February 2013        

Is Ireland a tax haven?


Can the term “tax haven” be justly applied to Ireland today? Since the global economic crisis hit in late 2007, a whole host of commentators have been trying to unveil the root causes behind the crash. One such area of study, emphasised somewhat of late in left circles, especially with the introduction of the new publication Irish Left Review, is that of tax havens.
      It is difficult to find an accepted definition of a tax haven, as the categorisation of the haven is usually fashioned by the criteria of the study. In general, though, we can think of a tax haven as an entity such as a country that tailors its tax laws and regulatory procedures so as to draw capital from abroad, away from other jurisdictions, by way of avoidance of tax and regulation, with maximum secrecy.
      To understand the emergence and continued vibrancy of tax-haven jurisdictions, some thought on their function in the global economic arena is worthy of consideration.
      Individuals, companies or transnational corporations doing business in the global economy have a duty to pay taxes in their country of residence. However, a company may have subsidiaries in numerous countries, with tax on its earnings paid at those countries’ rates. In such circumstances there might be the situation of double taxation, where the earnings in country B are taxed first in country B and then again in the home country, A.
      Obviously, companies and the countries in which they legally reside have taken steps to avoid such a scenario, in the form of tax treaties, for example.
      The other side of the coin is that there is a growing incentive for those residents and companies to avail of double non-taxation, “income escaping tax altogether solely as a result of crossing borders,” of which “the primary target has been countries which intentionally exempt capital from tax in one way or another—in other words, tax havens” (Rosenzweig, 2010).
      In this sense it can be demonstrated that countries that use tax laws to attract foreign investment are a result of the rules of the international tax regime, set up and dominated by the interests of the G7 and the United States in particular: in other words, tax laws are designed and implemented by the capitalist class in the interests of the capitalist class.
      The deindustrialisation of many of the long-established capitalist countries has been one of the major factors in driving competition on tax policy. It is this tax competition that has generated the incentive for countries to widen their tax base by competing for foreign investment through such instruments as tax-free policies, “secrecy in various forms, avoidance of financial regulation, avoidance of criminal laws, [and] escape from other rules of society such as inheritance or corporate governance rules” (www.tackletaxhavens.com).
      In other words, wealthy individuals or corporations—in short, monopoly capitalism—will try to avoid paying taxes so long as there are ways and means by which they can influence, manipulate or exploit the tax system. The private owners of industry don’t even want to accept the dues they owe to its citizens in a capitalist system.
      Countries that need foreign investment to meet their minimum revenue requirements will therefore take advantage of the high demand for both low tax and low regulation. Jurisdictions do this by competing in various fields, where they can, for example, employ tax rates that are less than the average in a certain geographical area, or “offer tax exonerations created in the development of export industries” (Maneal, 2010), both of which are relevant to Ireland.
      The typical image of a tax haven is of a small island country, such as the Bahamas or the Cayman Islands. However, some recent studies find that tax havens are flourishing in rich developed countries that offer different types of incentive for foreign investment to set up in their jurisdiction.
      One such study (Rosenzweig, 2010) that tries to explain the phenomenon of tax competition and tax havens contends that it is due to (1) a capital neutrality paradox (“as barriers to capital crossing borders are reduced, the ability to attract capital through tax competition increases”) and (2) punishment paradoxes (“punishing countries which engage in tax competition as a result of the incentives of the capital neutrality paradox will necessarily be counterproductive”) that have driven tax havens to more and more developed countries, offering different degrees to which an entity can avoid paying tax. Rosenzweig (2010, p. 961) gives a realistic scenario in which the punishment paradox leads to countries engaging in tax competition:
Apply a similar analysis to a world with over one hundred countries, with the progression moving from Bermuda, Jersey, and Mauritius in the lowest tier, to Liechtenstein and Morocco in the next tier, and Austria, Ireland, and the Netherlands in the third tier. As nations punished Bermuda, Jersey, and Mauritius, the incentive would shift to Liechtenstein and Morocco, and if nations then punished them the incentive would shift to Austria, Ireland, and the Netherlands.
      So, rather than a decrease in the number of tax havens, as one would hope (seeing that tax avoidance can be very damaging to an economy), there has on the contrary been an increase of various degrees in the number.
      Whether it be a Cayman Islands style or an Irish style of tax haven depends on the political, economic and social values prevalent in the country. We may think of tax havens, therefore, as having differing tiers or ranks, in which individuals or companies can avail of their services to suit their purpose—in other words, with different jurisdictions specialising in certain types of tax avoidance.
      There are two major indicators, closely linked, that would consider Ireland as being a tax haven. The first is its low corporation tax, relative to other European states, of 12½ per cent. The other is the presence of the Irish Financial Service Centre.
      Ireland has undergone major shifts in its economic policies, starting from a protectionist economy in the 1930s and 40s to what is now a fully open economy, which had its beginnings in the late 1950s with the introduction of exports profits tax relief in 1956, bringing about the first low foreign tax law.
      This basically allowed the Government to set different rates of corporate tax for foreign and domestic industries. When Ireland joined the EEC in 1973 the differential tax rate was considered discriminatory, and so the country had to adjust its tax policies, though the full implementation of a 12½ per cent tax on all trading companies was not introduced until 2003 (www.secrecyjurisdictions.com).
      The very reason for this low tax rate is in line with the literature on tax havens discussed so far, in that Ireland made use of its sovereign ability to set its tax rates at a lower level than the average in its geographical area to attract foreign investment.
      Lower corporate tax rates, however, are only one side of the question of being considered a tax haven. There are much cheaper countries (in terms of labour costs) and countries with lower taxes, in which manufacturing companies can set up operations; so having the low corporate tax rate to attract manufacturing business could not serve as a long-term solution to maintaining the required tax base.
      In the light of this, the development of the IFSC from 1987, under the direction of the corrupt Taoiseach Charles Haughey and his consortium of investors, business links, and wealthy individuals, can be much better understood as a move by the Irish state to appease monopoly capitalism and attract foreign investment by the other carrot, that is, “regulation havens in combination with maximum secrecy” (Troost and Liebert, 2009).
      As argued by Troost and Liebert, “since the EU’s new Eastern European Member States were also courting investors with low tax rates, Ireland had to come up with fresh concessions and built up the IFSC into a veritable shadow banking system.” (Shadow banks behave like banks, in that they borrow money and lend it on, at a profit; but they don’t take deposits from ordinary customers, and they fall outside the regulation system.) The Irish regulatory authority holds that it has no responsibility for investigating companies whose main place of business is outside Ireland.
      The scale on which investment has grown in the shadow banking system has “quadrupled between 2000 and 2006 to nearly €1.6 trillion—more than ten times as much as other forms of foreign direct investment in Ireland” (Troost and Liebert, 2009). And Ireland “hosts over half of the world’s top 50 banks and half of the top 20 insurance companies; in 2008 it hosted about 8,000 funds handling €1.6 trillion of assets; the Irish Stock Exchange hosts about a quarter of international bonds” (www.secrecyjurisdictions.com).
      Can the term “tax haven” be justly applied to Ireland today? As we have seen, comparing Ireland to the Cayman Islands is too simplistic and isn’t reflective of the intricate global capitalist system. Therefore, when Ireland is taken out of isolation and into the global mechanism it plays no small role in the plague of global tax avoidance. Ireland is ranked 31st of 71 countries in the financial secrecy index. It can be rightly labelled a tax haven.
      If we are to conclude that Ireland is a tax haven, a fundamental problem arises in trying to tackle the practices of tax and regulatory avoidance. Because of the role foreign investment plays in the Irish economy, without a vibrant indigenous manufacturing base the state, in its present form, is totally subservient to the very policies that make it a tax haven!
      One has to ask oneself if the type of politicians and political parties that dominate the political spectrum have either the desire or the will to really tackle the monopolies and the scourge of tax avoidance. Even as recently as 2012 it has been shown that very profitable transnational corporations pay only a small fraction of the prescribed 12½ per cent, while the Irish working class and its allies are hit hardest with house taxes and water charges, being strangled and stripped of their services, their welfare and their public companies and slowly but surely losing all meaning of the words “sovereignty” and “democracy.”
      Tax avoidance is not a new phenomenon, but its scale is global and tiered, with Ireland placed as an integral cog in monopoly capitalism’s wheel. The benefactors are the owners of the monopolies and their allies, while those who lose out are ordinary working people.
      It’s not just a matter of tax justice: tackling tax havens is a class issue, confronting head on the owners of capital and their allies. If our present political parties are unwilling to tackle them, they need to be replaced with class-oriented parties and organised labour. Class warfare has many battlefronts, and global tax havens is just one such front. The need to develop class-consciousness and build a strong class-oriented party, such as the CPI, is as important now as it was a hundred years ago.
[EON]

References

  • Maneal, Adrian Constantin, “The tax havens, between measures of economic stimulation and measures against tax evasion,” Bulletin of the Transilvania University of Braşov, Series VII: Social Sciences, Law, vol. 3 (52), 2010.
  • Rosenzweig, Adam H., “Why are there tax havens?” William and Mary Law Review, vol. 52, issue 3 (December 2010), p. 923–996.
  • Troost, Axel, and Liebert, Nicola, “Trillions down the drain of tax havens and shadow banks,” Blätter für Deutsche und Internationale Politik, 3, 2009. (Available on line at www.taxjustice.net.)

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