Wednesday, December 15, 2021

Leprechaun Redux: Ireland's fake €100bn+ of net exports in 2021

A 3D printed Apple logo in front of an Irish flag. REUTERS/Dado Ruvic

In the normal National Accounts of a country net exports (value of exports of goods and services minus the value of imports) is one of the key measures in GDP (gross domestic product). The merchandise or goods exports typically are produced in the country during a quarter or year. However, in Ireland, the National Accounts for 2021 will show that the majority of net goods exports will have been produced in countries such as China. In the first 3 quarters of the year, the net value of goods that physically left Ireland or arrived was €53bn and the net value of goods produced and sold elsewhere was €78bn — the value of the latter that will be in Irish GDP will exceed €100bn for the year 2021 and will be about a quarter of GDP.

I say that the €100bn+ is fake as it is motivated by multinational tax avoidance through profit shifting to Ireland (while the funds could be in a United States bank). The value of the so-called 'exports' is large while the value of so-called 'imports' is very low.

In April 2018 economists at the International Monetary Fund (IMF) wrote in the 'World Economic Outlook' "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." The headline GDP growth in 2017 was 7.6%.

Apple has many contract manufacturers. In China, the main iPhone assembler is Foxconn of Taiwan in Zhengzhou, a metropolis on the Yellow River and capital of east-central China's Henan province — which is a poor region of China. Bonded zones were created, where Apple's products could be imported and exported virtually according to The New York Times. "In those zones, products can be imported and exported virtually at customs, without crossing a single border."

The iPhones can be virtually sold to an Irish Apple subsidiary and then virtually exported back to China❗❗

In 2014 Apple made Apple Operations Europe (AOE), one of its Irish shell companies tax resident in Ireland and transferred 2 other shell subsidiaries from Ireland to Britain's Jersey in the Channel Islands: Apple Operations International (AOI) and Apple Sales International (ASI). The island has a population of about 108,000 people.

Steve Jobs at the opening of Apple Cork in 1980. Eugene Fitzgerald, Cork TD & minister of finance in middle
Photo: Apple Inc.

The Irish Central Bank forecasts that Irish GDP (gross domestic product) will grow by 15% in 2021 while a recent metric Modified Gross National Income: GNI* which deletes a number of multinational firm distortions (see below) is projected to grow 5.6% in the year.

There has been a jump since 2015 in overseas contract manufacturing called 'Goods for processing' by the Central Statistics Office (CSO) as well as merchanting (foreign transactions where the profits are supposedly channelled to Ireland).

Besides Apple, a number of Big Pharma firms are involved. It's a fiction that intellectual property (IP) is in Ireland and in the period to September contract manufacturing 'exports' were valued at €74bn with costs only at €10bn — maybe including Irish corporation tax for virtually routing the transactions through an Irish company.

Where Apple wants its IP to be "located" can be determined via accounting entries at the firm's headquarters in Cupertino, California.

By booking massive amounts of foreign production as Irish exports for purposes of tax avoidance, makes a joke of Ireland and exaggerates both GDP and GNI*.

Foreign production should not be the biggest component of Irish net merchandise exports that are supposed to reflect activity in Ireland. Real overseas contract manufacturing wouldn't be a tax avoidance device.

In 2014 Apple asked law firm Baker McKenzie to find the most reliable tax havens

The economists at the Central Bank noted: "Further increases in exports due to contract manufacturing and merchanting will continue to distort Ireland’s trade performance and inflate GDP in the National Accounts"

CSO trade data

Despite some adjustments to multinational firm distortions in Ireland's National Accounts such as the Modified Gross National Income: GNI* which makes 3 changes to GDP, there remain huge distortions as suggested above. The changes were 1) adjusting for redomiciled companies (mainly US firms that become Irish for tax purposes) 2) adding depreciation on R&D service imports and trade in intellectual property (IP), and 3) depreciation on aircraft leasing.

Denmark's economic output per head in 2020 was almost 25% ahead of Irish per capita based on Modified Gross National Income (GNI*) but the Irish amount of €41,600 is too high.

In July 2016 Paul Krugman, economics columnist of The New York Times, wrote in a tweet when he saw that Ireland's Central Statistics Office (CSO) had upgraded 2015 economic growth to a stunning level "Leprechaun economics: Ireland reports 26% growth! But it doesn't make sense..." The winner of a Nobel Prize in the economic sciences, in July this year in a column titled 'Yellen’s New Alliance Against Leprechauns' focused on Janet Yellen, the US Treasury secretary, and her efforts to push forward reform of international business taxation. Prof Krugman wrote "On paper, Ireland’s gross domestic product suddenly jumped 25% — a phenomenon I dubbed 'leprechaun economics,' a term that has stuck. (Fortunately, the Irish have a sense of humour.) "So let me tell you about Apple and the leprechauns," he wrote in reference to Ireland's corporate tax regime.

Daniel Mulhall, Irish ambassador to the United States, was not amused. "This is not the first time your columnist has used the word 'leprechaun' when referring to Ireland, and I see it as my duty to point out that this represents an unacceptable slur," Mulhall wrote in a letter to the editor of The New York Times. "I do not go along with Mr Krugman's disingenuous excuse that 'the Irish have a sense of humour' about his attacks on us," he said, adding that "derogatory references in a leading newspaper like yours are no laughing matter." However, we can see that aspects of leprechaun economics live on.

As Shakespeare's queen in Hamlet said, "The lady doth protest too much, methinks," and in 2018 Daniel Mulhall made a foolish claim: "Ireland has a stake in the US economy larger than countries many times our size, including Brazil, China and India." Mulhall seems to have thought that American companies that became Irish for tax purposes were Irish investors in the United States!

Profit shifting 2000-2020

Trade data here exclude the foreign trade of other countries.

In 2004 the American publication 'Tax Notes' reported that Ireland had become the most profitable global location for US multinational firms (MNCs). The net income of Irish-based affiliates had doubled to $26bn in the period 1999-2002.

Ireland had a merchandise (goods) trade deficit (difference between values of goods exports and imports which is also called net exports) every year from 1970 to 1984 and in the year 2000, the trade balance was in surplus at 100% of the value of net exports.

This reflected profit shifting by MNCs.

The category 'Chemicals and related products' accounted for 33% of the total value of goods exports in 2000 and in 2020 the category accounted for 66%.

Within the category which includes pharmaceuticals and medical devices, export value was 4.6 times the import value in 2000 compared with 4.9 times in 2020.

In 2020 'Chemicals and related products' exports were valued at €106bn according to the CSO while imports were valued at €21.5bn.

A survey by the Department of Business in 2019 found that in the Chemicals and Medical Devices categories foreign-owned firms in Ireland had an annual payroll cost of €4.3bn and €3.3bn on Irish-sourced materials and services purchases — a total annual spend of €7.6bn in the Irish economy. Data for Irish-owned firms were not published separately because of the small number of firms involved.

The exports ratio in 2000/2020 was 96% and 99%.

With a €77bn margin in 2020, it's obvious that there has been significant scope for profit shifting to Ireland and that just covers traditional trade.

What happens if the level of profit shifting falls?

Last October the Government of Ireland through its Department of Finance acknowledged that the inflated net exports "has almost no impact on Irish living standards as it generates little or no domestic activity/employment."

The Budget 2022 document noted that "on the back of surging global demand for pharmaceuticals, digital services and goods produced by contract manufacturers in the far-east, GDP in the second quarter of this year was actually one-fifth higher than its level immediately pre-pandemic (the final quarter of 2019)." Where is this "far-east"? 😏

The 2021 Rome agreement on international business tax reform will have an impact on profit shifting in the coming years.

The size of 'Computer services' which accounted for about a quarter of total exports value in 2020 will contract as the Double Irish tax dodge has already ended. Net exports were €128bn in 2020.

Big Pharma may reduce its significant annual profit shifting and Ireland as a fantasy exporter of iPhones could end.

Internationally, the optics of falling exports wouldn't be good and international benchmarks that use distorted data would dip, including the UN's Human Development Index.

According to the US Bureau of Economic Analysis (BEA), American firms employ 151,000 in Ireland and Irish firms employ 330,000 in the US!

Ireland is supposedly the fifth-biggest holder of US Treasury Bonds and in 2019 US ultimate direct investment in Ireland was valued at €734bn by the CSO while the BEA put FDI at $290bn including funds of $140bn in holding companies.

20 years of poor economic growth in Ireland, Greece and Italy

The GNI* which was first published in 2017 should have had a 4th adjustment to account for the net foreign-produced exports. In 2020 the value was almost 20% of GDP.

Both GDP and GNI* data have been exaggerated since 2015.

Even so, the average growth rate per capita in 2000-2020 was only 0.53% [GNI* €143bn 2000 at constant prices; €208bn in 2020; population 2000 3.805m and 4.995m in 2020.] Ireland was among the lowest with Greece and Italy — see chart at the bottom of this post.

Of course, there was a boom and bust in the past 2 decades but it's important to have a credible modified set of National Accounts that do not sugarcoat the reality.

Ireland is weak in innovation, employer entrepreneurship, indigenous firm exports — annual exports to the other 18 members of the Euro Area (337m people) are less than €6bn after 20 years of currency stability — consumer prices were 40% above the EU average in 2020 in both Ireland and Denmark according to Eurostat. Denmark is a wealthier country than Ireland. Germany was at 7%.

Since the economic bust in 2008 Ireland's AIC (Actual Individual Consumption of public and private goods and services) has been below the EU average.

Ireland has the 19th ranking for household net adjusted disposable income per capita among the OECD's 31 advanced economies.

Irish standard of living at 13th in EU27 and 19th among rich OECD countries

Tax reforms and challenges for the Irish economy in 2022 and beyond

Irish digital economy firms account for 1.4% of employment

How America’s biggest law firm drives global wealth into tax havens: Baker McKenzie has been a pioneer in corporate tax dodging. It now acts for notorious tycoons, arms makers and authoritarian regimes operating in the shadow economy — an October 2021 report from the International Consortium of Investigative Journalists.

What did Apple get out of its secret, $275bn China deal in 2016? December 2021: Interviews and internal Apple documents provide a behind-the-scenes look at how the company made concessions to Beijing and won key legal exemptions. CEO Tim Cook personally lobbied officials over threats that would have hobbled its devices and services. His interventions paved the way for Apple’s unparalleled success in the country.