Ireland does well on shadow economy policy

Countries ‘missing’ 15% of economic activity on average

Ireland does well on shadow economy policy

To judge by media coverage, the biggest problems with tax have to do with household names.

Most of the tech giants —the likes of Apple, Google, Facebook, and Amazon — are under the continuous scrutiny that goes with being a large public company, and their tax affairs can attract a prurient interest.

A tax issue can propel lesser-known companies into the limelight, like the €1.6bn tax challenge by Revenue on drugs company Perrigo. Sometimes it is the sheer size of the amounts involved rather than the tax issue that’s in dispute, which warrants the public attention.

The other reason such companies feature in the news is simply that we know their tax affairs. They are compliant and make their returns to the taxman. Some, as publicly quoted companies, have additional reporting requirements to stock exchanges. This pushed the Perrigo tax story into the public domain. Others have fallen foul of public investigations or challenges, as was the case with Apple.

There is an ongoing debate as to whether businesses generally behave in a sufficiently transparent way, with the European Parliament pushing the commission last week to speed up the creation of some form of publicly available register of who pays what and where.

It doesn’t follow automatically that because something isn’t fully transparent it is illegal. However, what is illegal is rarely fully transparent, and tax evasion falls into this category. By the reckoning of the UK revenue authorities, who devote considerable time and effort to tracking such matters, the biggest tax losses don’t arise from tax planning and tax avoidance.

They arise as a consequence of the shadow economy, the individuals and businesses who don’t declare income or gains and don’t pay the tax on them, often using cross-border and offshore methods to hide their hot money. Nobody knows exactly how much tax is evaded but we know it’s a lot.

Just as criminals don’t usually give lists of their activities to the gardaí, tax evasion by definition is unreported. Revenue’s list of tax defaulters represents only a tiny fraction of tax default activity because even if detected, not all default warrants publication in this way. We are left to educated guesses as to the scale of the shadow economy.

Austrian academic Friedrich Schneider has estimated the size of the shadow economy by reference to things like a country’s economic output and money supply, along with business surveys and the effectiveness of commercial regulation in a given territory. His studies and those of his colleagues even take account of the amount of light given out by cities at night, as an indicator of the amount of activity going on.

In his most recent report for the World Bank, he reckons that OECD countries are “missing” about 15% of their economic activity on average. If that is so, then tax receipts in many OECD countries are possibly somewhere between 5% to 10% less than they should be.

So how does Ireland fare? We have one of the smallest shadow economies in the world, according to Schneider and his colleagues. Out of more than 150 countries analysed, we seem to rank 14th, below the likes of Switzerland, the US, and Japan, but ahead of Canada, Norway, and France. We do well relative to many of the other EU member countries.

There’s an irony in having to constantly defend our tax policies internationally, while being one of the top performers compared to many of our international critics when it comes to ensuring compliance with those policies. It’s again being blamed for something we didn’t do.

Brian Keegan is director of public policy and taxation at Chartered Accountants Ireland

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