Monday

5th Dec 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.

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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.

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