Is tax avoidance at the heart of Ireland’s economic miracle?

Coming out of the economic crisis Ireland was one of the best performing economies, with GDP growth rates of 8.5% in 2014 and an extraordinary 26.3% in 2015. But how much of this economic activity was real, and how much a fiction created by Ireland’s tax haven status? A new paper by Heike Joebges of the University of Applied Science in Berlin considers the evidence.

While the European Commission has praised Ireland for its remarkable economic rebound after the crisis, Professor Joebges concludes that this recovery might not be as impressive as thought.

Firstly, much of the statistical economic boom in  Ireland over the last couple of years has been the result of a change in the way national accounts are calculated. But even if we strip out the accounting changes, Ireland would still have shown GDP growth of 5%, an impressive improvement. However, here there are some issues too.

Ireland is an economy dominated by foreign companies. According to official figures foreign controlled affiliates provide almost 50% of employment in the country and 80% of exports (90% of manufacturing exports). This, combined with Ireland’s status as a tax haven, makes Irish GDP figures particularly vulnerable to profit shifting.

Because of Ireland’s low tax regime it is advantageous for companies to try to report profits in Ireland. Through transfer pricing, which involves the Irish subsidiary overcharging other parts of the company based elsewhere for goods and services, profits can be moved from the rest of the world to Ireland.

However, this kind of internal profits shifting does very little for the domestic workforce. Indeed, in some cases headquarter companies based in Ireland may not be employing anyone at all. Wages do not increase because the Irish subsidiary is making more money.  (more...)

Is tax avoidance at the heart of Ireland’s economic miracle?

Background:

Commission may examine 300 more Irish tax rulings