any idea on how to move from fairytale policies pronouncements to real pro-growth ideas.

Sunday, May 26, 2013

26/5/2013: Corporate Tax Haven Ireland Weekly Links Page

"Taxes are not up to Google," Schmidt reiterated. "If the international tax regime changes we will follow. But virtually all American companies have structures like this; this is how the international tax regime works. The fact of the matter is if we pay more tax in one area, we pay less somewhere else."

Thus spoke Eric Schmidt of Google (http://www.wired.co.uk/news/archive/2013-05/22/eric-schmidt-tax) and guess what: he is right. Google is not breaking the law. It is the law that allows for countries, like Ireland, to follow beggar thy neighbour economic policies and strategies.

The issue is not the low tax rate, but the fact that various loopholes allow companies operating - allegedly in Ireland - to channel revenues from other countries into Ireland. This is not about exports from Ireland, and it is not about low tax regime in Ireland. When an MNC books revenue earned somewhere else to Dublin, MNC is not break a law. Instead, Ireland is facilitating transfer of funds that relate to value added activity elsewhere to its own economy. This, in the nutshell, summarises the entire nature of Irish economic development strategy: take value added from somewhere else and appropriate it as Irish.


And in the spirit of usual weekly posts (see thread start on Irish Corporate Tax Haven here: http://trueeconomics.blogspot.ie/2013/05/1452013-corporate-tax-haven-ireland.html ): in this week, it is virtually impossible to list all Tax Haven Ireland links from around the world in a post, but here are some:

I shall stop there, for now...