Wednesday, July 27, 2005

Subsidy to the Celtic tiger or just healthy tax competition?

A lot has been written about the Celtic Tiger (Ireland) and its economic growth. Today I read an interesting economic analysis performed Martin A. Sullivan on the so-called “U.S.'s Multibillion-Dollar Subsidy for Ireland” (See Tax Analysts WTD Daily July 27, 2005).

We all know that transfer pricing and tax havens, individually and in combination, adversely affect the ability of many countries to raise tax revenues. The story of Ireland's success (specially if we talk about GDP growth in the last years) is not of a tax haven but something close. We can say that Ireland is a country that understood the importance of lowering the CIT in order to attract FDI and at the same time use fiscal incentives as a key point to develop its industrial policy. The current state of affairs is that according to the Irish Development Authority, foreign corporations (many of them MNE) employ more than 130,000 Irish residents.

The exercise of Martin Sullivan article is designed to estimate of the amount of "excess" profits U.S. corporations have shifted into Ireland (the subsidy). He starts by referring that Irish subsidiaries of U.S. corporations reported in 2002 $18.3 billion of profit (equal to 15.1 percent of Irish GDP) and then presents estimates that between $1.9 billion and $4.8 billion represent the so-called annual subsidy paid by the U.S. Treasury to Ireland and to U.S. companies doing business in Ireland. That is a lot! even if we start from the lower number. It interesting to note that the author refers to a combination of the low Irish tax rates and leaky U.S. transfer pricing rules as factors for this multibillion-dollar subsidy! For example do you remember a famous US transfer pricing case involving manufacturing in Ireland, the Bausch & Lomb case?


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