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.

22/7/2013: G20 Spells Out a Squeeze on Tax Arbitrage

Last week we saw the conclusion of the G20 Finance Ministers and Central Bank Governors meeting in Moscow. The meeting covered, in part, financial regulation and international taxation issues, aimed at addressing, as the IMF put it, "international spillovers of national tax policies".

Here's what the basic set of the proposals discussed implies for Ireland - a country at the centre of these spillovers in the euro area and largest per-capita beneficiary of the international tax arbitrage after Luxembourg.

The OECD-prepared, G20 discussed 'Action Plan' on Base Erosion and Profit Shifting (BEPS) covers loads of technical ground. The main points of relevance to Ireland's real economy are:

1. Tax issues relating to the Digital Economy - including coverage of tax application to services, geographic distribution of tax revenues etc. In the nutshell, the G20 will aim to adapt international direct and indirect taxation rules to the digital economy, including attribution of profit 'together with the character and source of income'. In simple terms, aggressive tax base shifting from, say the UK-sold advertising revenues to, say Ireland-based pro forma sales centre. In other words, the rules will challenge the system on which much of the Ireland's comparative advantage in ICT and financial services currently rests. The threat is more genuine in my view in the case of ICT services than in the case of financial services.
2. Tighter controls over Controlled Foreign Company rules - a relatively minor issue from the point of view of Irish real economy, but having a potential to impose small adjustment on our official GDP.
3. Reduce artificial avoidance of tax application, presumably including by schemes such as Double Irish. This has potentially strong adverse impact on Irish economy.
4. Intangibles transfers within the company group are to be tightened, to reduce effectiveness of transfer pricing. Once again, this suggests pressures on IP tax arbitrage and licenses arbitrage - a core competitive point for Ireland.
5. The Plan also aims to (explicitly) develop rules to align profits with value creation. Bad news for major MNCs operations here.
6. Beefing up of data, tax and transfer pricing documentation, and reporting compliance in line with BEPS proposals - an additional significant cost for Irish companies and MNCs, although this is symmetric for all other jurisdictions, so not an issue from comparative advantage of Ireland point of view.

In effect, many proposals link directly into CCCTB structure (see my analysis of this in the G8 context here):

• Reporting on tax matters re-aligned to cover business activities and capital bases
• Focusing on documentation of the location where key business risks and business processes are located
• A country-specific breakdown of group profits and revenues
• Common anti-avoidance regime
• Services delivered on-line will migrate toward effective tax rates based on location of end-user of services
• As KPMG analysis statesd: "Change in effective rate of tax on group profits where change in transfer pricing basis for profit attribution alters the mix of profits attributable to group members". Or in other words: kiss goodbye the key pillar of tax arbitrage in Ireland via consolidation of the tax base.
• Tax base will migrate to the locations "of key functions and management and oversight of key risks"

So good luck eating that 'breakfast of champions' of the claims that the G20 proposals present no threat to Ireland's economic model. They might not spell a full-scale closure of the tax 'haven' we run, but they do present a significant costs and risks threat to our model, where it is reliant heavily on tax arbitrage. Not a catastrophe, but...