We cannot have it both ways with tax policy

Nothing, it seems, lasts forever. This is as true in economics and finance as it is in life generally. While we cannot stop the onward march of change, we can, and should, consider if we are planning for this.

Over the last two weeks we have seen the beginnings of the end of the present Irish macroeconomic business model. This has come about consequent to the growing concern, crackdown and outright confusion on international corporate tax.

When your country is being labelled (however fairly or otherwise) a tax haven in the US Senate, and when a large part of your (apparent) success is at least in part dependent on the underlying features that give rise to that description, then the writing is on the wall, the floor, the ceiling and around the wainscoting.

What is the Irish business model? It is in large part built on the idea of being an attractive venue for foreign direct investment for multinational companies. The idea, now into its sixth decade, is that these export-orientated companies will come here, and pay a low tax on corporate profits. We will gain the benefits of employment and eventually (remember, it’s in its sixth decade…) a cadre of Irish companies will grow and displace these multinationals.

A complex history underlies the tax issues here but the present situation is relatively simple. All Irish companies pay tax at 12.5% on profits in Ireland.

Where the problem arises is that first there can be many, many tax breaks that benefit a small number of companies (perhaps even one company); second there can exist companies that exist in Ireland but are not resident in Ireland for tax purposes; third there are a web of dual tax treaties between countries that allow and, to some extent, encourage tax arbitrage, where entities shuttle profits around paying some tax here, a little there and ultimately very little anywhere.

The US Senate report on Apple, and the hearings into Starbucks, Amazon etc in the UK give some idea of the complexities here. Ireland is a central node in this web and this, combined with the reality that we are a low corporate tax country, has drawn spotlights on us that we perhaps do not want.

The commonly accepted figure is that 150,000 jobs are held in multinational companies. This is impressive, but the total at work is 1.85m people.

Most multinationals are in the high and medium-tech sector and that is not where people are employed. More people by far are employed in knowledge-intensive marketed services (selling services) and knowledge intensive other services (mainly health and education) than in the hi-tech sector.

Yet these get relatively little play in the media compared to the foreign direct investment-dominated hi-tech sector. We need to consider a hard question: is the multinational tail wagging the employment dog? We will not get out of this perennial recession by concentrating on foreign direct investment — or even on exports.

The export issue is also problematic for a linked reason. A large part of our trade balance is composed of chemicals — 60% of our exports in 2012. Absent the chemical exports we would just about break even on our balance of trade.

A key aspect of transfer pricing is that it is encouraged and facilitated by tax arbitrage conditions. It gets worse — when we look at the rest of the balance of payments tables we see massive outflows. We apparently export €36bn worth of computer services — nearly 50% of the value of agribusiness. We, of course, nearly offset this by ‘importing’ royalties and licences of €32bn, all offsettable as costs and, in all likelihood, the vast preponderance of which is internal to multinationals.

We need a mature debate on this. Not only is the multinational sector now distorting the economy, this flows through. We are well out of kilter with our European peers in terms of our tax take and structure. They all pretty much have a balance between GDP (including multinationals) and GNP (excluding). We don’t. As a consequence when we calculate our tax take on GDP we look like a low tax country.

When we examine GNP this is less so. But ever other country works off GDP data and they look at us and ask: what is going on? Joe Stiglitz, a Nobel laureate and no enemy of Ireland, has asked why countries such as Ireland, which engage in tax-based multinational attraction/profit washing, should be bailed out?

We might decry this but our own rhetoric denies the reality. We cannot say at the same time that our multinational sector and its exports are real, not tax driven, and then say that we must discount these for all purposes related to taxation and comparative economic analysis.

Either these flows are real, in which case we need to treat them no differently to the local garage or the SME exporting to Britain — or they are not. We cannot have it both ways and expect to be taken seriously.

* Brian Lucey is professor of finance at Trinity College Dublin