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Is Ireland 'syphoning' corporate profits away from other European countries? - Yes (but)

Ireland’s corporate tax approach isn’t a popular one abroad.

IT’S THE HOT topic on everyone’s lips this festive season – why is Ireland getting so much money from corporate tax?

Receipts from the tax head have surged to such an extent in recent years that corporate taxes are single-handedly keeping the country’s finances in the black.

The surge in corporate tax has also led to Ireland being accused of ‘syphoning’ profits away from other (mostly EU) countries, for its own benefit.

The claim was made by Thomas Piketty, a leading French economist, who was reacting to a report from the European Union Tax Observatory, a Paris School of Economics research body.

The research found that Ireland earns €4,500 in corporation tax revenue per capita – five times the rate compared to France or Germany.

Whereas corporate tax revenue per capita has stayed roughly constant in these two countries over the last 20 years or so, it has surged in Ireland recently, multiplying fivefold since 2014.

The comments from Piketty prompted a wave of reactions from various prominent economic figures.

This included Ashoka Mody, who was one of the lead IMF (International Monetary Fund) officials during Ireland’s financial crisis bailout, who said the country had a “parasitic tax policy”.

French economist Gabriel Zucman, one of the coordinators of the report, also said Ireland “syphoned off” profits from other countries.

Nobel-prize winning United States economist Joseph Stiglitz, who wrote the foreword to the Tax Observatory report, previously said Ireland wasn’t being a good “EU citizen” with its corporate tax approach.

You get the idea. Ireland’s corporate tax approach isn’t a popular one abroad. Other countries have been looking on with increasing envy, outrage, etc, as Ireland has taken in billions and billions from the tax in recent years – so much that it has been compared to the country striking oil.

Ireland took in €15 billion in corporate tax in 2021 – up 29% year-on-year. In 2022, it took in €22.6 billion – up 48%. The increase this year won’t be as dramatic, but the direction of travel is still upwards.

Ireland took in €110 billion in taxes in total in 2022 – so the importance of corporate taxes are hard to overstate. They are crucial to Ireland’s financial health..

The Irish Fiscal Advisory Council estimated in 2021 that as much as €9 billion of that year’s €15 billion tax take that year was a ‘windfall’ – ie, it was “not be explained by the performance of the domestic economy”.

Without these windfalls, the country would go from running healthy surpluses to worrying deficits.

So why is Ireland taking in so much in corporate tax?

The view from many, including the likes of Piketty and Mody, is that it likely relates to profit-shifting.

This relates to how companies move their earnings from one jurisdiction to another and is often done to minimise tax payments.

The general idea is to move profits from countries with a higher corporate tax rate to one with a lower rate, or none at all.

Many large multinationals book much of their profits for their European operations in Ireland.

This is done because many, especially US companies with European headquarters in Dublin, moved their intellectual property (IP) assets to Ireland several years ago.

IP is the copyrights and patents which underlies the sale of products and often determines where profits are booked.

Many multinationals moved their IP after a 2015 international attempt at a crackdown on tax avoidance by the OECD (Organisation for Economic Co-operation and Development), an intergovernmental body made up of mainly wealthy developed countries.

After this, many big companies moved their IPs from jurisdictions with no corporate taxes, which were viewed poorly, to those which appeared more legitimate, such as Ireland.

Ireland was viewed as more legitimate as many of the US multinationals often have their European headquarters here as well as significant economic activity and staff numbers.

Ireland actively encouraged this process. In 2014, the government brought forward a tax break which made it more attractive for multinationals to move IP to Ireland.

The measure, which was open between 2015 and 2017, resulted in multinationals moving assets valued at tens of billion here and goes some way to explaining why so many large firms have their IP in Ireland.

This means profits from across the European operations of multinationals tend to flow to Ireland and are also taxed in Ireland.

Before the OECD changes in 2015, many US companies had held profits earned in European markets in zero-tax jurisdictions.

While tax wasn’t being paid on the money, it couldn’t be used by the multinationals. So moving it to Ireland was preferable. Pay some tax, but a lower amount – 12.5%.

The money could then be moved back to the US or wherever else was needed by the multinationals once it had been taxed.

This has resulted in massive windfalls for Ireland, but many other European countries feel they’re missing out.

The European Union Tax Observatory report estimated over $140 billion has been shifted to Ireland in recent years.

The Tax Justice Network, a UK-founded group of researchers, estimated earlier in 2023 that about $40 billion per year is shifted to Ireland, leading to $11 billion of “tax losses” for other countries. The exact numbers tend to differ by the report, but the point is the same.

This is why other European countries are so angry. Their view is that the taxes, which are largely flowing to the Irish operation, should be distributed more evenly across Europe on the basis of measures such as where products are sold.

The other view is that Ireland is simply playing the tax game well to benefit its citizens. None of the moves which the government has made (leaving the disputed status of the €13 billion Apple tax row to one side) have been found to be breaking international laws.

Readers may also notice that the multinationals being discussed are almost always US-based. This is partly because the US tax system allows its companies to not pay tax on foreign earnings until they are brought back to the US.

Some economists view this issue as one which is largely caused by the US tax system. Some would also argue that much of the tax revenue which Europe is fighting for – money which is currently flowing to Ireland – should be going to the US instead.

No matter where the money ends up in the future – be that back in the US, more evenly spread across Europe, or still in Ireland – it’s hard to argue with the view that massive amounts of corporate profits are being shifted to Ireland.

But as with most things in life, the reality of the situation is a bit messier than many might imagine.

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