24/3/15: There's no number left untouched: Irish GDP, GNP and economy

According to Bloomberg, US companies are stashing some USD2.1 trillion of overseas cash reserves away from the IRS: http://www.bloomberg.com/news/articles/2015-03-04/u-s-companies-are-stashing-2-1-trillion-overseas-to-avoid-taxes?hootPostID=ffda3e167ae0ebabc3da4188e9bd22de

Ireland is named once in the report in a rather obscure case. Despite the fact we have been named on numerous other occasions in much larger cases. But beyond this, let's give a quick wonder.

1) Last year, exports of goods in Ireland leaped EUR89,074 million based on trade accounts with Q1-Q3 accounts showing exports of EUR66,148 million compared to the same period of 2013 at EUR65,381 million - a rise of 1.01% or EUR767 million. Full year rise was EUR2,075 million. So far so good. Now, national accounts also report exports of goods. These show: exports of goods in Q1-Q3 2013 at EUR69,731 million and exports of goods in Q1-Q3 2014 at EUR78,835 million, making y/y increase of EUR9,104 million. Full year 2014 - EUR108.989 billion a rise of EUR15.98 billion y/y. The discrepancy, for only 3 quarters, is EUR8,337 million or a massive 6.1% of GDP over the same period. For the full year it is EUR19.92 billion or 11% of annual GDP. Much of this difference of EUR19.92 billion was down to 'contract manufacturing' - yet another novel way for the MNCs to stash cash for the bash… IMF estimated the share of contract manufacturing to be at around 2/3rds of the annual rise in Q1-Q3 figures. Which suggests that around EUR7.4 billion (once we take account of imports of goods) of Irish GDP rise in 2014 was down to... err... just one tax optimisation scheme. That is EUR7.4 billion of increase out of EUR8.275 billion total economic expansion in the MiracleGrow state of ours.

2) Last month, Services activity index for Ireland posted a massive spike: overall services activity rose 12.59% y/y, the dynamic similar to what happened in Q2-Q3 last year with goods exports (Q1 2014 y/y +8.2%, Q2 2014 y/y +12.9% and Q3 2014 y/y +17.9%). Even more telling is the composition of Services growth by sectors: wholesales & retail trade sector up 8.83% (a third lower than the overall growth rate), transportation and storage - ditto at 8.4%, admin & supportive services +2.91%. Accommodation and food services posted rapid rise of 14.03% and professional, scientific & technical activities rose 13.97%. Meanwhile, tax optimisation-driven information & communication services activity was up 21.15%. What could have happened to generate such an expansion? Anybody's guess. Mine is 3 words: "knowledge development box" - a non-transparent black-box solution for tax optimisation announced as a replacement for the notorious "double-Irish" scheme. So let's suppose that half of the services sectors growth is down to MNCs and will have an effect on our 'exports'. In Q3 2014 these expanded by 13.4% y/y and in Q2 by 10.8% - adding EUR5,560 million to exports. January data on services activity suggests, under the above assumption, roughly the same trend continuing so far, which by year end can lead to a further MNCs-induced distortion of some EUR11 billion to our accounts on foot of Services sectors exports.

Take (1) and (2) together, you have roughly EUR21-22 billion of annual activity in the export areas of services and goods sectors that is likely (in 2015) to be down to MNCs washing profits through Ireland through just two schemes.

Then there are our factor payments abroad - what MNCs ship out of Ireland, in basic terms. As our total exports of goods and services been rising, the MNCs are taking less and less profit out of Ireland. Chart below sums these up. While profitability of MNCs is rising - a worldwide trend - Ireland-based MNCs remittances of profits are falling as percentage of exports. 2008-2012 average for the ratio of net remittances to exports is 18%, which suggests that even absent any uplift in profit margins, some EUR27.5 billion worth of profits should have been repatriated in Q1-Q3 2014 instead of EUR22.16 billion that was repatriated - a difference of EUR5.36 billion over 3 quarters or annualised rate of over EUR7.1 billion. Factoring in seasonality, the annualised rate jumps to closer to EUR8 billion.

On an annualised basis, for full year 2014, exports of goods and services from Ireland rose y EUR23.28 billion year-on-year, while net exports rose EUR3.784 billion. Meanwhile, profits repatriations (net) rose only EUR719 million. Aptly, for each euro of exports in 2013, Ireland's national accounts registered 74.2 cents in net factor payments abroad. In 2014 this figure hit historical low of 69.1 cent.

My guess is, MNCs have washed via Ireland close to EUR30 billion worth of profits or equivalent of 17.1% of 2013 full year GDP and close to 16.5% of 2014 GDP. Guess what was the GDP-GNP gap in 2013? 18.5 percent. And in 2014? 15.4%. Pretty darn close to my estimates.

Let's check this figure against aggregate differences in 2008-2014 GDP and GNP. The cumulated gap between the two measures, in nominal terms, stands at EUR201.3 billion, closer to EUR204 billion once we factor in seasonality in Q4 numbers to the estimate based on Q1-Q3 data. The above estimate of EUR29.97 billion in 'retained' profits implies, over 7 years a cumulated figure of EUR209.8 billion, or a variance of EUR827-1,200 million. Not much of a margin of error. I'll leave it to paid boffins of irish economics to complete estimates beyond Q3 2014, but you get the picture.

And now back to points (1) and (2) above: how much of the Irish growth in manufacturing and services - growth captured by one of the two exports accounts and by the likes of PMI metrics and sectoral activities indices is real and how much of it is an accounting trick? And what about other schemes run by the MNCs? And, finally and crucially, do note that contract manufacturing and knowledge development box types of tax optimisation schemes contribute to both GDP and GNP growth, thus completing the demolition job on Irish National Accounts. There is not a number left in this economy that is worth reading.


Update: we also have this handy graphic from the BusinessInsider (http://uk.businessinsider.com/us-corporate-cash-stashed-overseas-2015-3?r=US) charting the evolution of U.S. MNCs stash of cash offshore:

Ah, those U.S. MNCs err... FDI... mattresses...

6/2/15: Two Tax Inversions Islands

Remember Tax Inversions Islands? Ireland ≠ Bermuda?

Bloomberg have a neat reminder:

Source: http://www.bloomberg.com/infographics/2014-09-18/tax-runaways-tracking-inversions.html

9/10/2014: A couple of new black eyes for our Corporate Tax regime

Oh dear... as if Apple news were not pretty bleak for Ireland Inc, Wall Street Journal is now covering Google's tax practices with Ireland featuring prominently: http://online.wsj.com/articles/googles-tax-setup-faces-french-challenge-1412790355 and related explanatory note on how Google tax schemes work: http://blogs.wsj.com/digits/2014/10/08/how-googles-french-tax-structure-works/.

With a handy graph:

And an ugly question: Presumably (per Irish Government and its 'analysts'), Google is in Ireland for the quality of our workforce and R&D capabilities. Which begs asking: is that quality Irish workforce and R&D in Bahama-ed 'Ireland' or in Irish Ireland?

But never mind, bad news keep rolling in. It now looks like the savings of EUR350m per annum on the IMF 'repayment' deal are going to come with some hefty price tags... http://www.independent.ie/business/irish/germans-want-irish-tax-reform-in-return-for-deal-on-imf-loans-30650496.html

Did someone say 'reputational capital' is illusory? How about reputational damage costs?..

17/9/2014: Letting Go Ireland's Tax Arbitrage Model Will be a Painful Process

OECD has put forward their proposals for new international tax rules that, in theory, could eliminate tax-optimisation structures that have allowed many multinational companies (such as Google, Apple, Pfizer, Amazon, Yahoo and numerous others) to cut billions of dollars off their tax bills. The proposals were prompted by the G20 request issued last year and the measures announced this week have already been agreed with the OECD’s Committee on Fiscal Affairs (44 countries).

The proposals form just a part of the overall international tax reforms package called “Action Plan on Base Erosion and Profit Shifting” that will be unveiled in 2015 and is commonly known as BEPS.

There are two pillars in the current announcement.

The first pillar addresses only some of the abuses of dual-taxation treaties that generally aim to prevent double taxation of companies trading across the borders. The OECD is proposing to make amendments to its model treaty package that would prevent cross-border transactions from availing of tax treaty reliefs whenever the principal reason for the transaction is to avoid tax liability. This is a principles-based change, recognising the spirit or the principle of the dual-taxation treaties. De facto, the aim is to prevent the situation where preventing dual taxation leads to the scenario of dual non-taxation.

As with all principles-based reforms, the devil will be in the fine print of the actual regulations and economist's mind is not the best guide for sorting through these. From the top, were the measures to succeed, profits shifting via the likes of Ireland to tax havens will be if not fully stopped, at least significantly impaired. The result will be putting at risk tens of billions of economic activity booked via Ireland. In some cases, practically, this will mean that activity will be re-domiciled to other jurisdictions, where it really does take place. In other, however, it will become subject to tax in the country that stands just ahead of the tax haven in the pecking order of revenues flows. Ireland might actually benefit here, since our tax regime is still more benign than that offered in other countries.

To support the first pillar, however, the OECD also wants to restrict the amount of profits that a company can report in its intra-company accounts when these are based offshore. In effect this will put a cap on how much of their activity companies can attribute to the intra-company transactions or to force companies to redistribute profits generated by intra-company divisions across the entire group.

This is likely to undermine our ability to gain from re-allocation of revenues mentioned above. For example, suppose a company has a division based in Ireland that holds the company IP. The division is highly profitable, despite being very small: revenues it earns from other parts of the company operating around the world are covering the alleged cost of IP. If these profits were capped and/or required to be redistributed around the world to other divisions of the same company, the incentive for the company to retain its IP in tax optimising location, such as Ireland, will be gone no matter what our tax rate is.


The second pillar relates to the rules on tax residency. In particular, the OECD said that the existent rules that allow companies to operate facilities in a country without registering tax residency there should be abolished. The result, if adopted, will be to force companies like Google, Apple and Amazon to pay taxes on activities carried out in larger European states in these states by removing the channel for profit shifting to Ireland and other countries. The OECD is explicit about this by insisting that companies with 'significant digital presence' in the market should be forced to declare tax residence in that country.

Ireland's official response to this threat is that majority of MNCs trading from here do have significant presence here in form of large offices and big employment numbers. This is a weak argument for two reasons. One: Irish operations are relatively small for the majority of MNCs, compared to their global workforce. Two: majority of Irish operations of MNCs are sales, sales-support, marketing and back office. In other words, these support larger markets workforce.


The first pillar of the proposal is likely to impact sectors such as phrama and tech, where significant profits are generated by IP, trademarks and patents and these are often held off-shore in what are de facto shell subsidiaries not registered for tax purposes in the countries where actual activities of the company are based.

The second pillar is even more damaging to smaller open economies such as Ireland, because it mirrors the old EU proposal for CCCTB basis of corporate taxation. This pillar will likely push activities that are registered in countries like Ireland back into the countries where actual transactions take place, favouring larger economies over smaller ones.

For example, take a US company running sales support centre in Ireland servicing Spain. This activity is supplied by Spanish-speaking, largely non-Irish staff that has been imported into Ireland not because they are more productive here or have better human capital or face lower costs of employing, but because their presence in Ireland allows the company to book sales in Spain into Ireland. In fact, absent tax arbitrage, it would probably be cheaper for the company to employ these workers in Spain.

Back in 2013, Reuters reported that 3/4 of the largest US MNCs in tech sector channeled their revenues from sales across the EU into Ireland and Switzerland, avoiding reporting these activities in the countries where actual customers resided.

If OECD proposals are implemented to reflect the spirit of the reforms, the tax arbitrage bit of the abnormal return on locating labour-intensive activities in Ireland will be gone. This, by itself, may or may not be enough to put those jobs on the airplanes back to Spain, Italy, Germany, France and elsewhere. But if other countries start making themselves more competitive in labour costs, tax and regulatory regimes, defending Ireland's competitive proposition will be harder and harder.

This process - of erosion of Irish competitive advantage - will be further accelerated by the OECD proposals on tax data sharing and clearance which envisages massive increase in the data reporting burdens on the multinational companies. The cost of compliance and audits this entails will be large and increasing in complexity of companies' structures, leading to more incentives for them to rationalise and streamline their operations worldwide. A tiny market, like Ireland, much more efficiently serviceable via the larger economy like the UK, is unlikely to win in this race.


OECD proposals can have a pronounced effect on economic growth, employment and financial health of a number of countries, including Ireland, Luxembourg, Switzerland, and the Netherlands because the proposals will force MNCs to change their global operations structures and move jobs out of tax optimisation states toward the states where real activity takes place.

From Ireland's point of view, closing off of the loopholes can have a dramatic effect on the ground if it is accompanied by other trends, such as renewed corporate tax rate competition that can challenge our attractive headline rate of 12.5%, erosion of Irish regulatory and supervisory regimes competitiveness, increase in cost inflation and other inefficiencies. Instead of competing on being a tax arbitrage conduit, Ireland will have to start competing on the basis of real economic fundamentals, such as skills, public policy, public goods and services, private markets efficiencies, etc.

Ironically, the threat of the elimination of tax arbitrage opportunities can result in Ireland becoming more competitive and more successful over time, assuming the Governments - current and subsequent - play it smart.

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.

17/6/2014: Ireland's Regulatory 'Resource Curse'

My WallStreet Journal op-ed on the European Commission's investigation into Apple tax affairs in Ireland is linked here.

7/6/2014: Ireland's Questioned Tax Regime & Taoiseach's Magnets

Two articles this week highlight the on-going saga of Irish corporation tax regime:

1) One covering California's Governor comments made to our Taoiseach: http://www.independent.ie/irish-news/politics/california-would-be-an-independent-state-if-it-had-irelands-tax-regime-30336242.html

2) And another covering the EU probe being launched: http://www.businessweek.com/news/2014-06-05/eu-said-to-decide-next-week-on-probe-of-irish-dutch-tax-breaks

The topic is of huge importance to Ireland and I covered it on the blog continuously over the years, so no comment from me on these.

One quick point. In the Irish Independent report, there is a quote from our Taoiseach Enda Kenny that strikes me as absolutely out of touch with reality. Taoiseach said that Dublin is "becoming a magnetic attraction for young people from all over the world".

Granted, he said Dublin, not Ireland, but… the bit of facts in order: based on CSO data (latest through April 2013, available here: http://cso.ie/en/releasesandpublications/er/pme/populationandmigrationestimatesapril2013/#.U5Npz5SwJ9k), in 2011, 2012 and 2013 the largest group with net emigration from Ireland was… the young people: those of age 15-24, in 2009 and 2010 the largest group was 'youngish' people - aged 25-44 (same group was the second largest source of net emigration in 2011, 2012 and 2013.

So, dear Taoiseach, it might be worth revisiting that high school physics class where you were (presumably) taught about magnetic force and polarity...

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.

8/2/2014: Yahoo's Tax Base (err… Optimisation) is Moving to Ireland

Some slowdown in the tax haven news for Ireland recently and now a return back: http://www.reuters.com/article/2014/02/07/us-yahoo-europe-tax-idUSBREA160Y420140207

Yahoo! Inc will shift its European tax base to Ireland from Switzerland, due to mounting pressures on Swiss tax codes.

Aptly, French authorities, already rather irate about Irish tax loophole known as Double-Irish are fuming: http://www.irishtimes.com/business/sectors/technology/yahoo-move-a-blow-to-france-1.1682566

And of course our own leaders are denying… citing our tight to have a low tax rate... as if someone is challenging the rate. Nothing like 'deflect and deny' strategy at work.

You can track some of the top stories on Irish tax regime in the news starting from here:
http://trueeconomics.blogspot.ie/2014/01/2112014-no-special-ict-services-tax-but.html
or by searching this blog for 'tax haven'.

As an aside: 

There is an interesting dichotomy being played out across Irish policy and state institutions and the MNCs when it comes to the Double Irish loophole in the tax code.

The dichotomy is based on the argument that since Double Irish is not illegal, there is nothing wrong with it.

Let's quickly consider this argument: MNCs and the Irish State promote good corporate 'citizenship' via extensive deployment of and support for Corporate Social Responsibility programmes. So far so good.

Via Double Irish, the same MNCs with the blessing of the Irish State are at the same time reducing tax payments in the countries where the MNCs use public infrastructure, institutions and benefit from returns to social capital that are paid for, in large, by taxes. When this is done by locating actual value-added activities in a country, like Ireland, with low tax rate, there is a reduction in demand for the above resources in other countries (e.g. MNCs employees use these services and returns in Ireland instead of, say, France). But when it is done via loopholes and transfer pricing, the employees of MNCs are staying in the locations where the value-added is created (e.g. France), while their tax base is partially migrating to an arbitrary and unrelated to value-added activities jurisdiction (e.g. Ireland).

Thus, the function of these loopholes is to transfer resources from the activity-linked jurisdiction to Ireland. It is a zero sum game (no new value is created) and it is a beggar thy neighbour system (one jurisdiction gains at the expense of the other). In simple terms, whether it is legal or not, it is wrong.

So how come the executives of the companies and the State officials who so loudly extol the virtues of corporate citizenship so quickly forget the said virtues and run for the cover of legal codes when it comes to tax regime? Is ti because the price of doing things right is different from the price of doing things legally?

21/1/2014: No Special ICT Services Tax, but Double-Irish is Back in the News

Fresh instalment of 'Non-tax Haven' double-Irish news: http://www.ft.com/intl/cms/s/0/ec659cec-81ef-11e3-a600-00144feab7de.html#axzz2r17cBb9C

To track back numerous links on the topic, follow this link: http://trueeconomics.blogspot.ie/2013/12/26122013-italys-illegal-measure-takes.html

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.

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

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

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:

• Bloomberg inforgraphic showing clearly the disconnect between our fabulously 'active' corporate profitability and our anaemically limp jobs creation amongst Ireland-based US MNCs: http://www.bloomberg.com/infographics/2013-10-28/u-s-profits-in-ireland-pile-up.html
• More Bloomberg reporting: an extensive profiling of the lead tax specialist behind Ireland's infamous double-Irish: http://www.bloomberg.com/news/2013-10-28/man-making-ireland-tax-avoidance-hub-globally-proves-local-hero.html

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:

http://trueeconomics.blogspot.ie/2013/10/24102013-irish-tax-regime-hits-news.html

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?

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 @jameseyryan @Gerpf @JeremyTaxman @seamuscoffey

24/7/2013: Few Links to Thought-Provoking Articles in Economics

Few reading links on economics of inequality and income growth trends links to human capital: "Is Inequality Inhibiting Growth?" by Professor Raghuram Rajan

"Starting in the early 1970’s, advanced economies found it increasingly difficult to grow. Countries like the US and the United Kingdom eventually responded by deregulating their economies.

"Greater competition and the adoption of new technologies increased the demand for, and incomes of, highly skilled, talented, and educated workers doing non-routine jobs like consulting. More routine, once well-paying, jobs done by the unskilled or the moderately educated were automated or outsourced. So income inequality emerged, not primarily because of policies favoring the rich, but because the liberalized economy favored those equipped to take advantage of it.

"The short-sighted political response to the anxieties of those falling behind was to ease their access to credit. Faced with little regulatory restraint, banks overdosed on risky loans."

Another interesting link on income inequality data 

War for Talent is covered here: "It’s the Market: The Broad-Based Rise in the Return to Top Talent" Steven N. Kaplan and Joshua Rauh

And a very provocative, and thought-provoking paper "Defending the One Percent" by N. Gregory Mankiw.

On G20 Tax Proposals: "OECD bureacrats in new diversionary plan to harm business and hike taxes" by  Daniel J. Mitchell covers the OECD proposals for dealing with tax anomalies presented to G20. 

I wrote about these here: http://trueeconomics.blogspot.ie/2013/07/2272013-g20-spells-out-squeeze-on-tax.html and http://trueeconomics.blogspot.ie/2013/07/272013-sunday-times-june-23-2013-g8-and.html

and http://trueeconomics.blogspot.ie/2013/02/1822013-oecd-on-corpo-tax-havens-for-g20.html

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...

2/7/2013: Sunday Times June 23, 2013: G8 and Ireland

This is an unedited version of my Sunday Times article from June 23, 2013


As G8 summits go, the latest one turned out to be as predictable as its predecessors – an event full of reaffirmations of well-known conflicts and pre-announced news. In terms of the former, the Lough Erne meeting delivered some fireworks on Syria. On the latter, there was a re-announcement of the previously widely publicized Free Trade pact between the US and Europe. Another pre-announced item involved the EU, UK and US push for corporate tax reforms.

The two economic themes of the Logh Erne Summit agenda are tied at the hip in the case of our small open economy heavily reliant on FDI attracted here by the opportunities for tax arbitrage. As such, the G8 meeting agreement poses a significant threat for Ireland's model of economic development. Although it will take five to ten years for the shock waves to be felt in Dublin, make no mistake, the winds of uncomfortable change are rising.


The trade agreement, first announced by the Taoiseach months before the G8 summit, promises to deliver some EUR120 billion in net benefits for the EU economy. Roughly 90% of these are expected to go to the Big 5 economies of the EU, leaving little for the smaller economies to compete over. Behind these net gains there are also some regional re-allocations of trade that will take place within the EU itself.

In the short term, Ireland is well-positioned to see an increase in exports by the US multinationals operating from here and to some domestic exporters. The uplift in trade flows between Europe and the US may even help attracting new, smaller and more opportunistic US firms' investments. While tens of billions in trade for Ireland, bandied around by various Irish ministers, are unlikely to materialize, a small boost will probably take place.

However, over time, the impact of the EU-US trade and investment liberalisation can lead to sizeable reductions in MNCs activity here. Under the free trade arrangements, longer-term investment and production decisions will be based on such factors as cost considerations, as well as concerns relating to access to the global markets, and taxes.


Consider these three drivers for future trade and economic activity in Ireland in the context of the G8 summit and other recent news.

On the cost competitiveness side, we have had some gains in terms of official metrics of labour productivity and unit labour costs. Major share of these gains came from destruction of less productive jobs in construction and domestic services. Increase in revenues transferred via Ireland by some services exporters since 2004-2007 period further contributed to improved competitiveness figures.

Once when we control for these temporary or tax-linked 'gains' Ireland is still a high cost destination for investors compared to the majority of our peers.  As reflected in Purchasing Managers Indices, since the beginning of the crisis, Irish producers of goods and services have faced rampant cost inflation when it comes to prices of inputs. Earnings and wages data for 2009-2012, released this week, show labour costs rising across the exports-oriented sectors. Lack of new capital, R&D and technological investments further underlines the fact that much of our productivity gains are related to jobs destruction and transfer pricing by the MNCs.

When the tariffs and other barriers to EU-US trade come down, some multinationals trading into Europe will have fewer incentives to locate their production in Ireland. This effect is likely to be felt stronger for those MNCs which trade increasingly outside the EU, focusing more on growth opportunities around the world. Based on experiences with other free trade areas, such as NAFTA and the EU, this can lead to increased on-shoring of FDI back into the US and into core European states, away from smaller economies that pre-trade liberalization acted as entrepots to Europe.


The tax dimension of the G8 agreement will be the most significant driver for change in years to come.

The G8 clearly outlined the reasons for urgency in dealing with the issues of both tax evasion (something that does not apply in Ireland's case) and tax avoidance (something that does have a direct impact on us). These are structural and will not dissipate even when the G8 economies recover.

All of the G8 economies are struggling with heavy public and private debt loads and/or high domestic taxation levels. All are stuck in a demographic, social security and pensions costs whirlpools pulling them into structural insolvency. In other words, not a single G8 nation can afford to lose corporate revenues to various tax havens.

In line with the longer-term nature of the drivers for tax reforms, G8-proposed agenda can also be seen in the context of quick, easier to implement changes and longer-term structural realignment of tax systems.

The first wave of tax reforms outlined in principle by the G8 Summit will focus on tightening some of the more egregious loopholes, usually involving officially recognised tax havens. On the European side, this will spell trouble for the likes of Gurnsey and Jersey. The first round will also target easy-to-spot idiosyncratic tax arrangements, such as the Double Irish scheme and similar structures in Holland. Shutting down Double Irish will impact around a quarter of our trade in services, or roughly EUR13-15 billion worth of exports – much more than the EU-US Free Trade Agreement promises to unlock. The cut can be quick, as much of this trade involves electronic transactions - easy to shift and costless to re-domicile.

Over time, as changes in tax systems bite deeper into the structure of European tax regimes, losses of exports and FDI are likely to mount. To raise substantive new tax revenues, the EU members of G8 will have to severely cut back tax advantages accorded to countries like Ireland by their competitive tax rates.

Free Trade zones are notorious for amplifying the role of comparative advantage in determining where companies choose to domicile. Thus, to achieve a level the playing field for trade-related investments within the EU, either the effective tax rates will have to be brought much closer to parity across the block, or the basis for taxation must be redistributed more evenly across producers and consumers of goods and services.

Forcing all EU countries to harmonise the rates of tax would be politically difficult. Instead, there is a ready-to-use solution to the problem of redistributing tax revenues available since 2009 - the Common Consolidated Corporate Tax Base (CCCTB).

Under this mechanism companies selling goods and services from Ireland into European markets will report separate profits by each country of sales. These profits will then be reassigned back to the countries where each company has operations on the basis of a complex formula taking into the account company sales, employment levels and capital structure on the ground. The re-allocated profits will then be subject to a national tax rate. The end game from the CCCTB for Ireland will be effective end to the transfer pricing that goes along with the current system.

The EU Commission analysis claimed that with full cooperation, the enhanced CCCTB implementation will lead to an 8% rise in tax revenues across the EU. The main beneficiaries of these gains will be the Big 5 member states. The total net impact of CCCTB on all EU member states is expected to be nearly zero.

This suggests some sizeable reallocations of economic activity and tax revenues away from the smaller member states, like Ireland, in favour of the larger member states. January 2011, study by Ernst & Young for the Department of Finance concluded that Ireland can sustain one of the largest drops in tax revenues in the euro area due to CCCTB implementation. The estimates range up to 5.7% Government revenue decline, with our effective corporate tax rate rising to 23%, GDP falling by 1.6%-1.8%, and employment declining by 1.5%-1.6%.

The Ernst & Young report was compiled based using data for 2005. Since then, Irish economy's reliance on services exports grew from EUR 49.5 billion or under 31% of GDP to EUR90.7 billion or close to 56% of GDP. With services exports being a prime example of a tax-sensitive sector in the economy, we can safely assume that the above estimates of the adverse impact of CCCTB on Irish economy are conservative.

The CCCTB matches nearly perfectly the G8 Action plans relating to the issues of tax avoidance. It also fits the objectives of the OECD plan on addressing taxation base erosion and profit shifting which the OECD is preparing for the Finance Ministers and Central Bank Governors of the G20 in July.

While much of the impact of this week's G8 summit remains the matter for the future, there is no doubt that the G8 push toward curtailing aggressively competitive tax regimes is real.  In my view, Ireland has, approximately between five and ten years before our competitive advantage is severely eroded by the EU and the US efforts to coordinate the effective rates of taxation and consolidate reporting and payment bases for corporate profits. We must use these years wisely to build up our technological capabilities and develop a skills-based high-value added and highly competitive economy.

Box-out:

The latest data on the duration of working life (a measure of the number of years a person aged 15 is expected to be active in the labour market over their lifetime) shows that in 2000-2002, on average, European workers spent 32.9 years in employment or searching for jobs. This number rose to 34.7 years by 2011. In Ireland, the same increase in duration of working life took Irish workers from spending on average 33.3 years in labour market activities in 2000-2002 to 34.0 years in 2011. The increase in years worked in the case of Ireland was the third lowest in the euro area. In 2011, duration of working life ranged between 39.1 and 44.4 years in the Nordic countries and Switzerland – countries with much more sustainable pensions costs paths than Ireland. The significance of this is that given our pensions, housing and investment crises, Irish workers can look forward to spending some four-to-five years more working to fund their future retirement. Aside from a dramatic greying of our working population this means that even after the economic recovery takes hold, there might be no jobs for today's younger unemployed, as the older generations hold onto their careers for longer.

16/6/2013: A Minister in Northern Ireland is Fond of Slaying Dragons

Readers of this blog are aware where I stand on excessively aggressive tax optimisation by some companies that the Irish system permits. There is, however, a major distinction implied by my arguments: Irish system of taxation is fully legal and does not violate other nations' laws. From economics point of view it is a form of tax haven. From legal point of view it is not.

This fine distinction is too often lost on some of this blog's readers, some Irish politicians (not readers of this blog) and, self-evidently after the below, to the Northern Ireland's  Finance Minister.


As reported by BBC (http://www.bbc.co.uk/news/uk-northern-ireland-22925772) "...Sammy Wilson has accused the Irish government of "stealing" UK tax revenue. The DUP minister said he was concerned companies were using the Republic of Ireland to pay tax which he claims should be paid in the UK. ..."My view is that the British government does have some leverage on the Irish government there, because they have a £7.5bn loan, that is a lot of leverage," he told the BBC programme Sunday Politics."

The terms of the loans conditions from the UK to Ireland are explained here: http://www.telegraph.co.uk/finance/financialcrisis/8203912/Key-points-terms-of-UK-loan-to-Ireland.html clearly showing the amount extended to be capped at maximum £3.25 billion (€3.76 billion) - subject to the exchange rate differences.

It might be possible that Minister Wilson was referencing some headline he read somewhere, e.g. http://www.independent.ie/business/irish/uk-slashes-its-interest-rate-on-our-7bn-bailout-loans-26863834.html but even the article headlined with '£7 billion loan' cites in the body of the text correct amount of £3.25 billion.

Another similar headline relates to the orignal estimates of the potential loan, e.g. http://www.guardian.co.uk/business/2010/nov/22/ireland-bailout-uk-lends-seven-billion, which was capped less a month after, e.g. http://www.guardian.co.uk/politics/2010/dec/08/george-osborne-cap-uk-loan-ireland ... at £3.25 billion.

NTMA reports the latest drawdown amounts here: http://www.ntma.ie/business-areas/funding-and-debt-management/euimf-programme/
According to the NTMA, Ireland has drawn down only £2.42 billion worth of UK funds so far.

We are, indeed, thankful to the UK taxpayers for providing these loans and for offering them on terms that reflected broader restructuring of these loans by other lenders.


On Minister Wilson's tax 'theft' charge, per Journal.ie report: "The Republic’s junior finance minister Brian Hayes, speaking on the same programme, said it was up to other countries to change their own tax laws if they wished to stop companies headquartered there from being able to avoid tax."

I often disagree with Minister Hayes on many matters, but on this occasion he is correct.