Ireland’s siphoning off of GDP and tax revenues makes a mockery of the EU Single Market

Introduction

The ‘Celtic Paper Tiger’ is that part of economy tied up with servicing foreign multinationals and reducing their tax bills. It represents 65% of the Republic of Ireland’s economy,¹it distorts the EU Single Market and causes significant damage to victim member states. In other words, the ‘Celtic Paper Tiger’ economy is based on an exploitation of EU-wide rights and residual member state powers. Paper trails are created for accounting and tax purposes, which concentrate revenues in Ireland and then apply questionable expenses to offset them. The paper trails do not follow where the underlying business occurs.

EU-wide rights

The Celtic Paper Tiger exploits the EU Freedom of Incorporation by enabling multinational corporations to construe the entirety of their EU sales as having been made out a Republic-incorporated subsidiary.

It exploits EU Freedom of Movement to move low-skill, low-wage workers from wherever they are available into the victim member states, and to use them for low-value tasks, causing the consumption of public services locally that are paid for by that member state without the workers or their employer making a meaningful contribution towards their cost.

Usage of residual member state powers

Setting allowances for intercompany expenses and depreciation, signing Double Taxation Treaties with non-EU countries, and setting the rate of tax are the member state powers that are applied once economic activity has been siphoned off into the Republic.

The profit is diminished thanks to the Irish tax authorities permitting wide deduction of intercompany expenses. Expense invoices are presented to an Irish subsidiary by a sister subsidiary of the same multinational but based in a tax haven with which Ireland has a Double Taxation Treaty and where little or no corporation tax is levied. The invoices, normally for the usage of Intellectual Property, can be paid without stoppages like withholding tax.

The profit is further diminished by the Irish subsidiaries of foreign multinationals using the depreciation allowances available on a fleet of aircraft that never land in Ireland.

The taxable profit, once eventually arrived at, is taxed at the modest rate of 12.5%.

The effective rate of tax on the real profit (sales revenues less direct expenses) is around 4%. 96% of this real profit can find its way back to tax havens as intercompany invoices, dividends, and possibly intercompany loan interest and management charges as well, and all without withholding tax, thanks to Double Taxation Treaties.

Scale of the abuse

In 2022 the re-routing of sales revenues through Irish subsidiaries amounted to €360 billion. In the same year the lease rentals on Ireland’s aircraft fleet amounted to at least €104 billion.²

That is ‘offshore’ activities of €464 billion, €215 billion more than the size of the ‘onshore’ economy, which the Irish authorities put at €249 billion.

Adding the €249 billion ‘onshore’ economy to the €464 billion ‘offshore’ economy gives a 2022 Gross Domestic Product for Ireland of €713 billion, not the €503 billion put out by the Irish authorities.

The ‘offshore’ economy represents 65% of the ‘Celtic Tiger’, as well as bringing in most of its corporation tax, high-salary jobs, personal income tax, and social taxes.

Benefits for the Republic of Ireland

The Celtic Paper Tiger supports Ireland’s public services at a high level, and provides most of its graduate-level employment and high-salary jobs. By inflating Ireland’s GDP, it reduces its Debt-to-GDP Ratio, improving its public credit rating, its access to credit and its cost of borrowing. Ireland’s compliance with the Fiscal Stability Treaty improves.

Detriments for other EU member states

The detriments for other EU member states are the exact inverse of the benefits for the Republic: loss of high-salary, graduate jobs and their replacement with low-skill, low-wage ones, increasing the demand for public services without delivering any new money to pay for them. This exacerbates the public fiscal deficit, causes a greater need to borrow, a higher national debt, and a deteriorating Debt-to-GDP Ratio, as debt is forced upwards whilst GDP is siphoned off into the Republic.

This undermines compliance with the Fiscal Stability Treaty, threatens public credit ratings, increases the cost of debt, raises the amount of debt interest and exacerbates the fiscal deficit. This causes a greater need to borrow…and round and round it goes.

Conclusion

The Celtic Paper Tiger is a self-serving exploitation of a combination of EU-wide rights and residual member state powers. At the same time, it is a direct attack on the rationale for the Single Market, which is to eliminate distorting outcomes caused by physical location within the EU. Ireland has instead built a distorting advantage for multinational corporations to locate in their member state. It is amazing that the other member states have not seen through this and squashed it.