TheCentral Bank of Ireland in Dublin'sIFSC. Then Governor Philip Lane chaired the Economic Statistics Review Group which published a report in 2016 recommending the creation of Modified Gross National Income.
Modified gross national income (alsoModified GNI orGNI*) is a metric used by theCentral Statistics Office (Ireland) to measure the Irish economy rather thanGNI or GDP. GNI* is GNI minus the depreciation on Intellectual Property, depreciation on leased aircraft and the net factor income of redomiciled PLCs.
In August 2018, theCentral Statistics Office (Ireland) (CSO) restated table of Irish GDP versus Modified GNI (2009–2017) showed GDP was 162% of GNI* (EU-28 2017 GDP was 100% of GNI).[6] Ireland's public§ 2018 Debt metrics differ dramatically depending on whether Debt-to-GDP, Debt-to-GNI* or Debt-per-Capita is used.[7]
The distorted GNI to GDP ratio in some EU states indicates a profound disproportionality in corporate havens as Ireland and Luxembourg.[8][9]
In February 1994, tax academicJames R. Hines Jr., identified Ireland as one ofseven major tax havens in his1994 Hines-Rice paper,[10] still[as of?] the most cited paper in research on tax havens.[11] Hines noted that theprofit shifting tools of US multinationals in corporate-focusedtax havens distorted the national economic statistics of the haven as the scale of theprofit shifting was disproportionate to haven's economy. Anelevated GDP-per-capita became a "proxy indicator" of a tax haven.[2]
In November 2005, the Wall Street Journal reported that US technology and life sciences multinationals (e.g. Microsoft), were using an Irishbase erosion and profit shifting ("BEPS") tool called thedouble Irish, to minimise their corporate taxes.[12][13] Designed byPwC (Ireland) tax partner,Feargal O'Rourke,[14][15] thedouble Irish would become the largestBEPS tool in history, and would enable US multinationals to accumulate over US$1 trillion in untaxed offshore profits.[16]
The accounting flows of BEPS tools can appear in national economic statistics, varying with each tool, but without contributing to the economy of the tax haven.[2]
Subsequent US Senate (2013), and EU Commission (2014–2016) investigations, into Apple's Irish tax structure, would show that starting in 2004, Apple's Irish subsidiary, Apple Sales International ("ASI"), would almost double the untaxedprofits shifted through itsdouble Irish BEPS tool every year, for a decade.[17]
Table 1: Estimate of profits shifted through Apple's Irish subsidiary, Apple Sales International ("ASI"), 2004–2014.[17]
Year
ASI profit shifted (USD m)
Average €/$ rate
ASI profit shifted (EUR m)
Irish corp. tax rate
Irish corp. tax avoided (EUR m)
2004
268
.805
216
12.5%
27
2005
725
.804
583
12.5%
73
2006
1,180
.797
940
12.5%
117
2007
1,844
.731
1,347
12.5%
168
2008
3,127
.683
2,136
12.5%
267
2009
4,003
.719
2,878
12.5%
360
2010
12,095
.755
9,128
12.5%
1,141
2011
21,855
.719
15,709
12.5%
1,964
2012
35,877
.778
27,915
12.5%
3,489
2013
32,099
.753
24,176
12.5%
3,022
2014
34,229
.754
25,793
12.5%
3,224
Total
147,304
110,821
13,853
From 2003 to 2007, research has shown that inflated Irish GDP from US multinationalBEPS tools,[18] amplified the IrishCeltic Tiger period by stimulating Irish consumer optimism, who increased borrowing to OECD record levels; and global capital markets optimism about Ireland enabling Irish banks to borrow 180% of Irish deposits.[19]
This unwound in the economic crisis as global capital markets, who had ignored Ireland's deteriorating credit metrics and distorted GDP data when Irish GDP was rising, withdrew and precipitated anIrish property and banking collapse in 2009–2012.[18][20]
The 2009–2012 Irish economic collapse led to a transfer of indebtedness from the Irish private sector balance sheet, the most leveraged in the OECD with household debt-to-income at 190%, to the Irish public sector balance sheet, which was almost unleveraged pre-crisis. This was done via Irish bank bailouts and public deficit spending.[21][22]
Dominance of US companies: Irish corporateGross Operating Surplus (i.e. profits), by the controlling country of the company (note: a material part of the Irish figure is also from UStax inversions who are US-controlled). Eurostat (2015).[23]
During the Irish financial crisis from 2009 to 2012, two catalysts would restart the distortion of Irish economic statistics:
Irish-based US technology firms such as Apple and Google entered a stronger phase of growth; for example, in 2007, Apple's Irish ASI subsidiary wasprofit shifting just under USD 2 billion of untaxed global income through its hybrid-double Irish BEPS tool, however by 2012, ASI wasprofit shifting just under USD 36 billion of untaxed global income through Ireland, although only a small amount of this BEPS tool appeared in Irish GDP.[17]
In 2010, Hines published a new list of 52 globaltax havens, theHines 2010 list, which ranked Ireland as the 3rd largest tax haven in the world.[26]
By 2011,Eurostat showed that Ireland's ratio ofGNI toGDP, had fallen to 80% (i.e. Irish GDP was 125% of Irish GNI, or artificially inflated by 25%). Only Luxembourg, who ranked 1st on Hines' 2010 list of global tax havens,[26] was lower at 73% (i.e. Luxembourg GDP was 137% of Luxembourg GNI). Eurostat's GNI/GDP table (see graphic) showed EU GDP is equal to EU GNI for almost every EU country, and for theaggregate EU-27 average.[18][27]
In 2013–2015 several large US life sciences multinationals executedtax inversions to Ireland (e.g. Medtronic). Ireland became the largest recipient of US corporate tax inversions in history.[28] The Irish BEPS tool enabled US multinationals to avoid almost all Irish corporate taxes, however, unlike other Irish BEPS tools, it registers fully in Irish economic statistics.[29] In April 2016, the Obama Administration blocked the proposed US$160 billion proposed Pfizer-Allergan Irish inversion.[30]
A 2015 EU Commission report into Ireland's economic statistics, showed that from 2010 to 2015, almost 23% of Ireland's GDP was now represented by untaxed multinational net royalty payments, thus implying that Irish GDP was now circa 130% of Irish GNI.[31] This analysis, however, did not capture the full effect of the BEPS tool as it usescapital allowances, rather thanroyalty payments, to execute the BEPS movement. The Irish media were also confused as to Ireland's state of indebtedness as Irish Debt-per-Capita diverged sharply from Irish Debt-to GDP.[32][33][34]
By 2012–14, Apple's Irish subsidiary, ASI, wasprofit shifting circa US$35 billion per annum through Ireland, equivalent to 20% of Irish GDP, via its hybrid-double Irish BEPS tool.[17] However, this particular BEPS tool had a modest impact on Irish GDP data. In late 2014, to limit further exposure to fines from theEU Commission's investigation into Apple's Irish tax schemes, Apple closed its hybrid-double Irish BEPS tool,[35] and decided to swap into the BEPS tool.[36][37] In Q1 2015, Apple Ireland purchased circa US$300 billion of virtual IP assets owned by Apple Jersey, executing the largest BEPS action in history.[17][38]
Ireland: Apple's Q1 2015 IP distortion of Ireland's balance of payments. Brad Setser & Cole Frank (Council on Foreign Relations)
The BEPS tool is recorded like atax inversion in the Irish national accounts.[38] Because Apple's IP was nowon-shored in Ireland, all of ASI's circa US$40 billion inprofit shifting for 2015, appeared in 2015 Irish GDP and GNP, despite the fact that new BEPS tool would limit Apple's exposure to Irish corporation tax.
In July 2016, the Irish Central Statistice Office announced 2015 Irish economic growth rates of 26.3% (GDP) and 18.7% (GNP), as a result of Apple's restructuring.[39] The announcement led to ridicule,[40][41][42][43][44][45][46] and was labelled by Nobel Prize economistPaul Krugman as "leprechaun economics".[47]
Finance MinisterMichael Noonan who removed the "cap" on the Irish "capital allowances for intangibles" BEPS tool in 2015, to remove any potential Irish corporate tax liability from Apple's Q1 2015 restructuring
From July 2016 to July 2018, the Central Statistics Office refused to identify the source of leprechaun economics, and suppressed the release of other economic data to protect Apple's identity under the 1993 Central Statistics Act,[48][49] in the manner of a "captured state", further damaging confidence in Ireland.[50]
By early 2017, research in theSloan School of Management in theMassachusetts Institute of Technology, using the limited data released by the Irish CSO, could conclude:While corporate inversions and aircraft leasing firms were credited for increasing Irish [2015] GDP, the impact may have been exaggerated.[51] The same research noted that capital markets did not consider Irish macro economic statistics to be credible or meaningful, as evidenced by the lack of any reaction by the capital markets to Ireland's 26.3% GDP growth (both on the day of release, and in the subsequent days).[51]
Where as the Obama Administration blocked the proposed US$160 billion Pfizer-Allergan Irish inversion in 2016, Apple's larger US$300 billion Irish inversion was ignored. It is not clear if this was due to the confusion caused by theCentral Statistics Office (Ireland) in protecting Apple's identity for 2 years, or other reasons.
Nobel Prize-winning US economistPaul Krugman whose tweet on the 12 July 2016 christened the Irish "Leprechaun economics" affair and precipitated the creation of "Modified gross national income", or GNI*
In September 2016, as a direct result of the "leprechaun economics" affair, the Governor of theCentral Bank of Ireland ("CBI"),Philip R. Lane, chaired a special cross-economic steering group, the Economic Statistics Review Group ("ESRG"), of stakeholders (incl.CBI,IFAC,ESRI,NTMA, leading academics and theDepartment of Finance), to recommend new economic statistics that would better represent the true position of the Irish economy.[52]
In February 2017, a new metric, "Modified Gross National Income" (or GNI* for short) was announced. The difference between GNI* and GNI is due to having to deal with two problems (a) The retained earnings of re-domiciled firms in Ireland (where the earnings ultimately accrue to foreign investors), and (b) depreciation on foreign-owned capital assets located in Ireland, such as intellectual property (which inflate the size of Irish GDP, but again the benefits accrue to foreign investors).[53][54]
Irish GNI less the effects of the profits of re-domiciled companies and the depreciation of intellectual property products and aircraft leasing companies.[55]
In February 2017, the CSO stated they would continue to calculate and release Irish GDP and Irish GNP to meet their EU and other International statistical reporting commitments.[56] In July 2017, the CSO estimated that 2016 Irish GNI* (€190bn) was 30% below Irish GDP (€275bn), or that Irish GDP is 143% above Irish GNI*. The CSO also confirmed that Irish Net Public Debt-to-GNI* was 106% (Irish Net Public Debt-to-GDP, postleprechaun economics, was 73%).[57][58]
In December 2017,Eurostat noted that while GNI* was helpful, it was still being artificially inflated by BEPS flows, and the BEPS activities of certain types ofcontract manufacturing in particular;[3] a view shared by several others.[18][59][60][61][62][63] There have been several material revisions to Irish 2015 GDP in particular (as per§ Irish GDP versus Modified GNI (2009–2017).[64] Modified GNI, or GNI*, was adopted by the IMF and OECD in their 2017 Ireland Country Reports.[65][66]
Economists noted in May 2018 that distorted Irish economic data was calling into question the credibility ofEurostat'saggregate EU-28 economic data.[4]
In June 2018, tax academicGabriel Zucman, using 2015 economic data, claimed IrishBEPS tools had made Ireland the world's largest tax haven (Zucman-Tørsløv-Wier 2018 list).[67][68] Zucman also showed that Irish BEPS flows were becoming so large, that they were artificially exaggerating the scale of the EU-US trade deficit.[5]
Another study published in June 2018 by the IMF called into question the economic data of allleading tax havens, and the artificial effect of their BEPS tools.[1][69]
Irish public debt-to-GDP and public debt-to-GNI* from 2000 to 2017[70]
The issues post leprechaun economics, and "modified GNI", are captured on page 34 of the OECD 2018 Ireland survey:[66]
On a gross public debt-to-GDP basis, Ireland's 2015 figure at 78.8% is not of concern;
On a gross public debt-to-GNI* basis, Ireland's 2015 figure at 116.5% is more serious, but not alarming;
On a gross public debt-per-capita basis, Ireland's 2015 figure at over $62,686 per capita, is the second highest in theOECD, after Japan.[71]
There is concern Ireland repeats the mistakes of the "Celtic Tiger" era, and over-leverages again, against distorted Irish economic data.[59] Given the transfer of Irish private sector debt to the Irish public balance sheet from the Irish 2009–2012 financial crisis, it will not be possible to bail out the Irish banking system again.
In June 2017, theIrish Fiscal Advisory Council benchmarked Irish public debt against Irish tax revenues (similar to the debt-to-EBITDA ratio used in capital markets). Ireland's 2016 gross public debt-to-tax revenues was 282.9%, the 4th highest in the EU-28 (after Greece, Portugal, and Cyprus).[72][73][74]
In November 2017, theCentral Bank of Ireland benchmarked Irish private debt against Irishdisposable income. Ireland's 2016 private debt as a % of Irish disposable income was 141.6%, the 4th highest in the EU-28 (after Netherlands, Denmark and Sweden).[75][76]
These two initiatives show Ireland's high public debt levels, and Ireland's high private sector debt levels, imply that on a "total debt" basis (i.e. Irish public debt plus Irish private debt), Ireland is likely one of the most indebted of the EU-27 countries when benchmarked on a GNI*-type basis; hence the importance of a GNI* metric.[citation needed]
^abJANNICK DAMGAARD; THOMAS ELKJAER; NIELS JOHANNESEN (June 2018)."Piercing the Veil of Tax Havens".International Monetary Fund: Finance & Development Quarterly.55 (2).Archived from the original on 12 June 2018. Retrieved12 June 2018.The eight major pass-through economies—the Netherlands, Luxembourg, Hong Kong SAR, the British Virgin Islands, Bermuda, the Cayman Islands, Ireland, and Singapore—host more than 85 percent of the world's investment in special purpose entities, which are often set up for tax reasons.
^abcSILKE STAPEL-WEBER; JOHN VERRINDER (December 2017)."Globalisation at work in statistics — Questions arising from the 'Irish case'"(PDF).EuroStat. p. 31.Archived(PDF) from the original on 28 April 2018. Retrieved22 August 2018.Nevertheless the rise in [Irish] GNI* is still very substantial because the additional income flows of the companies (interest and dividends) concerned are considerably smaller than the value added of their activities
^abBrad Setser (11 May 2018)."Ireland Exports its Leprechaun".Council on Foreign Relations.Archived from the original on 14 May 2018. Retrieved13 May 2018.Ireland has, more or less, stopped using GDP to measure its own economy. And on current trends [because Irish GDP is distorting EU-28 aggregate data], the eurozone taken as a whole may need to consider something similar.
^abGabriel Zucman; Thomas Tørsløv; Ludvig Wier (8 June 2018)."The Missing Profits of Nations∗"(PDF).National Bureau of Economic Research, Working Papers. p. 25.Archived(PDF) from the original on 2 August 2018. Retrieved23 August 2018.Profit shifting also has a significant effect on trade balances. For instance, after accounting for profit shifting, Japan, the U.K., France, and Greece turn out to have trade surpluses in 2015, in contrast to the published data that record trade deficits. According to our estimates, the true trade deficit of the United States was 2.1% of GDP in 2015, instead of 2.8% in the official statistics—that is, a quarter of the recorded trade deficit of the United States is an illusion of multinational corporate tax avoidance.
^James R. Hines Jr.; Eric M. Rice (February 1994)."FISCAL PARADISE: FOREIGN TAX HAVENS AND AMERICAN BUSINESS"(PDF).Quarterly Journal of Economics (Harvard/MIT).9 (1). Archived fromthe original(PDF) on 25 August 2017. Retrieved22 August 2018.We identify 41 countries and regions as tax havens for the purposes of U.S. businesses. Together the seven tax havens with populations greater than one million (Hong Kong, Ireland, Liberia, Lebanon, Panama, Singapore, and Switzerland) account for 80 percent of total tax haven population and 89 percent of tax haven GDP.
^"Irish Subsidiary Lets Microsoft Slash Taxes in U.S. and Europe".Wall Street Journal. 7 November 2005.Archived from the original on 16 June 2018. Retrieved23 August 2018.Round Island's legal address is in the headquarters of a Dublin law firm, Matheson Ormsby Prentice, that advertises its expertise in helping multinational companies use Ireland to shelter income from taxes.
^Seamus Coffey,Irish Fiscal Advisory Council (18 June 2018)."Who shifts profits to Ireland". Economic Incentives,University College Cork.Archived from the original on 20 November 2018. Retrieved20 November 2018.Eurostat's structural business statistics give a range of measures of the business economy broken down by the controlling country of the enterprises. Here is the Gross Operating Surplus generated in Ireland in 2015 for the countries with figures reported by Eurostat.
^Daly, Frank; Arnold, Tom; Burke, Julie; Collins, Micheál; Convery, Frank J.; Donohue, Tom; Fahy, Eoin; Hunt, Colin; Leech, Sinead; Lucey, Con; McCoy, Danny; O'Rourke, Feargal; O'Sullivan, Mary; Redmond, Mark; Soffe, Willie; Walsh, Mary; Taxation, Ireland Commission on (September 2009)."Commission on Taxation report 2009". UCD Archives.Archived from the original on 13 June 2018. Retrieved22 August 2018.
^Rochelle Toplensky (7 March 2018)."Europe points finger at Ireland over tax avoidance".Irish Times.Archived from the original on 7 March 2018. Retrieved7 April 2018.Multinational companies have made such extensive use of Ireland to funnel royalties — a common way to shift profits and avoid tax — that these payments averaged 23 per cent of the country's annual gross domestic product between 2010 and 2015, according to a European Commission report seen by the Financial Times. The scale of the net royalty payments channelled through Ireland contrasts sharply with the average in the EU as a whole, where such payments are a fraction of one per cent of the bloc's annual GDP.
^"Leprechaun Economics". Paul Krugman (Twitter). 12 July 2016.Archived from the original on 16 June 2018. Retrieved7 April 2018.
^"CSO Press Release"(PDF). Central Statistics Office (Ireland). 12 July 2016.Archived(PDF) from the original on 22 November 2017. Retrieved28 April 2018.
^Max de Haldevang (11 June 2018)."How tax havens turn economic statistics into nonsense".Quartz (publication).Archived from the original on 12 June 2018. Retrieved12 June 2018.A recent IMF article reveals a perfect example: "A stunning $12 trillion—almost 40% of all foreign direct investment positions globally—is completely artificial," write economists Jannick Damgaard, Thomas Elkjaer, and Niels Johannesen
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