Friday, February 14, 2020

Irish economic growth data remain unreliable

Trump likely doesn't know about the growing US drugs trade deficit with Ireland! 

Following the report in 2016 that Ireland's GDP (gross domestic product) had jumped 26% in 2015, a Modified Gross National Income (GNI*) was produced that eliminated distortions caused by  1) redomiciled companies: mainly American firms that became Irish for tax purposes 2) depreciation of foreign-owned intellectual property (IP) and 3) depreciation of aviation leasing assets.

GNI* in 2018 was valued at 61% of GDP.

However, the allocation of IP to Ireland (via accounting entries in the US) in 2015 gave a big opening for Big Pharma and Big Tech to engage in massive profits shifting by booking overseas transactions as Irish exports.

What is called goods ‘processing abroad', 'contract manufacturing', or 'factoryless production' would result in an export or import when a change of ownership occurs by selling or buying from a third party however in Ireland from 2015 the foreign multinationals paid additional corporation tax to the Irish treasury but overall they had a new massive profits shifting device.

The goods for processing 'exports' were not offset by service costs which resulted in Irish net exports/the balance of trade, rocketing.

The Irish trade surplus jumped from €16bn in 2007; €35bn in 2014 and a record €107bn in 2018 — up from €66bn in 2017 (the 2017 balance was initially €89bn). 

The 2018 surplus was 54% of the 2018 Modified GNI.

Net exports (the difference between exports and imports) is one of the key factors in measuring annual economic output. 

In 2014 the net addition of overseas goods transactions that were booked as Irish exports were valued at  €10bn. In 2018 the net effectively of fake exports were valued at €57bn.

Irish 'exports' of iPhones to China! 

In 2018 economists at the International Monetary Fund (IMF) noted that "Ireland, Korea, and Taiwan Province of China, are estimated to be the main beneficiaries of the new tech cycle in value-added terms. In Ireland, where the intellectual property of Apple Inc. resides, staff estimate the contribution in value-added terms of iPhone exports to account for one-fourth of the country’s economic expansion in 2017. At the same time, it is important to note that the income generated from smartphone sales does not fully contribute to the Irish economy. The acquisition of foreign-owned intellectual property assets leaves domestic employment mostly unchanged."

The Central Statistics Office (CSO) estimated that in 2017 the traditional measure of the trade balance with China was €1.4bn while the balance was  €19.4bn after adding fantasy iPhone exports of €17bn.

Ireland is main tax haven for Big Pharma

In 2019 'Chemicals and related products' (drugs and medical devices) in the CSO detail of cross border goods trade show that at €93bn this category accounted for 61% of cross-border goods exports as it had in 2018. The total cross-border goods trade was valued at €153bn.

The category (which includes a few small Irish firms) has also been a place for profits shifting by US firms and the category surplus in 2019 was €76bn while the overall surplus was €63bn, meaning there was a deficit of €13bn for ex-drugs & medical devices. In 2018 'Chemicals and related products' had a surplus of €86bn.

In March 2020 when CSO.ie publish its Balance of International Payments data, there will be an additional net surplus windfall of about  €60bn arising from mythical exports of Apple iPhones to China and more profits shifting by Big Pharma.

In 2018, excluding Apple from the fake overseas exports would leave Big Pharma with another €40bn (€57bn - €17bn).

Earlier this month Brad W. Setser of the US Council on Foreign Relations, told a subcommittee on Health of the House Ways and Means Committee in Washington "Like many Americans, I love the Irish — but the US tax code should not be designed to put Ireland first."

Stetser said on the US drugs trade deficit that "Switzerland accounts for more US imports, in dollar terms, than India and China combined. Ireland alone accounts for about a quarter — $35-40bn — of total pharmaceutical imports."

"The profits pharmaceutical and other large US firms book in the main low tax jurisdictions totalled $367bn in 2017 using the IRS country-by-country data set. The most recent US balance of payments data shows around $325bn in profits in the seven most prominent low tax jurisdictions, a $40bn rise in the two years after the Tax Cuts and Jobs Act. Such profit shifting allows some of America’s most successful firms to avoid their fair share of tax, and effectively raises the burden on small businesses and others who cannot employ sophisticated tax strategies to move their profits offshore." 

Conclusion

'Computer services' reflecting booking of global revenues in Ireland by companies such as Google, Facebook and Microsoft will likely have been above €100bn in 2019. However, this is the last year of the the Double Irish tax dodge.

While the net export impact may not be significant, various international indicators over time for Ireland will become more realistic.

The main conclusion here is that a positive Irish goods trade balance that is based on fake exports will not be permanent.

Facebook is facing a court trial where the US IRS (Internal Revenue Service) claims that more of the company’s profits should have been taxed at higher rates in the US, rather than in the company’s Irish subsidiary. Facebook claims that it deserves a refund.

Mark Zuckerberg, the Facebook founder, last Saturday backed plans by the Organisation for Economic Co-operation and Development (OECD) to reform of global business tax rules that are supported by the G20 (Group of Twenty), comprising leading rich and emerging economies.

Facebook and others have been accused of not paying their fair share of tax in countries where they operate.

In the UK, Facebook paid just £28.5m in corporation tax in 2018 despite generating a record £1.65bn in British sales. Facebook Ireland made a profit before tax of €361.3m in 2018 on revenues of €25.5bn. The company paid €63.2m in tax on the profit while utilising the Double Irish scheme.

At the annual security conference in Munich, Zuckerberg said,  "I understand that there's frustration about how tech companies are taxed in Europe. We also want tax reform and I'm glad the OECD is looking at this. We want the OECD process to succeed so that we have a stable and reliable system going forward.

"And we accept that may mean we have to pay more tax and pay it in different places under a new framework."

Reuters says cross-border tax rules are set to be rewritten after 137 states sought last month to avoid a new trade war over the global multiplication of taxes on digital services.

Related

Ireland has the fourth highest holdings of US Treasuries 

US FDI into Ireland and Irish investment in America: facts and myths — part of inward FDI reflects holdings of US Treasuries

Central Bank of Ireland's Quarterly Bulletin Feb 2020  — See from Page 16 how economists at the Central Bank think that the mainly overseas fake exports reflect a positive trend for Ireland!

Ireland's record trade surplus of €107 billion in 2018 — an illusion?  — see chart here on how the total trade balance has diverged from the traditional trade balance since 2015