Tax Avoidance and the Irish Balance of Payments

At this point, profit shifting by multinational corporations doesn’t distort Ireland’s balance of payments; it constitutes Ireland’s balance of payments.

Multinational corporations' efforts to avoid U.S. taxes by shifting profits abroad significantly distort the U.S. balance of payments (BoP). The clearest distortion is an understatement of U.S. services exports and an associated overstatement of income receipts on foreign direct investment (FDI), as U.S. multinationals transfer price their profits away to subsidiaries in low-tax jurisdictions.

The effect is big. In 2016, U.S. multinationals reported some $200 billion—roughly one percentage point of GDP—of reinvested earnings in the seven largest tax havens.

With such a noticeable impact on the U.S. balance of payments, what effect does profit shifting have on the balance of payments of tax havens?

Ireland for example.

The distortion of Ireland’s national accounts data by multinational activity is a prime example of what the Bank for International Settlements (BIS) has called “a growing tension between the nature of economic activity and the measurement system that attempts to keep up with it.” The 2015 economic data that Ireland’s Central Statistics Office (CSO) released in July of 2016 showed that in just one year real GDP had grown 26 percent; real GNP (generally thought of as less susceptible to profit-shifting distortions) by 18.7 percent; exports by 34 percent; and the country’s capital stock of fixed assets by some €300 billion. Paul Krugman called it leprechaun economics. Former governor of the Central Bank of Ireland, Patrick Honohan, wrote that the statistical distortions made “a mockery of conventional uses of Irish GDP.”  (more...)

Tax Avoidance and the Irish Balance of Payments