ANDY: IS OUR “ECONOMIC RECOVERY” BASED ON A SILICON BUBBLE?

Irish corporation tax returns are behaving oddly: the Department of Finance estimates that they are running €2 billion (74 percent) ahead of forecast for the year. Economist Seamus Coffey has described these figures as “very strange”.

Coincidentally (or perhaps not) the global accounts of the Apple corporation revealed an increase in the rate of tax it was paying on its non-US profits, leading Colm Keena in the Irish Times to report “speculation that the jump in Ireland’s corporation tax receipts may in part be connected to a US multinational booking profits here that previously were booked offshore”. Why Apple would do this is unclear, though it may be seeking to head off US and EU criticisms of its global tax-avoidance activities (see below).

Last week the Debt and Development Coalition Ireland published a report entitled Corporate Tax Secrecy and the State: the Apple Case in Ireland. The title refers to the European Commission investigation into whether Ireland granted Apple state aid in contravention of EU rules, by agreeing in advance on the amount of tax Apple subsidiaries would pay. (Similar cases are being taken regarding Fiat and Amazon in Luxembourg, and Starbucks in the Netherlands).

The Irish government claims the deals with Apple – negotiated in 1991 and 2007 – were not binding “rulings” but, rather, “opinions” offered by the Irish Revenue Commissioners in relation to Apple’s tax liability. The EU Commission suggests that what effectively happened was “reverse engineering”: Apple said how much tax it would pay and the Revenue Commissioners agreed despite the fact that there was no “scientific basis” for this calculation (though reference was made to the jobs Apple provides in Cork). These “opinions” are not subject to parliamentary or public scrutiny; we do not even know how many there are.

Two Apple subsidiaries – Apple Sales International and Apple Operations Europe – do not pay any tax at all as they are incorporated in Ireland but are not tax resident here. In fact, reports indicate they “have no legal tax residence anywhere in the world”. This rather remarkable state of affairs prompted a US Senate hearing to claim in 2013 that “Ireland has essentially functioned as a tax haven for Apple, providing it with minimal income tax rates approaching zero”.

In response to these charges, and also in anticipation of new proposed tax guidelines from the Organisation for Economic Cooperation and Development (OECD) – the Base Erosion and Profit Shifting (BEPS) project – the Irish government has slightly modified its corporate tax regime while seeking to maintain its overall status as a low-tax environment for corporations. The significance of that status is evident from the recently published Google accounts for 2014 – the company paid just €28.6 million in corporation tax in Ireland for the year while generating (stated) turnover here of €18.3 billion.

Successive Irish governments have placed a lot of eggs (apples?) in the single basket of foreign direct investment (FDI) and have been willing to subordinate the country’s tax laws to the profit imperatives of multinational companies (MNCs).

But what happens if the cheap US cash that is fueling the current wave of FDI dries up? What if insane property costs and infrastructural failings serve to drive investors and their employees out of Dublin in particular? What if new regulations on data secrecy and transfer undermine the profitability of the big tech companies?

Expressing more immediate concerns, outgoing Central Bank governor Patrick Honohan recently wrote to Minister for Finance Michael Noonan as follows:

“All things considered, you will be alert to the danger of using windfall fiscal gains to justify long-lasting spending commitments . . . Distinguishing between revenue sources that can be considered as stable – such as taxes on personal income – and those which have a one-off or transitory characteristic is a challenge of which I am sure that your department is cognisant, especially given the speed at which transitory revenue sources associated with the housing bubble evaporated in 2009 and 2010.”

In other words, the government looks like it is going to use what may well be temporary, one-off tax revenues (perhaps mainly from Apple) to fund a giveaway (for some) budget designed to buy an election.

Professor Honohan has also queried the reality of economic growth in Ireland, pointing to the “distorting features” of how MNC activity here is measured (or declared). All told, the much-vaunted economic recovery in Ireland is almost certainly overstated and the government’s revenue base much more vulnerable than it might appear. This is unlikely to end well.