2/5/2013: News from the Irish Tax Haven Central... Barrow St, D2

Given our Manufacturing PMI released today, things have to be looking sour when it comes to Irish GDP and GNP for Q1-Q2 2013. But, as always, never mind. In reality, Irish manufacturing is no longer the core driver of the economy. Instead, making stuff in Ireland (even if it was done for tax purposes with la-la-land accounting for value added) is now surpassed by billing revenues into Ireland by the services exporters, like Google.

Of course, the latter activity is also driven by tax arbitrage. And it is booming. So much so, that we now have a weekly international media instalment labeling Ireland a tax haven for services exporting MNCs.

Here's the latest one http://mobilebeta.reuters.com/special-report-how-google-uk-clouds-its-tax

And should you want to trace more stories on the same subject of Ireland as tax haven, here is the link to start with (keep tracing posted links): http://trueeconomics.blogspot.ie/2013/04/2742013-news-from-irish-corporate-tax.html

27/4/2013: News from Irish Corporate Tax Haven Front

Latest instalment on Irish corporate tax haven: http://www.irishtimes.com/news/politics/oireachtas/irish-corporate-tax-rate-on-agenda-in-berlin-1.1374576

For those who want to read more, here are earlier links on same topic:
http://trueeconomics.blogspot.ie/2013/03/1832013-irish-corporate-tax-haven-in.html
Follow link at the end to more posts.

22/3/2013: National Accounts 2012: Ireland - Part 3

The first post of the series covering 2012 National Accounts looked at the headline numbers for real GDP growth. 

The second post covered sectoral weights in GNP and our GDP/GNP gap.

Overall, there are two main themes in rebalancing of the economy that showed up in data so far: 

1) Increasing share of MNCs activity in GDP (and temporarily GNP), which means that the official figures for the National Accounts now even more overestimate the real economic activity in the country; and

2) Long-term falling out of Agriculture, Forestry & Fishing and Construction sectors from the economy, with Public Administration & Defence clearly showing signs of contraction, albeit at the rate that is, so far, trailing contraction in overall economy over the period 2003-2012.

In this post, let's take a look at the opportunity cost of the crisis.

Recall that relative to peak, Irish GDP is down 5.97% as of the end of 2012 and GNP is down 8.08% despite 'two years of consecutive growth' the Government is so keen on emphasising. 

Also recall that 1980-2011 average growth rates in constant prices terms were 3.58% per annum, whilst IMF forecasts consistent structural or potential growth rate is currently around 2%. Using 2% figure we can, therefore, estimate the opportunity cost of the current crisis as losses to GDP and GNP arising from the growth foregone during the crisis. Chart below illustrates:

The grand total in opportunity cost due to the crisis (note, this is not an exercise in 'blaming the Government' or providing any estimate of real or actual losses, but rather an estimate of the opportunity cost of the crisis) is:

-- EUR104.5bn of cumulated foregone GDP for 2008-2012 or per-capita EUR22,823;

-- EUR58.8bn of cumulated foregone GNP for 2008-2012 or EUR12,828 per capita

With taxes net of subsidies at 9.647% of the GDP in 2012, the above implies roughly EUR10.1bn in foregone net tax receipts or ca EUR2bn in annual receipts. Using 2008-2012 average weight of net taxes in GDP implies EUR2.4bn in foregone annual net tax receipts.

What does this mean? Aside from the massive opportunity cost of the crisis, we have a rather revealing figure on foregone tax receipts. The figure clearly suggests that even were economic activity running at the 2% growth rate since 2007 without the crisis, re-alignment of economic activity away from domestic sectors toward MNCs-dominated activities and toward MNCs-dominated services activities in particular would still result in unsustainable deficits and would still required some sort of a fiscal adjustment, thanks to our taxation system that is extremely unbalanced when it comes to supporting MNCs-focused activities.

18/3/2013: Irish Corporate Tax Haven in the News, Again...

As you know, I have been gradually building up a record of articles in international and Irish media detailing the tax haven nature of our (Irish) tax laws and practices when it comes to corporation tax.

Here is the link to a new article by the WSJ on the topic:
http://online.wsj.com/article/SB10001424127887324034804578348131432634740.html

And here is a link to the most recent compilation of information & articles on the topic from my blog:
http://trueeconomics.blogspot.ie/2013/02/1822013-oecd-on-corpo-tax-havens-for-g20.html

18/2/2013: OECD on Corpo Tax Havens for G20

Just as G20 was starting to make noises about corporate tax havens at their meeting in Moscow (here) the OECD produced a convenient paper on the topic of tax avoidance. The paper is rather 'neutered' when it comes to language, but nonetheless offers couple fascinating insights, especially when it comes to Ireland. The report is titled "Addressing Base Erosion and Profit Shifting"

Per OECD: looking "specifically at the effects of income-shifting practices of United States based MNEs [Clausing, 2011],  …finds large discrepancies between the physical operations of affiliates abroad and the locations in which they report their profits for tax purposes: the top ten locations for affiliate employment (in order: the United Kingdom, Canada, Mexico, China, Germany, France, Brazil, India, Japan, Australia) barely match with the top ten locations for gross profits reporting (in order: the Netherlands, Luxembourg, Ireland, Canada, Bermuda, Switzerland, Singapore, Germany, Norway and Australia)."

And then:

"A report of the United States Congressional Research Service (Gravelle, 2010) concludes that there is ample and clear evidence that profits appear in countries inconsistent with an economic motivation. The report analysed the profits of United States controlled foreign corporations as a percentage of the GDP of the countries in which they are located. It finds that for the G-7 countries the ratio ranges from 0.2% to 2.6% (in the case of Canada). The ratio is equal to 4.6% for the Netherlands, 7.6% for Ireland, 9.8% for Cyprus, 18.2% for Luxembourg. Finally, the study notes that the ratio increases dramatically for no-tax jurisdictions with for example, 35.3% for Jersey, 43.3% for Bahamas, 61.1% for Liberia, 354.6% for British Virgin Islands, 546.7% for the Cayman Islands and 645.7% for Bermuda."

Now, of course, Ireland is a conduit via which profits of MNCs are off shored to zero tax jurisdictions, so one wonders, how much of Cayman's and BVI or Bahamas' 'profits' are really coming via Ireland.

The whole report addresses the issue of 'base erosion' in tax systems - the topic also close to heart to Ireland, as CCCTB proposals at the EU level are attempting to deal exactly with that problem and represent a massive threat to Ireland's tax optimisation industry.

Based on the data in the report, here are some revealing charts:

It is first worth noting that in absolute terms, corporate tax revenues overall are not that spectacular in the case of Ireland, contributing at an OECD average levels to the Exchequer. And these revenues have been falling, not rising, in importance despite a severe decline in GDP during the crisis:

Three interesting aspects per above are:

1. It is pretty clear that Irish Exchequer has opted to transfer lower corporate tax burden onto the shoulders of individual Irish taxpayers, and that this process has started well before the onset of the crisis, but became dramatically pronounced in 2007-2009.
2. It is also pretty clear that overall corporation tax is not an important source of Exchequer funding in recent years despite the Government numerous claims that the Corporation Tax receipts are robust and vital to the Exchequer.
3. Domestic boom period was associated with a massive (relative) uplift in tax revenues from the corporation tax, while the MNCs/exports boom during the crisis did nothing of the sorts, showing clearly that the effect of MNCs activities on Irish economy (as instrumented by the Exchequer) is weak.

However, the trend toward deterioration in revenues importance to the Exchequer during the crisis (driving down the 2000-2011 average) stands in contrast with rising importance of the corporation tax in the decade of the 1990s:

It is illustrative to highlight the change in relative importance of the corporation tax revenues over the last decade:

Ireland stands out as the the country with the third largest decline in corporation tax importance in 2011 compared to 2000-2005 average. In contrast, in Switzerland, the corporation tax contribution in 2011 stood at a premium on 2000-2005 average.

Here are some links on the topic of the Irish corporate tax haven from the blog:

http://trueeconomics.blogspot.ie/2012/11/19112012-links-on-irish-corporate-tax.html

http://trueeconomics.blogspot.ie/2012/10/13102012-irish-corporate-tax-haven-in.html

http://trueeconomics.blogspot.ie/2012/10/30102012-feeble-defense-for-tax.html

http://trueeconomics.blogspot.ie/2012/11/19112012-two-points-on-irish-corporate.html

http://trueeconomics.blogspot.ie/2012/10/13102012-irish-corporate-tax-haven-in.html

Enjoy.

22/1/2013: Merkel cites Ireland as one of 3 tax havens in Europe

A very interesting exchange between Angela Merkel and Francois Hollande talking at a public venue, as reported by the EUObserver : http://euobserver.com/political/118795

In particular, consider the following quote:

"When asked if it is "utopian" to think that one day there would be a federal EU state, Hollande said that the EU as it is today seemed "utopian" 50 years ago. "I accepted that we need to converge towards common budgetary policies. We need to have a similar discussions about taxes, for instance a common CO2 tax. It's true there are political risks, but we need to embrace our common destiny," he said.

"Merkel named Ireland, Malta and Cyprus as low-corporate tax havens: "I don't want to make a statement now that my fellow EU leaders will be upset about, but step by step we'll need to establish margins and then each country will have to choose how it fits in those margins. Your utopia is totally right.""

No comment needed.

Update: 9/2/2013: Here's another link on Apple use of Irish legal structures to reduce tax exposures in the US. And another one.

Update 10/2/2013: UK MNC Associated British Foods is implicated in tax minimisation scheme involving Ireland: http://www.guardian.co.uk/world/2013/feb/09/zambia-sugar-empire-tax

19/11/2012: Two points on Irish Corporate Tax

Two thoughts, related (on foot of the current discussions of the Irish Corporate Tax Haven in the EU, US and in Ireland):

1) US/EU/Ireland strategy dilemma: 

(X) : US is unhappy about MNCs underpaying tax in the US via international tax arbitrage

(Y) : US' strategic ally - the EU - is unhappy about US MNCs underpaying tax in the EU via international tax arbitrage

(Z) : Ireland is a trading & investment ally with the US and a member of the EU

(W): Ireland is a major center for tax arbitrage by the MNCs

So now: Z  =  X  +  Y  -  W  +  V(?)

Where V(?) is the unknown 'good will' that US and EU must feel toward Ireland to sustain the above equation.

2) And the above implies this: In the current environment: 

-- incentives for the US to increase (X) are higher than normal (driven by the fiscal cliff and the need to onshore jobs); 

-- while incentives for the EU are to increase (Y) are also much higher than normal (driven by EU own fiscal deleveraging and aggravated by the fact that EU member states are funding 'bailout' for Ireland), 

-- yet at the same time, incentives for Ireland to keep increasing (W) are also extremely heightened (due to the Irish crisis 'solution' model of 'exporting out of the recession and fiscal deleveraging'). 

All of which means that V(?) is rapidly diminishing, squeezed by contradicting (X)+(Y) and (W) rapidly pulling the national interests further and further apart.

I'd say (as an old boxer) - we are heading for the corner... Good luck to anyone thinking we can sustain current corporate tax regime in this world...

30/10/2012: Feeble defense for tax arbitrage

Saturday, October 27, 2012: http://www.irishexaminer.com/ireland/gilmore-bids-to-reassure-merkels-heir-apparent-212198.html#.UI2WTN8hVo4.twitter

"Ireland’s corporation tax rate was in the sights of the man most likely to succeed Angela Merkel as German chancellor when he met Tánaiste Eamon Gilmore in Berlin. Peer Steinbruck, the Socialists’ candidate to lead the party in next year’s election, also said he doesn’t personally believe in using EU funds to pay down bank debt."

Now, here's the problem: Steinbruck has been "deeply critical of Ireland’s generous corporation tax, blaming it for Germany losing income from German companies, when he was finance minister in the previous coalition government with Ms Merkel."

Per report, "the Tánaiste tried to reassure him that Ireland’s tax rate of 12.5% — the second lowest in the EU — posed no threat to Germany… …Over 1,000 multinationals are based in the country and last year was a record for inward investment. "This is not a threat to Germany or to our other partners in Europe — there are more jobs in Irish companies operating in Germany than there are in German companies operating in Ireland. "In fact, in many instances we are competing for mobile investment with other parts of the world and not with our fellow European," said Mr Gilmore."


One wonders if Mr Gilmore is simply playing an ignorant or is indeed unaware of the fact that beyond his own prowess of policy foresight, other countries in Europe, including Germany, would like to see European HQs of non-EU MNCs set up in their jurisdictions? Or perhaps Mr Gilmore thinks that Peer Steinbruck is some naive school-teacher-turns-politico and that the German Socialist has no desire to correct for often absurd tax arbitrage on which Germany is losing billions in tax revenues and which Ireland facilitates (see links here : http://trueeconomics.blogspot.ie/2012/10/13102012-irish-corporate-tax-haven-in.html). This tax arbitrage not only imposes direct cost on Germany (via German MNCs accounting practices via Ireland operations), but also massive indirect costs as non-German MNCs trade into German economy bypassing German tax system.

In reality, all tax havens are small open economies, so Mr Gilmore's 'Ireland is small, so it needs special tax regime' argument is hardly a defense.