EU: Irish output is distorted

Multinationals assigning a very high value to products being finished in Ireland in order to avail of tax advantages are distorting the country’s productivity figures, according to the EU.

At three times the average, Ireland has by far the highest labour productivity in manufacturing of any country in the EU. It is more than double that of Germany.

The true value of goods manufactured in Ireland is “to some extent inflated by research and marketing activities undertaken mainly outside Ireland, as well as by transfer pricing”, said the report.

This includes importing components, or even the finished product, into Ireland, but declaring it is worth little in the country where it is produced and where taxes are higher.

In reality, only a small part of it may be manufactured in Ireland or it may be packaged in the country, where its full value will be assigned to avail of the country’s low tax regime.

On paper, it then looks as though a huge amount of value was added to it by Irish workers, while the reality is quite different.

According to Eurostat, manufacturing accounts for 25.8% of total value added in Ireland, compared to the EU average of 15.5% last year. However, the real “value added” is unknown so there is doubt over what the true contribution to the economy is of manufacturing.

The report says the economy has two distinctive parts: The export-oriented and technology-driven part that includes information technology, medical technology, pharmaceuticals, and chemicals; and the domestic, small business sector.

The SME sector is where 90% of the jobs are but it is less innovative, less technology-oriented, and less export-driven.

Access to funding for SMEs has deteriorated to third worst in the EU and while demand is about the EU average, double the eurozone average do not even apply. Access to finance continues to be a weakness of the Irish business environment, which otherwise is the best in the EU after Britain, the report says.

The report is critical of the civil justice system, where it takes an average of 650 days and costs 27% of a claim to enforce contracts. It said SMEs cannot afford the time and cost, and say many courts have limited understanding of business issues.

Meanwhile, business expenditure on research and development fell 2% between 2009 and 2010. Local firms increased their spending by 3.6% in this time, but did not make up the gap as the multinationals account for about two thirds of the total spend.

Changes in the tax credit for R&D should help SMEs especially, said the report. The State is pursuing too many strategies on research and innovation, and the report advises that it should be re-evaluated, especially in light of past experience, and become more focused.

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