Graham Gudgin: Smoke and mirrors - beware the Republic of Ireland’s scam economy

This is a scam because tax revenues which should accrue to governments in the USA or Europe are never paid, or paid in small part instead in Ireland. Multi-national company profits are boosted so that rich share-holders become richer while poorer tax-payers in the USA and elsewhere must pay more tax to cover the cost of public services.

It has long been obvious that the Republic is a major tax-haven, even if politicians and prominent economists in the south are at pains to disguise the fact. A new report from the EU Tax Observatory in Paris (Global Tax Evasion Report 2024) makes this very clear.

Ireland is the world’s largest tax-haven alongside the Netherlands, but with a population under a third of the Netherlands, Ireland is hugely more intensive on a per capita basis. In fact, except for tiny Caribbean islands, Ireland is second only to Puerto Rico in the intensity of profits inflows for tax evasion.

The standard accepted measure of the size of an economy is GDP (Gross Domestic Product) which is the sum of all incomes earned in the country. If we divide this by the number of people then we get GDP per head, a standard measure of national prosperity.

For the UK, this figure is around £40,000 per head. In the Republic it is £85,000, i.e. more than double that of the UK. Of course, no-one believes that Ireland people are twice as rich as the British and the distorting effects of international tax evasion are widely acknowledged outside Ireland.

Ireland’s government statisticians define a range of alternative measures of GDP designed to remove the impact profit shifting in order to measure the size of the real economy. The most widely used of these, Modified Gross National Income, shows Ireland 16% richer than the UK at current exchange rates but similar to the UK if we allow for higher prices in Ireland.

Even this exaggerates Irish living standards. If we look at direct measures of living standards like household spending and government spending on behalf of households, then Irish households are around 15% poorer than those in the UK. This degree of distortion in Irish national accounts statistics is unknown in the rest of the world and leads to misleading international statistical comparisons of things including spending on health and education.

The EU Tax Observatory calculates that 140 billion Euros of profits from US and other multi-national companies are diverted into Ireland to save tax (a billion is a thousand million). This is equivalent to half of the size of the official Irish estimate of the size of the real economy.

In addition, there are taxes unpaid by multinationals as a result of bloated tax allowances for depreciation (i.e tax allowances for the cost of replacing capital equipment, buildings and intellectual property like patents and brands). Important among these are depreciation allowances for global aircraft leases, where amazingly, Ireland dominates the world.

The Irish profits tax rate of 12.5% has been one of the lowest in the world and is half of that in the UK. But this is only the tip of the tax-haven iceberg. Irish tax rules allow companies to reduce their taxable profits so that the actual tax rate falls to only 4%. Since this is a fraction of what the companies would pay in the UK, USA, France or Germany, it is not surprising that they strive might and main to claim fictitiously that their profits are actually made in Ireland.

The scam works in three ways. Companies can first manipulate intra-group export and import prices – what are known as transfer prices. For instance, a subsidiary located in a high-tax country can purchase services (for instance management advice or financial services) from a related part of the company in Ireland at an artificially high price. This shifts income away from the high-tax to the low-tax country. Alternatively, by undercharging for components being assembled in Ireland, a foreign-owned Irish factories can appear more profitable while the company reports reduced profits in high-tax countries

Secondly, multinationals can use intra-group lending and borrowing, with affiliates in high-tax countries borrowing money from related parties in low-tax countries.

Thirdly, companies can strategically locate trademarks, intellectual property, and logos in tax havens, and charge subsidiaries in high-tax countries for the right to use these assets. The corresponding royalty payments reduce income in high-tax countries and increase it in tax havens.

Pharmaceutical or electronics firms which manufacture things like Viagra in Cork or provide computer services in Limerick, depend on expensive research and development undertaken in the USA or elsewhere. If the company can charge this research to an Irish subsidiary and get it deducted from Irish tax, then the taxable profit becomes very small. As a result, the majority of American firms in the Republic are in chemicals, pharma or electronics and these mainly foreign-owned sectors account for nearly 80% of Irish profits tax revenue.

Much of this has been going on for decades. Even 30 years ago a major US drinks firm reported profits of nearly a million pounds per employee for adding water to syrup and putting it in bottles. However, the scale of global tax evasion ramped up a decade ago, especially in Ireland.

In 2015 Irish GDP rose overnight by 26%, something impossible in real-world economies. The cause of this unbelievably large rise in national income was concealed for two years, but it eventually emerged that the US company, Apple, had transferred $300 billion of intellectual property overnight to Dublin. This amount was larger than the entire size of Irish national income in 2015. Not all of it counted as current income (and hence as GDP) but earnings from the intellectual property and depreciation allowances against tax did count in this way.

On top of transfers of intellectual property is the growth of the Irish aircraft leasing industry which incredibly owns around 70% of the world’s commercial airliners and leases these out to airlines. Even by 2017 an Irish Central Bank Review article reported that an Irish-owned aircraft took-off somewhere in the world every two seconds.

In 2017 there were 596 Irish companies buying aircraft to lease out and the industry has grown substantially since then. The profits of the operation are recorded in Dublin even though the planes almost never land there. Even at minimal tax rates the tax revenues are large for the Irish Government.

Bob Lyddon, an accountant with a background in aircraft leasing has recently reported on tax evasion in Ireland. His figures suggest that Irish companies buy $150 billion worth of aircraft each year, with a total stock worth perhaps $1 trillion (i.e. million million) in all, or four times the size of annual income in Ireland’s real economy.

The Irish Central Bank review article stated that the main reason for this industry being located in Ireland was the light and permissive tax regime. Lyddon goes further and suggests that aircraft leasing has grown in Ireland, rather than in other low tax regimes like Caribbean islands, because of the physical presence of multi-national companies initially attracted by the low tax rate.

These companies can invest up to 15% of the value of each aircraft with the rest borrowed from banks and other investors. Under Irish law the multi-nationals can then set one eighth of the total value of the aircraft against their own Irish tax bill each year.

Lyddon estimates that this tax allowance is worth $84 billion per year, saving $14 billion in tax every year. Rental income from the aircraft leases is estimated at $110 billion a year, or nearly half the size of the Irish real economy, but this is used to pay the borrowing costs. The real advantage to the multinationals based in Ireland is the tax relief. The industry also employs several thousand very highly paid people in the Dublin finance sector as well as lawyers, and indirect beneficiaries including estate agents and high-end restaurants.

The distortionary impact on the Irish economy is immense. The financial economy based on tax-evasion is around the same size as the real economy. The staggering 26% rise in GDP In the first months of 2015 is not anything a real economy can do. Even China at its peak of economic growth only averaged 10% per year. Western European countries rarely achieve more than 3% a year.

Corporate tax revenues constitute 21% of all taxes paid in Ireland compared with 7% in the UK, and up from only 9% in 2010. Almost 90% of this paid by multinational companies. Most comes from only ten US-owned firms. Just three US-owned firms contribute a third of tax revenues on corporate profits, and the largest of these is Apple.

If this degree of tax evasion is so large and so well known to experts why is something not done to control it? The answer is that several attempts have been made but multinational companies and the Irish Government have usually been able to circumvent attempts.

The UK Government in 2007, and the US Government ten years later, did legislate to prevent firms from moving their registered headquarters to Ireland and other tax havens to avoid tax. This largely worked, but the other tax evasion measures listed above have remained.

The OECD club of advanced economies finally succeeded in 2021 in persuading most major economies to introduce a minimum profits tax rate of 15%. This means that Ireland must raise its rate from 12.5% to 15% for foreign-owned firms, (but will keep the low rate for smaller domestic firms). The OECD agreement has subsequently been watered down and has done little to prevent around a third of the offshore profits of global multi-national companies being routed via tax-havens like Ireland.

The EU thoroughly dislikes Ireland’s tax-haven policies which lead tax revenues to be diverted away from other EU economies. However, profits tax is not an EU competence and projected reforms can be blocked by an Irish veto. Attempts to remove this veto and move to qualified majority voting on this issue have thus far come to nothing.

Attempts have been made to use EU state aid (i.e. subsidy) rules to discipline companies but these too have failed. The EU Commission’s attempt to fine Apple 13 billion euros under these rules in 2016 was resisted by the Irish Government even though it would have received this revenue, and was later overturned in the European Central Court.

The Republic has seen several financial collapses reflecting its financial laxity, most notably in 2008 during the global banking crisis. Most relevant to the present situation was the failure of Shannon-based Guinness Peat in 1992.

This was the first major Irish aircraft leasing company. It collapsed in 1992 during a downturn in air travel, after orders were placed for 10% of the world’s aircraft production. Lyddon warns that this could happen again with dire consequences for the Republic’s economy but it is difficult to judge how realistic this is.

Currently, the Irish Government is offering to share a small part of its ill-gotten tax revenue gains with Northern Ireland, for instance in part financing the dualling of the A5 road. If Northern Ireland were to go further in future and integrate its economy with the Republic it would expose itself to the financial dangers of a tax-haven economy. Much better to remain a subsidised region of the much more financially stable UK economy.

​Dr Graham Gudgin is honorary research associate at the Centre for Business Research, Judge Business School, Cambridge University and senior economic advisor at Policy Exchange think tank, London. He was director of the NI Economic Research Centre 1985-98 and special advisor to David Trimble 1998-2002