Mar 16 2011

Ireland is a hostile country: it might bite you on the arse

Posted by: Nick Shaxson in: Thoughts

OK, Ireland as a whole isn’t a hostile country. I’ll temper that headline and say this: many things that happen in Ireland’s financial centre constitute hostile acts towards the taxpayers of other countries. Because it is a tax haven, or secrecy jurisdiction.

A while ago I wrote a blog for the Tax Justice Network which looked at the Wild-West Dublin International Financial Services Centre (IFSC), and quoted a well-regarded blogger, David Malone, who said this:

The same banker told me this. She was aware of instances, and so was everyone else, of banks, German banks, who used to fly their people from Germany to Ireland in order to do deals that were not allowed in Germany.

This is absolutely, quintessentially, offshore business. In Treasure Islands my definition of a tax haven, or secrecy jurisdiction, is this:

“a place that seeks to attract business by offering politically stable facilities to help people or entities get around the rules, laws and regulations of jurisdictions elsewhere.”

Which is just what Malone describes. He continues:

“This is known in the financial world as jurisdictional arbitrage. You and I would call it cheating if we were feeling charitable and lying if we weren’t. . . .I have spoken to such people. Usually I can hear the sweat coming off them as they ask how I got their number and where did I get my information.”

The rest of Malone’s blog, entitled Who Bankrupted Ireland? is well worth reading, to get a proper feel for what the IFSC is up to: helping banks get around the financial regulations of jurisdictions elsewhere. He describes the IFSC as a “legal gated community” which again gets close to some of my descriptions of tax havens, particularly in my Delaware/Jersey chapter “Ratchet.” This appallingly lax business (for more specifics on the IFSC’s skulduggery, see Jim Stewart’s work here,) at least as much as Ireland’s 12.5% tax rate, had been a major component of Ireland’s Celtic Tiger economy leading up to the crisis. As the photo above (click to enlarge, hat tip: here) so memorably puts it:

“Do not approach this rare and dangerous animal . . . it might just bite you on the arse.”

This is, well, pretty much exactly what tax havens do. Unfortunately, they aren’t that rare these days. About 60 at the last count.

Now the IFSC stuff I’m describing here isn’t about tax, but about financial regulation. And this underlines one of the big points in my book that tax havens are about much more than tax.

But the same basic argument applies for tax: once again, it’s Ireland’s laxity that is at play. Lax rules suck up money from elsewhere – and in the process screw ordinary taxpayers elsewhere. It’s the basic offshore formula.

The Progressive Tax Blog has a most useful post looking at Ireland’s business of hoovering up capital, shaking off the tax charge, and spitting it out again to be reinvested elsewhere, all for a small fee. This graph, from a recent report on Ireland’s economy, shows how important this tax haven business is.

By and large, as the report explains, the smaller green segments represent real investment while the blue segments represent offshore business (“the movement of capital by multinational companies to subsidiaries in the IFSC that is re-invested overseas”). This offshore busines amounted to about $1.8 trillion in 2009. Trillion, not billion. That’s rather a lot.

Now a lot has been written about Ireland’s famous 12.5% tax rate. But that’s not the subject  here. What Ireland does is to let companies route their transactions through the IFSC and escape tax altogether. As the Prog Tax Blog explains, Ireland:

“does not have comprehensive ‘transfer pricing’ rules. . . . Ireland has historically had no transfer pricing rules whatsoever.”

Transfer pricing rules are supposed to stop corporations from playing fast and loose with tax havens to shake off the tax charge. (The rules are an ass, but they are all we’ve got for now.) The fact that Ireland doesn’t have comprehensive rules means that corporations can get away with these shenanigans, without getting questioned. (It’s a bit complex – you use Luxembourg too — the Prog Tax blog outlines the gory details for those who are interested.)

Here again we have that appalling Wild West laxity, that screw-other-countries approach, the tax haven classic. It’s led to companies like Google getting away with a 2.4% overseas tax rate, way below Ireland’s headline 12.5% rate, and leaving ordinary American taxpayers to pay the taxes Google won’t.

Now here is the main point of this blog. Prog Tax notes the obvious question:

You might ask why Ireland is used in planning structures like this in place of classic tax havens such as Bermuda, Cayman Islands and Jersey.

Why indeed? Good question.

The answer is that in these cases many countries would apply withholding tax on interest paid to traditional tax havens.

In other words, reputable democratic countries have put in defences against the “traditional” tax havens like the Caymans, Bermuda or Jersey, to try to stem the abuses run out of the hostile financial services industries located on those islands. But not Ireland. It’s not regarded as a hostile country for tax purposes.

Well, it should be. It is biting ordinary taxpayers, the world over. On the arse, if you will.

7 comments so far

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[...] most people assume. This will most likely be about the exemptions and loopholes. This is what the corrupt and dangerous Wild West model adopted by the Republic of Ireland, one of the world’s most important tax [...]

AlienEdouard 3th March, 2011 10.35 am


You write: ‘Here again we have that appalling Wild West laxity, that screw-other-countries approach, the tax haven classic. It’s led to companies like Google getting away with a 2.4% overseas tax rate, way below Ireland’s headline 12.5% rate, and leaving ordinary American taxpayers to pay the taxes Google won’t.’

You are going well and truly over your two skis here.

Google’s (and others’) low overseas tax rate might be to some extent manufactured in Ireland, but its actual impact on the American taxpayer is most definitely made in the USA.

Nothing would prevent the US from imposing some form of ‘equalization regime’, that would force US corporations to pay in the US the difference between the taxes actually paid on overseas earnings, and the tax that would be due on these earnings if they had been generated onshore (a bit like the UK is doing at present). After all, the United States already tax its citizens on that basis.

There have been discussions about this in Congress, but it has never got any momentum, and probably never will.

But Google has nevertheless been a massive contributor to the US treasury. Just look at a graph of the Google stock, and one does not need a brain surgeon to realize that the company has helped produce a fairly large amount of capital gains tax. How much of that is due to overseas and domestic tax management is impossible to determine, but the low tax rates certainly did not hurt.

Thoughts welcome.

Nick Shaxson 3th March, 2011 5.48 pm

Compare your “Nothing would prevent the US from. . . ” and the “There have been discussions about this in Congress, but it has never got any momentum, and probably never will.” That’s quite a contradiction. And it’s significant. The reason for the “probably never will” is corporate lobbying, of course. And this is one of the great reasons why when it comes to this kind of stuff, we need to hold the corporations’ feet to the fire – as well as the jurisdictions themselves – both the tax havens and the victim countries, which need to tighten up. Offshore finance is, as I explain in Treasure Islands, a multi-headed thing, and an either-or approach looking at only the USA (or only the tax havens) is far too simplistic.

And to the extent that a jurisdiction does tighten up, that will trigger a response in the tax havens to get around it. Here is one great reason for the complexity of the tax systems of ‘onshore’ jurisdictions: this cat and mouse of attack from the tax haven, defence from the onshore jurisdiction, and renewed attack.

AlienEdouard 3th March, 2011 1.24 pm

Nick – thank you for the reply.

There is no contradiction at all in what I am writing. The reason that these discussions never gained momentum is because there is no political consensus on the issue. Lots of things get discussed in Congress but very few result in actual legislation. Corporate lobbying is part of this political process, in the same way that unions’ lobbying is. Corporate lobbying efforts fail (healthcare, Dodd-Frank) about as many times as they succeed. To make more of this is falling straight into the land of conspiracy theories.

Since you brought up this topic you may be interested to know that in fact the current corporate lobbying effort goes into a complete different direction. US corporations only get taxed on foreign earnings when they are repatriated to the United States; as a result US corporations are “stuck” with billions of Dollars in their overseas subsidiaries which they would rather use for domestic investment or return to shareholders. Major corporations (incl. Google and Microsoft) have brought this to the attention of the government, offering to repatriate these funds and to pay tax, but on a reduced basis.

The Obama administration REFUSES this for reasons that nobody can really understand. So we have this unbelievable situation that multinational companies are offering to pay MORE tax in the US than they currently do, invest in America and/or put money in the pocket of American shareholders, and that the president says NO.

If America is a victim of anything or anyone, it is of its current administration. Made in USA as I said.

Nick Shaxson 3th March, 2011 8.04 am

There was a contradiction. But still, on the repatriation issue, there’s been a lot written about this, and I discuss it in some detail in my book. In short, the last George W. Bush repatriation scam (I think they were, from memory, offered a 5.25% tax rate for repatriated income) saw hundreds of billions whoosh back – and analysis of what happened subsequentlu was that no new jobs were created, but a lot of stock options were inflated. It was a disaster. Now you want to repeat this? It’s even worse now – corporations are awash in money at home, without investment opportunities to stick it into, and repatriating more of it won’t make a difference. All it will do is line the pockets of those who least deserve it. The Obama admin is right to refuse this, and right to close its ears to the efforts of those who are lobbying for this on the basis of bogus claims about jobs and investments.

oh, and there’s the small matter that companies are finding way to repatriate anyway, via loopholes.

[...] these powerful countries – so many congratulations to this effort. And, as I argue in a recent blog about Ireland – it’s incredibly important not to chicken out of pointing the finger at countries [...]

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