This is a version of a column published in the Irish Examiner June 1 2013. Nothing it seems lasts forever. This is as true in economics and finance as it is in life generally. While we cannot stop the onward march of change, we can and should consider if we are planning for this. We are not generally good at planning in this country, and there is no evidence that when such plans are made they are revised and updated regularly and implemented without political jigging.
Over the last two weeks we have seen the beginnings of the end of the present Irish macroeconomic business model. This has come about consequent to the growing concern, crackdown and outright confusion on international corporate tax. When your country is being labeled (however fairly or otherwise) a tax haven in the US Senate and when a large part of your (apparent) success is at least in part dependent on the underlying features that give rise to that description then the writing is on the wall, and the floor and the ceiling and round the wainscoting. This issue has been the subject of much discussion. One thing is clear – there are deeply held (if not deeply thought out) views on this. Indeed, it is clear to me that even advocating discussing the taxation of Multinational Companies (MNC’s) in Ireland is greeted with distrust bordering on hysteria. Even the mere discussion of it might cause terrible things to happen. Saying we must examine whether it is right that large companies can use the structure of Irish taxation to minimise their ultimate tax bills seems to be the economic equivalent of saying Candyman five times in front of a mirror.
What is the Irish business model? It is in large part built on the idea of being an attractive venue for foreign direct investment, for multinational companies. The idea, now into its 6th decade, is that these export orientated companies will come here, and pay a low tax on corporate profits. In the meantime we will gain the benefits of employment and eventually (remember, its in its 6th decade…) a cadre of Irish companies will grow and displace these MNC’s. A complex history underlies the tax issues here but the present situation is relatively simple. All Irish companies pay tax at 12.5% on profits in Ireland. Where the problem arises is that first there can be many many tax breaks that benefit a small number of companies (perhaps even one company); second there can exist companies that exist in Ireland but are not resident in Ireland for tax purposes ; third there are a web of dual tax treaties between countries that allow and to some extent encourage tax arbitrage, where entities shuttle profits around paying some tax here a little there and ultimately very litte anywhere. Arrangements such as the “double Irish“, whereby Irish companies can be tax exiles, simply exist to facilitate this tax roulette. We wash profits clean of immediate tax liabilities. The US Senate report on Apple, and the hearings into Starbucks, Amazon etc in the UK give some idea of the complexities here. Ireland is a central node in this web, and this combined with the reality that we are a low corporate tax country has drawn spotlights on us that we perhaps do not want.
Figures vary but the commonly accepted figure is that some 150k jobs are held in multinational companies. This is impressive, but the total labour force consists of some 1.85m people. Most MNCs are in the high and medium tech sector and that is not where people are employed. More people by far are employed in Knowedge Intensive Marketed Services (selling services) and Knowledge Intesive Other Services (mainly health and education) than in the igh tech sector. Yet these get relatively little play in the media as compared to the FDI dominated high tech sector. The bottom line is that we need to consider a hard question : is the MNC tail wagging the employment dog? We will not get out of this perennial recession by concentrating on FDI, or even on exports. Government ministers parading round announcing ten jobs here and a few dozen there will at the same time take actions that further depress demand in the domestic economy, and trumpet then the rise in parttime and ‘family’ jobs plus the effects of emigration on the live register as proof that this time is different and there is such a beast as expansionary contraction.
The export issue is also problematic for a linked reason. A large part of our trade balance is composed of chemicals. In fact, of total exports in 2012, 60% was accounted for by chemicals. Chemicals and related have long been suspected of being industries in which transfer pricing has artificially inflated the export figures. We facilitate transfer pricing in this country ; if you doubt this read S3.2 of the excellent report here. Absent the chemical exports we would just about break even on our balance of trade. A key aspect of transfer pricing is that it is encouraged and facilitated by tax arbitrage conditions. It gets worse – when we look at the rest of the balance of payments tables we see massive outflows. We apparently export 36b worth of computer services – nearly 50% of the value of agribusiness. We of course nearly offset this by ‘importing’ royalties and licenses of 32b, all offsettable as costs and in all likelihood the vast preponderance of which is internal to MNCs.
We need a mature debate on this. Not only is the MNC sector now distorting the economy, this flows through. We are well out of kilter with our European peers in terms of our tax take and structure. They all pretty much have a balance between GDP (including MNC’s) and GNP (excluding). We don’t. As a consequence when we calculate our tax take on GDP we flatter ourselves and look like a low tax country. When we examine GNP this is less so. But ever other country works off GDP data and they look at us and ask : what is going on. Joe Stiglitz, a nobel laureate and no enemy of Ireland has asked why countries such as Ireland which engage in tax based MNC attraction / profit washing should be bailed out. We might decry this but our own rhetoric denies the reality. We are perhaps now so used to saying one thing and meaning the other that we cannot even tell ourselves the truth. We cannot say at the same time that our MNC sector and its exports are real and not tax driven and then say that we must discount these for all purposes related to taxation and comparative economic analysis. Either these flows are real, in which case we need to treat them no differently to the local garage or the SME exporting to the UK ; or they are not. We cannot have it both ways and expect to be taken seriously.