Wednesday

6th Jul 2022

Opinion

Why you shouldn't trust Ireland's economic statistics

  • At first glance, the Irish tax system is probably the most business-friendly in the European Union (Photo: Annie in Beziers)

Ireland is the only EU member state which avoided recession in 2020. A miracle? No – Ireland is the European Union's tax haven.

The country uses an incentive system for intangible asset transfers on a scale that distorts its own national accounts.

Read and decide

Join EUobserver today

Become an expert on Europe

Get instant access to all articles — and 20 years of archives. 14-day free trial.

... or subscribe as a group

Irish statistics have little in common with the actual picture of the economy – artificial transactions account for 20 percent of GDP.

Irish GDP expanded by 3.0 percent in 2020, boosted by exports from multinational companies specialising in medical equipment, pharmaceuticals and computer services. It is a phenomenal result, considering that the European Union's GDP dropped by 6.3 percent.

However, Irish growth is doubtful – it is driven by specific characteristics of the country's tax system.

Ireland is a tax haven

At first glance, the Irish tax system is probably the most business-friendly in the European Union.

The standard corporate income tax (CIT) rate is 12.5 percent, whereas the EU average rate exceeds 20 percent. However, it is merely the tip of an iceberg.

Ireland uses enormous incentives to attract intangible assets as well as research & development expenditure by the international corporations. Such activities allow global firms to reduce their tax burden nearly to zero.

Ireland uses such practices at the expense of other EU member states.

The above-mentioned mechanisms encourage international corporations to artificially transfer profits earned in other countries.

This process generates around two-thirds of Ireland's CIT revenue, but at the same time it costs other countries – primarily the EU, the United Kingdom and the United States – billions of dollars/euros every year.

Ireland is also a key conduit country for the international capital – firms use the Irish tax system to transfer profits to traditional tax havens, like Bermuda, the Cayman Islands or the British Virgin Islands.

Therefore, Ireland has become one of the world's greatest acquirers of phantom foreign investments. Phantom, because its objective is tax optimisation rather than productive use of capital.

Taxes and GDP

The problem has enormous effects on the Irish economic indicators.

In 2015 Ireland's GDP rose by 25 percent attracting attention of the international institutions. The growth was initiated by the relocation of intangible assets of major corporations to their Irish branches.

Simultaneously, it deteriorated Ireland's international investment position and increased production, exports and investments.

International corporations are accounting in Ireland their sales of goods manufactured in other countries.

Simultaneously, such firms transfer their incomes from Ireland to their parent companies in the form of dividends or reinvested earnings.

On the paper, reinvested earnings increase the Irish stock of intangible assets.

In fact, they serve as the basis for depreciation allowances reducing taxation in the following year.

The enormous scale of such mechanisms is confirmed by the erratic structure of the balance of payments.

Ireland records high surplus in exports of goods and a significant deficit on services, especially in case of licence fees and royalties for the use of intellectual property. It also maintains a considerable deficit in trade of R&D services.

What next?

In 2016 Eurostat and IMF's experts recommended Ireland publishing modified Gross National Income (GNI*). The standard indicators were adjusted for the profits of re-domiciled companies, the depreciation on foreign-owned capital assets and aircraft leasing.

The adjustment shows how much of Ireland's GDP is related to tax optimisation.

In 2019, the difference between gross national income and GNI* amounted to 20 percent of Irish GDP.

Economic growth also appeared to be significantly less impressive; in 2014–2019, Ireland's GDP jumped by a total of 60 percent, whereas GNI*– by a mere 20 percent.

What can be done?

First and foremost, the cause of the problem should be dealt with – by putting an end to the practices used by Ireland, typical of a tax haven.

There should be enough motivation to do so – the most politically-powerful member states of the EU lose billions of euros on an annual basis.

The European Commission also has appropriate tools, it can:

1. harmonise corporate tax base across the EU;

2. exclude from the tax base expenses most frequently used for tax optimisation;

3. introduce restrictions on tax incentives used by the member states.

However, a strong opposition from countries which benefit from the current regulations should be expected.

Probably, it would be easier to change the calculation rules for certain economic indicators so as to exclude artificial transactions related to tax optimisation.

For example, Eurostat might prepare consistent statistics specifying, for all the member states, the part of GDP connected with tax incentives regarding intellectual property.

It is a minimum that we must require from the institutions intended to guarantee access to reliable and transparent information.

Author bio

Krzysztof Marczewski, Jakub Rybacki, Jakub Sawulski are economists from the Polish Economic Institute.

Disclaimer

The views expressed in this opinion piece are the author's, not those of EUobserver.

Dublin to scrap 'double Irish' tax loophole

Ireland is to scrap its controversial tax loophole, as EU countries agree new legislation to claw back the €1 trillion lost to tax cheats each year.

Keeping gas as 'green' in taxonomy vote only helps Russia

Two days before Vladimir Putin launched his illegal war on my home country Ukraine, Russian energy minister Nikolai Shulginov gave an interview addressing the European Commission's taxonomy on sustainable activities — saying he was pleased it kept gas as 'green'.

Column

'War on Women' needs forceful response, not glib statements

Some modest headway in recognising the unrelenting tide of discrimination and violence facing women worldwide was made at last week's largely self-congratulatory and mostly irrelevant G7 talk-fest. But no one mentioned abortion, just days after the Roe vs Wade decision.

The Digital Services Act — a case-study in keeping public in dark

Companies and lobby groups like Spotify, Google and International Federation of the Phonographic Industry (IFPI) were able to lobby member states using live knowledge of the trilogue discussions on content-ranking systems, advertising and liability for search engines.

Council must act on core of EU migration package

By only screening, fingerprinting or relocating (some) refugees, or by outsourcing our border control to Turkey and giving Erdogan our keys, we will not solve the current problems.

News in Brief

  1. France to nationalise nuclear operator amid energy crisis
  2. Instant legal challenge after ok for 'green' gas and nuclear
  3. Alleged Copenhagen shooter tried calling helpline
  4. Socialist leader urges Czech PM to ratify Istanbul convention
  5. Scottish law chief casts doubt on referendum
  6. British PM faces mounting rebellion
  7. Russian military base near Finnish border emptied
  8. Euro slides to lowest level in two decades

Stakeholders' Highlights

  1. Nordic Council of MinistersNordic and Canadian ministers join forces to combat harmful content online
  2. Nordic Council of MinistersNordic ministers write to EU about new food labelling
  3. Nordic Council of MinistersEmerging journalists from the Nordics and Canada report the facts of the climate crisis
  4. Council of the EUEU: new rules on corporate sustainability reporting
  5. Nordic Council of MinistersNordic ministers for culture: Protect Ukraine’s cultural heritage!
  6. Reuters InstituteDigital News Report 2022

Latest News

  1. Legal action looms after MEPs back 'green' nuclear and gas
  2. EU readies for 'complete Russian gas cut-off', von der Leyen says
  3. Rising prices expose lack of coherent EU response
  4. Keeping gas as 'green' in taxonomy vote only helps Russia
  5. 'War on Women' needs forceful response, not glib statements
  6. Greece defends disputed media and migration track record
  7. MEPs adopt new digital 'rule book', amid surveillance doubts
  8. 'World is watching', as MEPs vote on green finance rules

Join EUobserver

Support quality EU news

Join us