Ireland » Tax Research UK

€24 billion is not it – so Ireland should brace itself for more – so long as International Accounting Standards are in use

Accounting, Economics, IASB, Ireland 1 Response »

Apr 012011

There’s widespread coverage of the fact that Ireland’s had a fifth go at estimating how but its banks are, and has upped the estimate to €70bn, a cool €24bn increase on the last time.

This time they say that’s it.

Well, I have a message for Ireland – I think you said that last time too. And you were wrong. And you may be again.

The fact is that this is just an exercise. And like all accounting exercises it only has meaning at a point in time. The loss is €70bn now – it could be more (and conceivably, but on current form improbably) less in the future.

Why more? Well, the more you say that Irish, and more generally, recently constructed real estate on a wider horizon is worthless – then the easier it is for markets to believe that’s true. And moral hazard comes into play – why bother to repay an Irish bank when it doesn’t expect you to do so?

That’s what’s happening, I’m sure. So, the losses just mount. It’s a vicious and endless circle. One way to stop it is to say that these banks are quite simply no longer viable, that they are in state control, and that as such the absurd accounting logic of International Financial Reporting Standard should no longer apply to them.

Now let’s talk about what this means. Mark to market accounting makes no sense in this environment when all that matters is future debt servicing. The rest is of no consequence.

So having to borrow to restore capital lost when actually the capital has not been lost – the property is still there and can be taken under the control of he bank and in at least a majority of cases can be turned to generate a cash flow for it is meaningless. That’s compounding the burden of the crisis. Of course these banks are bust on an asset basis – we all know that. But to force a nation to borrow to make that good is more than adding insult to injury. It’s providing other banks with the opportunity to lend money at profit to the ECB for them to lend on at high cost to Ireland so the bust banks can then repay the banks who lent to Ireland recklessly in the first place at cost to the Irish people. That’s a double burden on the Irish people – they lost the capital, now they’re losing the income and the reckless banks win both from them.

And all of that is done to comply with, firstly, an insane set of International Accounting Standards – rightly condemned by the House of lords this week for encouraging this mess in the frost place. Second, it’s done to meet banking regulations that assume a country has a functioning banking system. Well Ireland doesn’t enjoy that any more. It’s banks are bust. So let’s account for them on that basis.

That means that like it or not the loans to these banks can only be accounted for on the basis of the capacity of the Irish banks, and to limited degree, that nation to service them. And that means the only real measure of the worth of these loans is their cash generation ability. This is a long term view. It is one that might well suggest the loans have considerable worth – the value of real estate goes up, generally, in the long term. The markets may well recover from the current mess. It’s only International Accounting Standards that say we must only take the short term view – which is why they are fundamentally dangerous economic tools. In other words, different accounting would make Ireland’s plight look very different.

And actually different accounting would make the plight of the banks that lent to Ireland look very different if prudence dominated accounting thinking rather than the corrupt mark to market view of the International Accounting Standards Board. If a prudent view were taken then the loans to Ireland would have to be written down by the banks that lent them recklessly to ireland in the first place – because any prudent auditor (not that we have any in the Big 4 any more) would immediately see that Ireland has no capacity to service this debt – whatever the contracts say and however the markets are naively valuing the debt right now. So with a decent accounting system in place the problem would cease to be Ireland’s and would move on to be the problem of the banks that lent to Ireland – as it should be.

What does all this mean? Simply that Ireland is being screwed (there’s no better word for it) by poor accounting. And it can only get worse. Change the rules of accounting though and the horizon would look a lot better.

Two questions about Ireland

Ireland 6 Responses »

Mar 312011

The Guardian reports:

Ireland‘s embattled banks need to be bolstered by an extra €24bn (£21bn) – some €13bn of which needs to be used to prop up the troubled Allied Irish Banks (AIB).

It takes the total bill for repairing the hole in the banking sector caused by the bursting of the Irish property bubble to €70bn.

Two questions:

a) How long will it be before civil disobedience breaks out at the cost of this being imposed on ordinary people in Ireland, all to save banks elsewhere?

b) How long is it before Ireland defaults?

The answer is, of course (b) is not long after (a) but I see (a) as distinctly likely now. Why not? What have the Irish to lose any more? This debt cannot be repaid. It is €23,000 or thereabouts a head.

Driving the Getaway Car: Ireland, Tax and Development

Development, Ireland, Secrecy jurisdictions, Tax avoidance, Tax Havens Comments Off

Mar 312011

When it comes to tax policy, is Ireland a fine example or ahorrible warning?

This new report by Dr Sheila Killian of the University of Limerick argues that Ireland’s corporate tax regime can be abused by multinational companies (MNCs) engaged in tax evasion and illicit capital flows. Despite recent reforms to transfer pricing rules, significant weaknesses remain that provide MNCs with opportunities to create abusive international tax avoidance schemes to reduce tax payments in other countries. The result, according to Killian, is a policy incoherence which, among other things, goes against Irish commitments to ensure that government actions contribute to global development and do not undermine the objectives of Irish Aid.

This policy incoherence cuts to the heart of current thinking on development. As the report illustrates in the following flow chart, external debt burdens are closely linked to weak tax effort (the ratio of tax receipts to GDP) and increased dependence on external loans and aid programmes. The latter typically impose conditions which further undermine tax justice and ultimately contribute to fiscal and economic crisis. Tax competition lies at the very heart of this cycle.

Ireland has famously – and controversially – used its low corporate tax rate as a bait to attract foreign direct investment, and despite its current fiscal and economic crisis, strongly resists external pressures to remove some of the loopholes that allow the tax system to become a vehicle for complex tax cheating schemes. As we have blogged elsewhere, companies like Google are attracted to Dublin not so much by the 12.5 percent tax rate as the ability to use Ireland as a part of a more elaborate tax structure – in Google’s case employing the Double Irish (and Dutch Sandwich) techniques involving the routing of profits through Ireland and the Netherlands.

Despite being a relatively small player in both the European and global contexts, Ireland is able to exert a quite extraordinary influence on international tax policy. This influence derives from very active participation at a number of international fora, including the OECD, the UN Tax Committee and, of course, the European Union. This puts Ireland in a position of choosing between being a force for good in promoting enhanced international cooperation on tax matters, or a force for bad in blocking progress in that direction. In TJN’s experience, for example of observing at sessions of the UN Tax Committee, Irish representatives have in the past more generally aligned with blockers such as Switzerland, Liechtenstein and the United Kingdom.

The big question facing the incoming Irish government is whether – and how – to modify their corporate tax regime in ways consistent with the commitment to “work for a coherent approach to development across all Government Departments.” (Government of Ireland White Paper on Irish Aid, 2006). And can this be achieved without adversely affecting the country’s ability to attract inwards investment? Killian proposes 11 recommendations which, she argues, would strengthen policy coherence while also providing potential net future gains for the Irish economy. These measures include:

- Adjustment to the transfer pricing regime;

- Abolition of tax exemption on patent royalty income;

- Negotiation of tax treaties with a wider range of countries;

- Promoting enhanced tax information exchange, preferably on an automatic rather than on request model;

- Promoting a country by country financial reporting standard for MNCs.

Driving the Getaway Car is a timely and useful contribution to an urgently needed debate. The new Irish government faces tough choices on tax policies. The current situation is unsustainable and a new development strategy is urgently required. They can either opt for further tax competition, which we would argue is harmful to the interests of other countries and ultimately self-defeating (see Sheila Killian’s article in Tax Justice Focus here), or they can strike out in a direction that reduces harmful impacts on other countries and contributes to strengthening internal fiscal sustainability.

As Killian argues in this report, the current tax policy mix is not coherent with existing commitments to avoid causing harm to other countries. Change is necessary, but does the current government have the appetite to take on the vested corporate interests who find the current corporate tax regime, with all its gaps and loopholes, very much to their liking?

NB: Above reposted from Tax Justice Network blog with permission

Tax competition is destroying the social contract – and social unrest will follow – Jeffrey Sachs

Economics, Ireland, Tax avoidance, Tax Havens, Tax justice, Tax Justice Network 7 Responses »

Mar 292011

Jeffrey Sachs is not my favourite economist. There again, he’s far from bottom of the pile, and he’s notched up a fair few places this morning with an article in the FT on tax competition. In it he says:

With a quarter of a million people on the streets of London protesting against the UK budget cuts, and with the US government days away from a potential shutdown, the social divisions over fiscal policy are deepening. It is not hard to see why. Both the US and UK have experienced a profound shift of income distribution from the poor and the middle-class to the rich in the past 30 years yet the fiscal adjustments are dominated by sharp cuts on public services combined with reductions on corporate tax rates. The social contract is under threat. Only international co-operation can now solve what is becoming a runaway social crisis in many high-income countries.

As the Tax Justice Network note, it looks like he’s signed up to tax justice. That seems the way when he continues with this:

The underlying political and economic forces tearing our societies apart are very powerful. The rise of globalisation, and especially the entry of China and India into the world markets, has put extreme downward pressure on wages of low-skilled workers while giving new opportunities for financial and business investments. The pre-tax income of the top 1 per cent of households has soared, from 10 per cent of household income in 1979 to 21 per cent in 2008 in the US, and from 6 per cent in 1979 to 14 per cent in 2005 in the UK.

This ins the reality the right ignore, daily. Because for them enough is never enough, so as Sachs notes:

With capital globally mobile, moreover, governments are now in a race to the bottom with regard to corporate taxation and loopholes for personal taxation of high incomes. Each government aims to attract mobile capital by cutting taxes relative to others. Governments like Ireland have created tax havens that drain revenues from the rest and act as conduits to tax-free Caribbean hideaways such as the Cayman Islands. The rich are doubly benefited: by the underlying market forces of globalisation and by their governments’ policy response.

And as I’ve been pointing out, much of this is the result of lobbying, a point with which Sachs wholeheartedly agrees. Lobbying that can be subtle of course: the Oxford Centre for Business Taxation is just one example of such lobbying that denies it is anything of the sort.

That’s the good news. Then Sachs gets a little wobbly when it comes to deficits. As he notes:

The end result is that both the US and UK are battling deficits of about 10 per cent of gross domestic product. The situation in the US is far graver. Total government (federal, state, and local) revenues as a share of GDP in the US are now 32 per cent, roughly 9 percentage points below the UK and 15-20 percentage points below countries such as Denmark, Finland, Norway, and Sweden, which all have much lower budget deficits (or a surplus in the case of Norway) and highly effective public services.

Note his point: the deficits are the result of low tax. Services are possible: we just need to pay for them. But as he notes:

The problem is that both the US and UK are aiming to do the impossible: run a modern, high-technology, prosperous 21st-century knowledge economy without the requisite tax base, largely to satisfy the upper classes and multinational companies, which threaten to decamp to milder tax regimes, or direct their campaign contributions elsewhere, if they do not get the tax cuts they obsessively crave.

In that context his praise that follows for the ‘Cameron-Clegg-Osborne team’ that follows looks ill informed: no one is doing more appeasing than Osborne right now. But as he points out, the US isntax cut obsessed, “while Ireland has clung to its irresponsible tax-haven status in the middle of a crippling turn to austerity.”

And he’s right to note

For too long, fiscal politics between the left and right has been debated on false premises. Left-of-centre politics has tended to play down the importance of closing the budget deficit, arguing against spending cuts on the basis that deficits do not matter. Right-of-centre politics has tended to play down the importance of taxing higher incomes, arguing that only spending cuts can reduce the budget deficit. A more responsible position takes a note from both sides. We surely need to reduce the deficits but in a fair, efficient, and sustainable manner, by levying higher taxation on the rich, who are enjoying a boom in living standards and a share of the national income unprecedented in modern history.

I think that’s unfair: the Left in the UK is saying no cuts for a reason. The reason is we have come up with alternatives. We can raise taxes, as Sachs suggests, we can close the tax gap, at least in part, we can use pension contributions to fund new investment as a condition of tax relief, and we can have a Green New Deal. All of those would close the deficit because of the wealth generated and the tax paid. We know there’s an issue. And we can deal with it.

But as Sachs says the odds are stacked against us right now:

Yet to get to the right place, countries cannot act by themselves. Even the social democracies of northern Europe, with their balanced budgets and high tax rates, are increasingly being pulled into the vortex of tax cutting and the race to the bottom. The political defences in the US and the UK against the power of the rich are crumbling. Multinational companies and their disproportionately wealthy owners are successfully playing governments against each other. The game is clear, and it is working fiercely well.

This is precisely why UK Uncut are right to protest. It’s why they’re on bail and bankers are not.

And this is why, as Tax Justice Network has argued often, we need international cooperation. Sachs looks to the OECD for that. He’s wrong to do so. It’s well and truly captured. It hires the Oxford Centre for Business Taxation for advice: and utterly biased advice flows back as a result – a foreseeable consequence. The OECD oppose country-by-country reporting designed to tackle this problem. The OECD has refused to properly tackle the tax haven issue. They’re the rich country club band they service the rich in those countries. Sachs is right to say:

[C]ountries should urgently convene a meeting of finance ministers to enunciate basic principles of budget fairness: that fiscal adjustments towards budget balance are needed for medium-term solvency but must be carried out in a fair way; that the basic needs of citizens need to be protected in this period of fiscal stringency; that recent trends towards unprecedented inequalities of wealth and income require increased, not decreased, taxation of higher incomes, including corporate profits; and that tax and regulatory co-ordination across countries are vital to prevent a ruinous fiscal race to the bottom.

Hear, hear.

Now let’s get on and do it. Through the UN if need be. But let’s do it now.

Before society breaks down.

Because that’s where the policies of the far right and George Osborne are leading us.

And I value society a lot, even if they don’t.

Why Northern Ireland must not have a separate corporation tax rate

Conservatives, Corporation Tax, Ireland Comments Off

Mar 252011

I have the following piece in the printed version of the Belfast Telegraph this morning:

The Conservatives have now made clear that they think the Stormont government should reduce the corporation tax rate in Northern Ireland.

They are wrong to do so. I set out many reasons for saying so in a publication entitled ‚ÄòPot of Gold or Fool’s Gold? ’ published by the ICTU last autumn. I’ll summarise just some of them here.

First, unlike the government I do not think this power can be devolved to Northern Ireland under EU law. That Whitehall is even proposing this is sufficient in itself to suggest that any such action will fall foul of EU law. The decision has to originate in Stormont, and isn’t. The risk of getting this wrong is too big to take, and will discourage business from relocating because of the resulting uncertainty.

Second, the only known outcome of the change will be Northern Ireland losing part of the block grant. Northern Ireland cannot afford that risk when the upside is a massive gamble of £160 a year for every person in Northern Ireland on the creation of a tax haven.

Third, precisely because this is a tax haven activity EU law would restrict who could take advantage of it. Finance companies could not. Nor could companies providing what are called ‚Äòintra-group services’ within groups of companies. That massively reduces the attraction to the type of business that relocates to the Republic.

Fourth, as the government’s own paper recognises, nothing Northern Ireland could do could replicate the lax tax regime of the Republic which refuses to tax large tranches of profit – so Northern Ireland can never compete with Dublin’s current offering.

Fifth, Ireland is under massive pressure to withdraw the 12.5% rate now, and may do so under protest to cut the cost of its bail out.

And finally the sheer admin complexity of two tax rates and a tax border with the rest of the UK will eliminate all the cash advantages for companies.

This is an idea that needs to be returned to the economics classroom now, where it belongs as an object of idle curiosity of no benefit to a single person in Northern Ireland.

There’s one piece of good news: The DUP hold the Treasury portfolio in Northern Ireland their minister, Sammy Wilson, is not convinced. Maybe he’ll stand up to the madness of George Osborne and the Taxpayer’s Alliance – because that’s where this folly began.

And that’s resoundingly good reason why it should end – because we all know they, like Osborne, are members of the Ministry of Truth – where everything is the opposite of what is claimed.

As Ireland comes under pressure to end its abusive tax rate Northern Ireland plans to join it in the sin bin

Conservatives, Corporation Tax, Ireland Comments Off

Mar 242011

The FT notes this morning:

Ireland saw a leap in its cost of borrowing on Wednesday as peripheral eurozone economies came under pressure because of worries over the risk of sovereign bond defaults.

Dublin has come under pressure because of fears Germany will refuse to back down over its demands that Ireland must increase corporation tax rates in return for lower interest rate costs for bail-out loans.

I support Germany on this issue. It is absurd that Ireland should demand concessions on anything when it sets out to undermine the corporate tax revenues of its neighbours who it has expected to bail it out.

But the fact that Ireland’s corporate tax system is seen throughout the international community as being highly abusive makes the Tory move to replicate it in Northern Ireland all the more ludicrous. A paper paving the way for this to happen will be published this morning.

I am a vociferous opponent of this (and will be on Radio Ulster this morning discussing the issue at about 9.30). My reasoning is in the paper ‘Pot of Gold or Fool’s Gold?’ published last year for the TUC and Irish Congress of Trade Unions. In summary the reasons why this will be a disaster for Norther ireland are:

1) NI will lose £300 million of block grant – a cost to the ordinary people of NI who will have to pay for the tax haven that will be created;

2) It may be illegal under EU law;

3) Unless NI abandons controlled foreign company and transfer pricing laws too (and I really can’t see that) the tax environment of the Republic cannot be reproduced in NI;

4) Transfer pricing will have to operate into and out of NI from the rest of the UK – bad news for many businesses working in both places and adding massively to costs of locating in NI – which will be bad for jobs;

5) Intra-group activity cannot attract the low rate under EU law but it the most likely to relocate;

6) Under EU law finance activities cannot attract the low rate – blocking much of what Dublin does.

All of this makes it a complete non-starter and further evidence of Tory anti-tax madness over-ruling any common sense in government, or consideration of the needs of ordinary people.

Thankfully Sammy Wilson, DUP NI finance minister sees all the problems. I can’t see him doing this. That’s my hope.

Google’s tax gets an SEC review

Ireland, Tax avoidance, Tax Havens, USA Comments Off

Mar 222011

Bloomberg has reported:

Google Inc. received questions from the U.S. Securities and Exchange Commission in December about earnings in other countries that may have reduced the company’s tax bill, according to regulatory filings released today.

SEC officials asked Google for “disclosures to explain in greater detail the impact on your effective income tax rates and obligations of having proportionally higher earnings in countries where you have lower statutory tax rates,” according to a Dec. 2 letter.

The company responded to the requests for information, the filings show. The SEC said in a Feb. 3 letter that it had completed its review of Google’s filings, and has “no further comments at this time on the specific issues raised.”

Google, owner of the world’s most-popular search engine, has used a strategy that has gained favor among some U.S. companies to reduce taxes. Google cut its income taxes by $3.1 billion over three years by shifting the bulk of foreign profits to Ireland, then the Netherlands and eventually to no-tax Bermuda, according to regulatory filings in the U.S. and abroad.

The tax-cutting strategy, involving a pair of techniques known as the “Double Irish” and the “Dutch Sandwich,” helped cut the company’s income-tax rate to 2.4 percent on the profits it attributed to its foreign subsidiaries during the three-year period, filings show. The statutory corporate income tax rate in the U.S. is 35 percent.

Not bad for a story that began on this blog some time ago.

And full credit to Jesse Drucker for making it a global story.

In praise of tax

Ireland, Tax avoidance, Tax Havens, Tax justice 1 Response »

Feb 172011

An editorial in London’s only evening newspaper, the London Evening Standard, says today:

In praise of tax

Paying tax is a good way for individuals and companies to contribute to the society in which they operate. So why is Google choosing to base itself in low tax Ireland rather than in the UK, where it has far more workers? We should be told.

Hard to argue with that.

And a very welcome sign of the times that such comment is now becoming commonplace.

The madness continues – the Tories are urging Northern Ireland to become a tax haven

ConDems, Conservatives, Ireland, Tax Havens 1 Response »

Feb 152011

From the Belfast Telegraph:

Northern Ireland should cut a deal on corporation tax now and not worry about “a couple of hundred million” that it would cost, the Secretary of State has warned.

Owen Paterson told the Belfast Telegraph: “There are all sorts of good projects for public spending but at the moment the only source of money is the British taxpayer, coming from the Treasury in a block grant.

“To be absolutely brutal about that, that isn’t going to go on forever.”

His prediction that cuts are likely to get worse echo the sentiments of Ken Clark, the Justice Secretary, who warned at the weekend that the economy was in a “calamitous state” and that the Government’s austerity drive could cause serious political unrest as its full extent sunk home.

Mr Paterson was reacting to comments from Finance Minister Sammy Wilson.

Mr Wilson told this newspaper that the Treasury’s price for devolving power over the tax to Stormont and allowing a cut was “a rip-off”. It would cost us around £300m off our block grant to reduce the business tax from the current 28% to the 12.5% charged in the Republic.

Mr Paterson suggested we could go as low as 10%, and that it could be reduced in increments as new business was attracted by lower rates and revenue increased.

He conceded that there may be some room for movement on cost from the Treasury.

“This whole issue will be subject to discussion and bargaining”, he said, while urging Stormont to seal the deal quickly.

“There will never be a chance like this again. If I fail, no other Secretary of State is going to come along and touch this issue.”

Low corporation tax was one of the main drivers of the Republic’s Celtic Tiger boom.

The insanity of this is breathtaking. I’ve just reported that the Isle of Man and Jersey are both seeking to commit economic suicide to keep low taxes that they clearly cannot afford and which will lead to the failure of their economies. Now we have the government urging Northern Ireland to do the same.

I have tackled the issues involved in this publication. I doubt there is EU provision to allow this. Owen Paterson is clearly indifferent to this.

But worse – yet again this is the clearest possible sign that this government thinks that subsidies for tax haven abuse are more important by far than providing services to people. Sammy Wilson has this right – he knows the people of Northern Ireland will suffer a terrible cost for this madness. But what does that matter to a Tory? Tax abuse is all they’re out to promote and hang the consequences it seems.

There are days when it really seems that the lunatics are taking over the asylum. Today is one of them.