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Not the rate, the loopholes

Tax-haven status distorts, globally and domestically

For the current partnership Government and its political-allies-in-opposition the end of summer has brought with it some rather unpleasant affairs. And a string of seemingly never-ending, insider scandals rocking the Irish charitable and sports ‘sectors’, is just a small headache, compared to the migraines of Irish economic and tax-policy fiascos.

The reason is simple: in its quest for sustaining our decades-old economic growth model of beggaring our neighbours, Ireland always relied heavily on our PR-and-charm-driven international reputation for being a ‘straight down the line’ regulatory and tax arbitrage location for the Multinationals. Thus, in the absence of any dramatic change in the way we intend to do business here, no Irish Government could afford the country’s reputation to be marred by the realisation that our entire economic strategy is distorted by the very same Multinationals we so desperately need to sustain the narrative.

The Paris-based OECD has been probing international tax regimes, at the request of the G20 group, in the hope of developing a face-saving mechanism to curb the more egregious abuses of global tax codes. Ireland was in its crosshairs from the start. A US Congressional investigation and a number of on-the-record statements by senior US politicians flashed the spotlight on Ireland as an alleged ‘tax haven’ for US corporations, opening Dublin to the scrutinisations of the OECD and the G20 taxpolicy artillery. Through traditional and alternative media, the global public was fed a steady flow of leaked documents from around the world highlighting Ireland’s prominent position in tax avoidance by Multinationals.

With all that past attention, the government in Dublin did not need the EU Commission pointing a finger at Ireland as one of the most aggressive facilitators of tax optimisation in Europe. And yet, this is exactly what is unfolding in front of our eyes today. In simple terms, within a span of just 50 days, the Irish establishment has been hit by a perfect international storm.

The first thunder rolled over our shores on July 12 when the CSO released the final numbers for Irish GDP for 2015. Declaring that the Irish economy had grown by a whopping 26.3 percent in one year would have been a cause for celebration anywhere on earth. Ireland had set the record for any OECD economy in GDP and GNP growth terms. Alas, the announcement drew international ridicule of Dublin of an intensity not seen since the night when Dustin the Turkey flopped at the Eurovision. Paul Krugman declared the number “leprechaun economics”. Micheál Martin, the ever-adaptable leader of the pro-Government opposition (!) had to make a strongly worded statement about the need for an official inquiry into the figure. Even Irish Stockbrokers, well-schooled in the arts of selling anything a Bloomberg terminal throws at them under the ‘Irish economy’ heading, had to admit that the CSO statistic a chimera.

Quite hilariously, one Irish Stockbrokerage analyst told Bloomberg that the whole problem was, of course, down to the Eurostat methodology for measuring GDP that “Clearly, …is not fit for purpose as an indicator of economic growth in an economy like Ireland”. He did not mention that the Eurostat approach doesn’t work here precisely because corporate tax arbitrage underpins the Irish economy.

But the “leprechaun economics” would have been merely embarrassing were it not a herald of worse news yet to befall Ireland.

Contrary to the wishes of our establishment, the CSO release pushed the Irish corporate tax system straight back into the global headlights. Most of it focused on Ireland being the world’s favourite location for corporate tax inversions – a dubious distinction that makes us hot in the US as a lightning rod for all Presidential candidates and a score of zealous legislators. It also shoved Ireland to the front of a number of political debates raging across Europe, where entrenched establishment politicians are desperately seeking a foreign scapegoat to blame for domestic trends that fuel the rise of the populist left and right.

Based on data compiled by the US Congressional Research Service and published in April of this year in one of its reports, Ireland now leads the Cayman Islands and Bahamas at the top of world league tables for inversions by US corporations. That, despite the Irish authorities repeatedly claiming that the Government here has been closing tax loopholes since Budget 2014. This fact is not even referenced in the US Congressional office report. Nor has it been figuring in academic studies. The Rutgers Business Review 2016 paper published in August surveys aggressive tax avoidance practices by US and other Multinational corporations. It reserves an honourable place for Ireland as one of the world’s leading tax-optimisation locations, without citing any of the recent tax reforms passed by the Government.

Then, on August 29th, the EU Competition Commissioner, Margrethe Vestager, who is an outspoken opponent of tax arrangements which amount to hidden state aid, delivered another blow to Official Ireland when she produced her long-awaited report on Apple’s tax affairs here. The report had been anticipated. And it was also heavily lobbied by the Government through media and diplomatic channels. An extraordinary spin was bought by the media – that the back tax was only a couple of hundred million euro, that it could only be used to pay down the national debt. The media was utterly suckered. In the end, Vestager found that Apple paid vastly less tax in Ireland than the ‘headline 12.5 percent rate would imply – some €13bn less. Summoning Cowenesque opaqueness, Ireland’s Finance Minister has already managed to signal that he doesn’t accept the ruling: the Government will appeal the Commission decision to the European Court of Justice.

Appeal or not, the damage is now done. Ireland’s entire Multinational-based model of economic development has been exposed as a zero-sum game in which our neighbours and trading partners surrender their tax revenues to us. It is futile to paint the case as the Big Bad EU against Good Little Ireland, for the case is not based on a challenge to the Irish 12.5 percent corporation tax regime, but on the sharp practices within this regime that allow companies to book effective tax rates some ten times lower than the stated headline rate.

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Yet for all the media and foreign outrage, the fact that this model of development is no longer working is still escaping our policymakers.

The economic figures presented by the State to support the FDI-focused Multinationals are impressive. On paper, some one fifth of the Irish workforce is employed by a Multinational of sorts, though some sources put it at a more modest and more realistic one tenth. Allegedly, these workers earn around €6bn in annual wages. Although no one can point to any serious official or reliable time series data to verify these claims. Multinationals also, allegedly, spend around €4bn on annual purchases of goods and services here in Ireland, though again this is not verifiable through any sources other than those produced by the vested interests. Even if we attempt to control for double counting with some these figures, the benefits to the Irish economy in tangible terms of cash staying on the ground in Ireland from these companies’ operations elsewhere around the world run close to €10bn. And, unlike a range of Irish indigenous sectors, the Multinationals do not rely on direct subsidies from the EU or Dublin. So their gross value added in the economy is closer to the net value created.

But headline figures do not show other features of our high dependency economy. High wages earned in Multinationals sectors come at the expense of higher costs that have to be carried by indigenous companies operating in the sectors that are in direct competition with Multinationals for talent. And some of the wages earned in Ireland-based Multinationals are remitted abroad by foreigners imported by these Multinationals. Moreover the figure of “one in five” Irish workers being employed by the Multinationals is also false as it includes scores of foreign workers brought into Ireland for temporary employment in foreign companies. Many of these have tangible connections to the economy here only through rents and the price of restaurants.

It is easy to be cynical about many of the economic claims made nowadays in Dublin, but worse are bombastic claims from our political establishment. After all, they did spectacularly blow their credibility with July GDP figures.

So it’s Irish Government 0: International Tax Politics 2. And a penalty has just been awarded against us.

In fact, over the last 20 years or so, the Irish economy has become severely skewed in favour of capital: physical capital via REITs, vulture funds, Nama and the rest gaining dominance over the property and development sectors; intellectual capital, via state-sponsored tax schemes such as the already infamous ‘Knowledge Development Box’; and foreign financial capital, via a host of lobbying, tax and regulatory schemes that sustain the likes of the IFSC.

The losers in this game are labour and human capital – both of which are afforded distant secondary status in the power hierarchies of Irish economic policies and in our tax policies. As a result, the wage share of Irish GDP has declined in importance over the years, just as the wage share in Irish taxes has risen. (Chart) 1999-2007, compensation of employees accounted for 38.5 percent (on average) of Irish GDP. In 2015, the year of miraculous Multinational-driven growth, the share fell to just over 30.6 percent – the lowest on record.

The Irish establishment deserves the bruising it received in recent months for pushing the system of tax optimisation beyond what reason and prudence in international trade and investment diplomacy requires today. The problem here is not our benign and competitive 12.5 percent headline tax rate, but the Byzantine system of tax loopholes created around it by the vested interests and charlatan politicians relying on foreign investment to cover up domestic policy failures. Blaming Brussels for the unpalatable realities of our corporatist economy is an escapism we increasingly cannot afford.

By Constantin Gurdgiev

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