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Column: Is Ireland actually a tax haven?

The consequence of tax avoidance and evasion by multinationals and wealthy individuals is higher income taxes for the rest of society, writes Dr Tom McDonnell who says Ireland is certainly not a haven for the average taxpayer.

Tom McDonnell Senior Economist, NERI

AGGRESSIVE RACE TO the bottom tax competition is a zero sum game at the international level; relying on tax policy to attract foreign direct investment is not a sustainable industrial policy for Ireland in the long-run. There is nothing to stop other countries engaging in different forms of this ‘state-aid competition’.

State-aid competition naturally benefits global multinationals but it does so at the expense of domestic firms and, of course, other taxpayers. Artificially providing competitive advantages to multinationals distorts competition to the detriment of domestic firms. This ‘state-aid’ stifles opportunities for new and smaller firms, undermines domestic rivals, and hampers the Schumpeterian process of creative destruction that is so crucial to generating economic growth in the long-term.

Undermining tax bases

The race to the bottom also has the effect of undermining tax bases everywhere. One important effect is the enabling of aggressive tax avoidance by multinationals and wealthy individuals. This tax avoidance is a diversion of public resources to private shareholders and individuals. Aggressive tax avoidance is by no means a new phenomenon. Why is the EU seemingly only concerned about this now?

Public tolerance of anti-social tax avoidance behaviour, and of the jurisdictions that facilitate such behaviour, has been eroded across the EU by the ongoing austerity being endured by people in these countries. Up to €1 trillion is lost to EU countries each year through tax avoidance.

There is a growing understanding that the consequence of tax avoidance and tax evasion by multinationals and wealthy individuals is the imposition on the rest of society of higher income taxes, higher consumption taxes, and/or higher property taxes, as well as a hollowing out and deterioration of education and health services and reduced spending on such areas as pensions and public infrastructure.

Ireland’s tax policy is notable for its aggressive tax competition. But is Ireland actually a tax haven? It’s not a haven for the ordinary taxpayer.

Tax haven characteristics

Nor does Ireland meet each of the OECD criteria for a tax haven. Then again when even the Cayman Islands and the British Virgin Islands don’t officially count as uncooperative tax havens definitions like those of the OECD cease to have meaning as an analytical tool. Ireland is certainly perceived as a tax haven by members of the US Senate committee and Ireland clearly does have tax haven like characteristics.

The “Double Irish with a Dutch Sandwich” places Ireland close to the centre of global tax avoidance by multinationals. Ireland is by no means unique amongst European countries. This technique is just one of several similar global tax avoidance schemes. These schemes involve arranging transactions between subsidiary firms to take advantage of the differences between the varied national tax codes. Cyprus, the Netherlands, Luxembourg and Switzerland are all major enablers of aggressive tax avoidance. The Netherlands is perhaps the most significant tax haven for rooting capital flows in Europe because of its treatment of royalties. The Netherlands even goes so far as to secretly negotiate with multinationals on these companies’ profits from royalties.

Ireland’s tax policy can harm countries in the Global South through abuse by multinationals of the system of transfer pricing. In order to reduce their overall international tax liability multinational firms have an incentive to manage internal pricing between subsidiaries in a manner that artificially shifts income from their operations in higher tax regions, to their operations in lower tax jurisdictions.

Tax liability

Transfer ‘mis-pricing’ based on inflated royalty payment arrangements associated with intellectual property is particularly straightforward and multinationals with a research and development tax base in countries like Ireland can easily avail of transfer pricing and royalty payment arrangements to reduce their overall tax liability. These types of arrangement can undermine the ability of countries in the Global South to collect tax, draining resources for their public services and postponing the day when they can raise sufficient revenue from local economic activity to reduce their reliance on aid.

Such behaviour counteracts Ireland’s aid to developing countries. There is therefore real policy incoherence. We display solidarity with the Global South by providing aid yet facilitate behaviour that undermines the ability of these countries to provide public services.

What needs to be done? One guiding principle is that profits and income should be taxed in the countries where the economic activity actually occurs. Fighting international tax avoidance requires full transparency and automatic exchange of information between tax authorities to establish where the real economic activity is taking place. Such information will also help establish whether transfer mis-pricing is taking place.

Declaring revenues

Compelling offshore companies and trusts to reveal their beneficial ownership would be another key reform, as would measures to force companies and individuals to declare publicly their revenues, profits and tax payments on a country by country basis.

Is meaningful change likely? Some change is coming but given the sheer strength, access and influence of the tax avoidance industry (banks, law firms, accountancy firms) it is difficult to be optimistic. The secondment of staff from the large accountancy firms to finance ministries and tax authorities raises legitimate questions about undue influence over tax policy. Regulatory capture undermines the democratic process itself. Vigilance is required.

Dr Tom McDonnell is an economist with TASC (Think-Tank for Action on Social Change). He has also lectured in Economics at NUI Galway between 2005 and 2010.

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About the author:

Tom McDonnell  / Senior Economist, NERI

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