Irish Corporate Tax 2014: How official spin and distortion works – in short-term
Irish Corporate Tax 2014: The current Irish governance system has remained unchanged through boom and bust and the addiction to political spin, distortion and sometimes lies, works at least in the short term while in some cases it has an enduring impact. To paraphrase Abraham Lincoln, America’s 16th president, it’s possible “to fool some of the people all of time, and all of the people some of the time.”
In recent years for example, corporate tax avoidance has provided rich material on the Orwellian use of language for Irish political distortion with an effective corporate tax rate (actual taxes paid as a ratio of reported net earnings before tax) cited both internationally and domestically, knowing that it was misleading, but useful.
In 2010, Nicolas Sarkozy, then French president, criticised the low headline Irish corporate tax rate of 12.5% but Irish officials and the mainstream media countered that the ‘Paying Taxes 2010‘ [pdf] report, produced by PricewaterhouseCoopers (PwC) in association with a unit of the World Bank, had calculated the Irish rate at 11.9% compared with 8.2% for the comparable French rate.
The case study company has remained unchanged each year: a flowerpot manufacturer and retailer. Its turnover is the same multiple of the income per capita for each country. The company is 100% domestically-owned and has five owners, all of whom are resident for tax purposes in the country and it neither exports or imports.
In March 2011, Finfacts in a report: Corporation Tax: Ireland, France and ceramic flowerpots, said that Michael Noonan, the new Irish finance minister, briefed a breakfast meeting of centre-right finance ministers in the European People’s Party (EPP) group, on the Irish economy.
“I briefed them on the Irish situation and particularly on the corporate tax rate, and there was significant support for Ireland’s position,” Noonan told reporters. “I was pointing out to them that, while our rate was 12.5%, we had eliminated practically all allowances so our effective rate was over 11%, whereas France, with a 32% nominal rate, had an effective rate of 8.1, the research would show.”
This was an illiterate argument as France would have had huge allowances for companies to cut its rate by a claimed 24%.
In the same month, in The Financial Times, Peter Sutherland, chairman of Goldman Sachs International said: “…we should note that in a World Bank-PwC Report it has been established that the actual rate of tax paid, for example, in France is 8.2% and is even lower elsewhere.”
What can be charitably assumed is that neither Noonan nor Sutherland had read the actual report.
The truth was that the flowerpot firm had no relevance for the big foreign companies in Ireland that were involved in massive tax avoidance.
A spokesperson for Christine Lagarde, then French finance minister, told The Irish Times it was “inaccurate” to say that France had a lower effective corporate tax rate than Ireland.
France as Irish officials were surely aware of, had a low headline rate of 15% for small companies.
This month, – – three years later- – The Irish Times gave front page prominence to a story that undermined the well-used talking point of Enda Kenny, taoiseach/ prime minister, that all companies operating in Ireland are subject to the 12.5% headline tax rate and an effective rate of 11.9%.
Why was old news new news? Why could Kenny repeat his claim so often and not be challenged when the evidence was a few clicks away? – – see last section below.
On Monday in Brussels, Michael Noonan, finance minister, provided another example of spin when he reaffirmed a commitment to cut the income tax burden in next October’s budget to stimulate “job creation” and he cited the 2011 cut in VAT to aid tourism as an example of a successful tax cut — the man with an entitlement to 3 guaranteed pensions as a minister, TD and teacher, omitted the inconvenient detail that he hiked the levy on private pensions in 2014, which was introduced in 2011 to seize €2bn to fund the cut in the VAT rate; last Friday,Richard Bruton, enterprise minister, issued a statement on 2013 goods exports and the following contains false claims:
Exports to key target countries of Brazil, India, Saudi Arabia and Russia also rose in 2013 compared to 2012. These grew by 6% to €1.8bn and reflect the investments in market development that have been made by the Department’s enterprise agencies and especially Enterprise Ireland. Exports to Singapore grew by 9% to €560 million. This reflects the importance of small Asian economies to our overall export agenda and the increased attention being given to building our presence across the wider Asian region and for which Singapore is a key gateway.”
In 2013, exports to China fell while shipments to India remained at a decimal point — see page 6 here [pdf].
About 90% of exports made by firms supported by Irish public enterprise agencies, are made by foreign-owned firms in Ireland and ‘Chemicals (including pharmaceuticals) and related products’ accounted for 57% of 2013 exports.
In emerging markets such as China, foreign firms account for 94 to 95% of Irish exports and the Irish-owned units of such firms do not generally decide on the destination of their outputs.
So Bruton claims all the increases in exports to the emerging markets cited reflect jumps in exports by indigenous firms without citing any evidence for such claims.
This issue is akin to the research programme, which again is based on faith as the evidence would be inconvenient.
On Monday, Richard Bruton and Eamon Gilmore, tánaiste/ deputy prime minister,announced details of the Irish Government’s St. Patrick’s Day week of international travel in mid-March “which will see 27 Ministers taking part in over 100 business events and 80 high-level political meetings in 35 cities across 23 countries.”
The ministers also announced another ‘scheme’: “This new scheme, under which companies can receive grant support of up to €150,000 to develop new markets, is a very significant addition to the trade mission activity and the wide range of supports which Enterprise Ireland already provides for exporting companies. This scheme is aimed at companies that are investigating new markets that demonstrate strong potential and will provide funding support to develop marketing strategies to capitalise on these opportunities.”
What works and what doesn’t? Who knows or who cares?
Last year, the Organisation for Economic Co-Operation and Development (OECD) advised the Irish Government to introduce sunset clauses on innovation and enterprise supports. Surely a good thing to force some evaluation?
Six months later, making job announcements for American firms looks a lot more interesting!
Finfacts: Feb 19:
Irish tech startups may create 1,850 jobs in 3 years; Zero past evidence presented
How spin works
Spin works with the assistance of the constituency messenger boy/ girl system in Dáil Éireann (the lower house of the Irish Parliament) and a docile mainstream media where the taoiseach/ prime minister can go through a parliamentary term without being subject to one forensic broadcast or print media interview, covering the full gamut of government policy while ministers regard a five-minute so-called door-step interview on the way into or exiting meetings, as accessibility.
Even where online media has been in the vanguard of pushing for change in the sclerotic systems, for many years journalists in the mainstream media while using the web to source information, in contrast with mature markets such as the US, seldom cite these sources — it’s also uncommon in Ireland compared with the US for an Irish newspaper to cite a rival newspaper as the original source of a report that it has used.
During the bubble, Bertie Ahern, then taoiseach / prime minister, was able to get away with arguments about the housing market when annual private credit growth was almost ten times annual inflation — in fairness as we Irish say, some of his arguments were not easy to zap in a sound bite as commercial economists in particular conjured up positive scenarios to encourage the gullible while pleasing their masters.
This is an example from April 2006, the craziest year of the Irish bubble:
“I mean quite frankly, if you had taken the advice a year ago you would have lost a lot of money. Everybody said we’re going to see a huge downturn in 2005 linking into 2006 – – they were entirely wrong.
“Really we should have an examination into why so many people got it so wrong. My view is there’s not a great problem. Really, the bad advice of last year given by so many has maybe made some people make mistakes, that they should have bought last year.”
In recent times, Enda Kenny, Ahern’s successor, has been able to counter questions on Ireland’s role in facilitating international corporate tax avoidance, that also would not pass a pub-stool test.
In January 2013, Enda Kenny said on a panel at the World Economic Forum annual meeting in Davos, which was chaired by Lionel Barber, FT editor, that Ireland’s effective corporate tax rate was 11.9%.
Finfacts said: “One claim was false and the other was very misleading.”
Finfacts 2013: Kenny in Davos: Ireland’s tax regime is “very clear, very transparent”
We responded to subsequent repeats of this claim and termed it “bogus.”
Last September, Finfacts reported that in 2010, the effective tax rate for US firms in Ireland was 2.5% based on US Bureau of Economic Analysis data — neither the opinion editor nor the business editor of The Irish Times considered our research newsworthy.
We also raised the taboo subject of booking huge chunks of global revenues diverted from other countries for tax avoidance purposes by companies such as Microsoft, Google and Facebook that become virtual Irish services exports and output.
In coming years before new international rules take effect, up to half of Ireland’s recorded services exports will be bogus.
According to Michael Noonan, finance minister, these virtual exports reflect improving “competitiveness.”
On Tuesday, February 11, The Irish Times reported the story that Jim Stewart, a Trinity College academic, had produced a paper that undermined Kenny’s claim that the effective corporate tax rate was 11.9%.
Using BEA data for 2011, Stewart had calculated that the effective rate for US companies was 2.2%.
“He is wrong. The methodology for determining tax differs from academic to academic,” Kenny told CNBC.
“2.2% is not correct. The effective rate can range between 10% and 11.9,” he said.
Individual journalists usually are not in command of the facts to zap ministerial talking points, while at organisation level, there is no excuse for repeatedly reporting bogus claims without fact checking.
Kenny conveniently chooses to ignore the Irish mailbox companies in places like Bermuda and the Cayman Islands, which have Unlimited status provided by Ireland to shield them from public scrutiny and are used to receive tax-free transfers from Ireland using the “Dutch Irish Dutch Sandwich” scheme.
The tax paid by Google and Microsoft, on 2012 and 2011/2012 net income after multi-billion royalty charges results in effective rates of 11% (€17m on €154m) and 13.2% (€132m on €1bn) respectively, appearing to confirm the official line that Ireland’s effective rate of corporate tax (actual tax paid as a ratio of net income) is close to the headline rate of 12.5%. However, the net income in Ireland is minimised through huge intercompany charges. See here for the reality beyond the spin.
Through boom and bust, spin succeeds because as David Begg, trade union leader and Central Bank board director for fifteen years, suggested in 2010 that in the view of insiders like himself, attention should be given to people of status or standing.
Credit: Finfacts
