By Is Ireland is the world’s biggest tax haven?. In the space of three months alone in 2015, one company funnelled €300 billion through Ireland to avoid taxes. That was actually about €7 billion more than Ireland’s entire GDP for the entire year. Yet Ireland seems to be in denial about this. Common consensus in Ireland is that it is actually a good thing for Ireland to be a tax haven. Cathal Kerins explains why he thinks it is not.
Apple Scandal
A good place to start is at the recent Apple tax scandal.
On 29 August 2016, after a two-year investigation, the European Commission announced: “Ireland granted illegal tax benefits to Apple”. The Commission ordered Apple to pay €13 billion in back taxes to the Irish state. This would have amounted to over €20 billion due to the Irish state after penalties and interest is considered. This approximates to around 10% of Irish GDP in 2014.
It was the largest corporation tax fine in history.
However, the Irish government formally appealed the ruling, claiming that Apple had not broken the law. That’s correct, it was not technically illegal under Irish law for Apple to pay approximately 0.005% tax on €110.8 billion of taxable profits made in the years from 2004 to 2014.
Despite the enormity of this figure, it actually excludes the profits made by Apple from 1990-2003 when this agreement was first set up. So the real figure, which was not subject to review, is worryingly far higher.
Leprechaun economics
Just how much higher, is terrifying. In Q1 of 2015, alone (the month after the investigation conveniently ended), Apple shifted €300 billion, through Ireland, in the biggest ever base erosion and profit shifting (BEPS) action ever undertaken in the history of the World.
This resulted in Ireland’s national GDP rising by 34.4% in the year. Paul Krugman, the Nobel Prize-winning economist coined the phrase “leprechaun economics” in reference to this single action when describing Ireland as the World’s biggest tax haven.
The Irish government then had to redact its own economic statistics, which normally should be available to us, the public, in order to protect the identity of Apple. That’s also right. The Irish government would not release economic data, which is obliged to release to its citizens, because it wanted to protect the anonymity of a corporation using Ireland as a tax haven.
Captured State
It is a stark reality that one of the world’s largest, wealthiest, strongest and technologically advanced corporations in the World can pay less than 2% tax for over three decades. And that it is actively aided and abetted in doing so by the Irish state.
This is the same Irish state that says it cannot afford social housing, cannot afford universal healthcare, cannot afford to reduce university fees, cannot afford to build adequate public transport infrastructure. But coincidentally, can afford to fight large corporations’ taxation battles for them, and create nuanced tax avoidance instruments to help them to pay little or no tax.
2020 University College Dublin undergraduate fees range from €5,880 to €7,574 per year. This does not include the student levy of €254. For comparison, in Germany and France, university is free, there is only a student levy of around €250 per year.
However, Apple is only one company. Indeed, tech is not the only industry to which Ireland is a tax haven or captive. Other industries include:
Aircraft leasing
Aircraft leasing, where special tax treatments allow many lessors to operate tax-free. This might sound arcane, but consider that 14 of the 15 of the World’s largest aircraft leasing companies make Ireland their home. Irish-based leasing businesses manage more than 5,000 aircraft in total worldwide, representing more than $130 billion in assets. That’s more than 50% of all the leased aircraft Worldwide. Yet, sadly… no tax.
Funds
Or “vulture funds” who used children’s charities in their “corporate structure” to avoid tax on Irish property speculation. These vulture funds were responsible for a significant amount of home repossessions in Ireland during the recession, and the crazy thing is, the government removed regulation on these firms; therefore, they were not subject to any regulation by the Irish Central Bank whatsoever. This is all while Ireland suffered from the worst homelessness crisis in the history of the State. The Irish state has since toughened restrictions on some funds, though not all.
Special Purpose “Tax avoidance” Vehicles (SPVs)
Or special purpose vehicles (SPVs) and section 110 of Ireland’s Tax Consolidation Act which allows for a special tax regime that enables SPVs to pay no Irish taxes, VAT, or duties whatsoever. It came to light in June 2016, that US debt funds used Section 110 SPVs to dodge Irish taxes on €80 billion.
In most financial centres, many SPVs are illegal because they allow bankruptcy remote. This means companies can move assets into a company, let the company go bust and it doesn’t affect them. Basically, it turns the corporate veil into a corporate slab of concrete. Furthermore, you’d think this makes them subject to more regulation. However, SPVs are largely unregulated in Ireland and, as such, are used to facilitate illegal transactions, like those facilitated repeatedly in Ireland’s IFSC in 2016-2018 by prohibited Russian banks.
Once these illegal transactions caught international news headlines, the Irish government updated it’s tax law to include a new instrument that allowed for greater anonymity. It was as if they almost gave the game away.
These instruments and the state policy of facilitating BEPS means that large corporations pay effective tax rates of between 0% and 2.5%. The scale of the facilitation by Ireland is evident in the graph which indicates how Ireland is a bigger tax haven than Bermuda and all the Caribbean Islands.
It is frightening, the extent to which the Irish government goes to provide large US investors with lucrative tax free profits, instead of seeking the best way for Irish citizens to be housed, provided with healthcare and infrastructure.
You’d think that when a country increases its GDP by 34.4% in one year (i.e. 2015) that there would be noticeable benefits for its citizens. Unfortunately, this was and is not the case, as Ireland, suffers from chronic lack of public infrastructure and public services as well as, high living expenses and worsening wealth inequality as a direct result.
This means that the benefit of the tax haven regime that Ireland operates, benefits only a privileged few. And the real beneficiaries are not even Irish at all. They are the ultra-wealthy owners of corporations, most of whom, live in America.
The abuses in Ireland are so large, that the US Senate set up an investigation, under the Senate’s Permanent Subcommittee on Investigations to review the malpractices undertaken in Ireland. This embarrassed the EU which had been allowing (and still does allow) the malpractices to continue.
In fact, one reason the EU hadn’t done anything, was because it can’t do anything. The EU is powerless to stop Ireland because taxes are the responsibility of each member state alone, not the EU.
This is why the EU Commission’s finding was successfully appealed by Ireland. However, the €13 billion amount did not even amount to a fine. The €13 billion is only what would be owed to the Irish Exchequer under the normal application of Ireland’s own tax rates (i.e. the already low 12.5% rate). And it amounts to over €20 billion when tax penalties are included. This amount was due to Ireland, not the EU.
“But it’s the economy stoopid”
Many people who work in the finance and legal industry who benefit and the politicians who listen to them maintain that this is good for the Irish economy. It is undeniable that many businesses have moved their European headquarters to Ireland (it must be non-US HQs because the US introduced measures to curb tax malpractices originating from Ireland for US companies). This is why Facebook, LinkedIn, Google etc have their “EMEA” (Europe, Middle-East, Africa) headquarters in Ireland, but no US ones.
The problem is that the economy becomes imbalanced and two-streamed. There is a ballooning financial services sector that disproportionately attracts investment, talent and profits and as such, the imbalance actually damages the other sectors of the economy. Prices rise, but only those benefiting from the over-sized financial sector can afford the rises. In effect, this means the rest of the economy is getting proportionally poorer.
More for us
Another argument is that Ireland makes a considerable amount of tax revenues from Corporation Tax so this increases the tax revenues for the government and therefore can compensate those being left behind with public spending.
But this is fundamentally not true. There are four main sources of tax revenue: income tax, VAT, Customs and Excise, Corporation Tax. Over the past decade the biggest source of revenue by far is Income Tax (taxes on personal income); the second is VAT (valued-added tax); the third is Customs and Excise, and last is Corporation Tax (CT).
Normally, CT is not even a reliable means for governments to collect tax. In 2014, the proportion of CT collected to total tax revenue in Ireland was only 8.7%. The EU average was 7.5%. This means that in 2014, our tax haven policies helped the Irish exchequer net 1.2% more from CT than our European counterparts. Wow. That’s a relief. So all that tax avoidance wasn’t for nothing!
The other problem with using CT when budgeting for governments is that it is extremely unreliable (especially when you’re a tax haven). When the recession occurred, Ireland’s receipts from CT fell to less than half of what it was receiving before the crash. Ireland actually lost more money from what it had budgeted to receive in CT revenues the year after the financial crises than it received in that year. This is how big the swings in CT revenues can be.
The effect on government budgets is that recessions are exacerbated, and boom-time budgets entice governments to engage in unsustainable projects that leave a country over-leveraged and possibly bankrupt. Good thing Ireland had the Troika and taxpayers of other countries to come in and save the day, so that we didn’t bankrupt ourselves then. This means that the government’s soaring debts incur huge finance costs in servicing it, in the subsequent years. These huge financing costs alone arguably eradicate the benefit of low CT in the first place!
And people talk about sovereignty; yet, how sovereign can a state be, when it’s reliant on hand outs from the IMF? Thanks IMF and international taxpayers for keeping us afloat and letting us rip you off even more!
Jobs for the boys
Another argument is that it creates jobs. It does. But it also sacrifices jobs.
Firstly, the jobs it creates are in the tax supported industries and not in the real economy. Who cares you might say? Jobs are jobs. Well you should care if you’re not working in finance or tech because evidence shows your industry and your purchasing power suffers.
There is a growing body of evidence from academics such as, Juan Montecino of Columbia University, Gerald Epstein of the University of Massachusetts Amherst, and Andrew Baker of the University of Sheffield, that countries who engage excessive financialisation of their economies actually suffer from a trap known as “the finance trap”. “Enter United Kingdom.”
The Finance Trap (book by Nick Shaxson)
The finance trap partly explains why in places like the UK other sectors of the economy are in decline while the finance industry grows. It diverts funds, investment and growth from the real economy preferring instead to invest in the shadow economy and financial instruments. In the UK, banks went from lending 50% of their funds to other banks in the 1950s, to lending 90% of their funds to other banks today. This means that only 10% is loaned into the real economy (#quickmath). It also explains why productivity in the UK is 25% lower than in France, and why German manufacturing grows while in the UK it declines despite having resource advantages.
Overtime, this results in lower GDP growth, less competitiveness, and thus, fewer opportunities and yes, fewer jobs.
It also seems to create higher domestic prices for rent, housing, and daily living expenses which disadvantages those who are not involved in the financial sector. Again, worsening inequality and undermining long-term growth.
Hooked on a feeling
The fact is that Ireland has become hooked on this tax regime. In geography class, Irish students “learn” about the benefits of 12.5% corporation tax. However, it is clear from the data that the Celtic Tiger took off directly when Ireland joined the single market in 1993, and not when it changed corporation tax in 1990. Ireland actually had a lower CT of 10% for three years before joining the EU single market and there was no marked change in tax revenues or economic growth. The change occurred almost instantaneously when we joined the common market.
Being a captured state is a feature of many tax havens. This is when a country is so controlled by corporations that policy makers will do whatever the corporations say, that they just write and enact legislation specifically for corporations. The Irish government operates “consultations” with the tax agents of all the big tech and financial firms in Ireland who provide the government with “recommendations” on what treaty clauses to opt out on. The Irish government follows these “recommendations” religiously. And there I was, thinking that citizens controlled the government…
Take back control
This is an extremely worrying development and it’s up to us as citizens to stand up for the future of our society and regain control over our own state. It was once the Irish Free State, then it was a Republic. Now, it serves only corporations. I want to live in a free nation with opportunities for all. Not the World’s biggest tax haven.
This is why we as citizens of Ireland should be worried, not happy about the practices that are conducted here.
One way to help Ireland regain autonomy would be to instigate the reforms backed by the EU. These would create a level playing field for all of Europe, avoid a race to the bottom, bring about sustainable long-term growth, prevent smaller states from being captured by large corporations, and create a balanced and more sustainable economic system.
You’ve written a great article, but it understates the difficulty Ireland would experience in moving away from its current business model. According to several studies, the “true” Irish economy is at least 30% smaller than the apparent one, and quite possibly much smaller still once the wider benefits of being a “tax haven” are removed. A recent visit to Ireland illustrated the problem very starkly: by comparison with the UK, in Ireland there was little if any visible industry (apart from the inevitable peri-urban retail parks); the fields were mostly lying fallow (crops, cattle and sheep were hard to spot); fishing villages had few if any active boats (Cleggan Pier, one of the largest fishing harbours on the west coast, had no landings whatsoever during the entire time I was there; even the transporter lorries were standing idle for days on end); the tourist industry was moderately busy, but most of the tourists were (very wealthy) Germans, Dutch or Americans, because the prices were too extortionate for anyone else. In short, the true, domestic, Irish economy is somewhat difficult to identify, but is almost certainly narrowly-based, comparatively unproductive and technologically modest. Ireland is actually in a very difficult place: on the one hand, if she wants to be a good European, she will need to comply with “full economic union”, which will inevitably mean the loss of her tax haven status; on the other hand, if she veers away from this, she will find herself being marginalised by the European core, and back within the orbit of Britain (which would have the economic and legal freedom to configure its tax regime so as to prevent Ireland from parasitizing its economy). All in all, there are tough decisions ahead.
Enjoyed reading your article, I really felt your passion while reading it. Also, there are some comments I’d like to raise:
1. Here is a quote from Wikipedia about the economic progress of Ireland:
“The republic today ranks amongst the wealthiest countries in the world in terms of GDP per capita[99] and in 2015 was ranked the sixth most developed nation in the world by the United Nations’ Human Development Index.[100] A period of rapid economic expansion from 1995 onwards became known as the Celtic Tiger period, was brought to an end in 2008 with an unprecedented financial crisis and an economic depression in 2009”. By the way – Ireland was not somehow more vulnerable to the economic depression in 2009 because of it’s low tax policy. The country was only developing way to fast in comparison to other countries, which is why the crisis had more impact on it’s economy. Nonetheless it has recovered not slower than other countries of the European Union.
Additionally, I don’t want you to forget that Ireland was for a very long time an economic colony of the United Kingdom. Till 1921, it was suffering a lot from it, just take a look at other former colonies, where bureaucrats are in control of government spending and live like the bourgeois, while the rest of the country is suffering (see Ghana, Venezuela, Gabun,… etc.). In my honest opinion, I prefer a fair distribution of control by corporations. Or some other kind of healthy competition, if you prefer.
To sum up one can say that Ireland is far away from falling into a welfare cycle like Greece, where taxes are high and social reforms (free university and healthcare and early retirement) are being pushed forward. This has led to an enormous debt, in Greece as well as in Italy. In comparison, the debt of Ireland makes up a third of the debt of Greece.
Remember to always consider the history, economic resources and pitfalls of your topic and arguments, before pushing forward such straightforward proposals. There is never one right direction to go where everything works as you have imagined. Most of the time you need to find some middleway, so that the poor people don’t get left behind. But the economic power of a country is a driving force to submit such welfare in an acceptable manner and additionally to guarantee successful human development in a country.