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Many economic commentators doubt the "leprechaun economic" effect (esp. gap between GNI* and "true" GNI) can be fully removed from Irish data.<ref name="eurostat1"/><ref>{{cite web|url=https://www.irishtimes.com/business/economy/ireland-s-economic-figures-still-not-adding-up-1.2899681?mode=sample&auth-failed=1&pw-origin=https%3A%2F%2Fwww.irishtimes.com%2Fbusiness%2Feconomy%2Fireland-s-economic-figures-still-not-adding-up-1.2899681|title=Ireland’s economic figures still not adding up |publisher=Irish Times|date=January 2017}}</ref><ref>{{cite web|url=http://economic-incentives.blogspot.ie/2018/03/what-is-going-on-with-gnp.html|title=What is going on with GNP (again)?|publisher=Seamus Coffey, University College Cork|date=27 March 2018}}</ref>
Many economic commentators doubt the "leprechaun economic" effect (esp. gap between GNI* and "true" GNI) can be fully removed from Irish data.<ref name="eurostat1"/><ref>{{cite web|url=https://www.irishtimes.com/business/economy/ireland-s-economic-figures-still-not-adding-up-1.2899681?mode=sample&auth-failed=1&pw-origin=https%3A%2F%2Fwww.irishtimes.com%2Fbusiness%2Feconomy%2Fireland-s-economic-figures-still-not-adding-up-1.2899681|title=Ireland’s economic figures still not adding up |publisher=Irish Times|date=January 2017}}</ref><ref>{{cite web|url=http://economic-incentives.blogspot.ie/2018/03/what-is-going-on-with-gnp.html|title=What is going on with GNP (again)?|publisher=Seamus Coffey, University College Cork|date=27 March 2018}}</ref>


The problem of Ireland's economic statistics post "leprechaun economics" and "modified GNI" (or GNI*), is captured by the OECD:
The problem of Ireland's economic statistics post "leprechaun economics" and "modified GNI", is captured on page 34 of the OECD Ireland survey:<ref>{{cite web|url=http://www.finance.gov.ie/wp-content/uploads/2018/03/OECD-survey.pdf|title=OECD Ireland Survey 2018|publisher=OECD|date=March 2018}}</ref>:


* On a Debt-to-GDP basis, Ireland's 2015 figure at 73% is not of concern
* On a Debt-to-GDP basis, Ireland's 2015 figure at 73% is not of concern.


* On a Debt-to-GNI* basis, Ireland's 2015 figure at 103% is more serious
* On a Debt-to-GNI* basis, Ireland's 2015 figure at 103% is more serious.


* On a Per Capita basis, Ireland's 2015 figure at $60,000 per capita exceeds every other OECD country except Japan
* On a Per Capita basis, Ireland's 2015 figure at over $60,000 per capita, exceeds every other OECD country, except Japan.


==See also==
==See also==

Revision as of 13:08, 4 April 2018

Nobel Prize-winning economist Paul Krugman
Finance Minister Michael Noonan

Leprechaun economics was a term coined by Nobel Prize-winning economist Paul Krugman in a tweet on 12 July 2016 in response to the publication by the Irish Central Statistics Office (CSO) that Irish GDP had grown by 26.3%, and Irish GNP had grown by 18.7%, in the 2015 National Accounts.[1]

Krugman tweeted: "Leprechaun economics: Ireland reports 26 percent growth! But it doesn't make sense. Why are these in GDP?"[2]

The use of the term received widespread coverage in the Irish and international media.[3][4][5][6][7][8][9][10]

The term "Leprechaun Economics" has been used many times since (including by Krugman himself), to describe distorted/unsound economic data:

  • Krugman in relation to the effects of the US Tax Cuts and Jobs Act[11]
  • Krugman in relation to national statistics from some Eastern European Countries[12]
  • Irish Times in relation to Irish house building completion statistics[13]
  • Bloomberg in relation to US economic data and in particular, US trade deficit figures[14]

The "leprechaun economics" affair has had material consequences in various parts of the Irish economy, including:

  • Proving that Apple's 2015 restructure drove "leprechaun economics" (via an Irish "capital allowances" scheme)[15] has prompted a follow-up EU investigation.[16][17]
  • While Apple's "capital allowances" scheme was made tax free in the 2015 Irish Budget[18], it increased Ireland's EU GDP levy by €380m per annum.[19][20]
  • The CBI introduced a new metric, GNI*, to remove "leprechaun" distortions; GNI* is 30% below GDP,[21][22] but still a material gap above "true" GNI.[23][24][25]

It reaffirmed a suspicion that "leprechaun economics" has been going on in the Irish National Accounts (i.e. GNI vs. GDP) for a longer time.[25]

Official explanations

It was immediately suspected that the driver of "leprechaun economics" was Apple's restructuring of Apple Sales International (ASI) (the focus of the EU Commission's €13bn investigation into alleged illegal Irish State Aid to Apple) onshore to Ireland in January 2015.[26][27] This was disputed by the Central Statistics Office.[28]

The official explanation of the Irish CSO for the "leprechaun economics" economic growth was that it was due to a combination of factors including aircraft purchases (Ireland is a major location of aircraft securitisation SPVs) and the reclassification of corporate balance sheets (i.e. corporate tax inversion).[29]

Finance Minister Michael Noonan clarified 10 days later on RTE News that the driver of the "leprechaun economics" was Ireland's closing of the double Irish tax structure in 2014/15 (agreed under OECD guidelines)[30] which led to some multinationals moving intellectual property assets onshore to Ireland from the Caribbean.[31]

EU GDP levy

While the drivers of Ireland's "leprechaun economics" growth might not have produced tangible additional tax revenues for Ireland, the 26.3% rise in Ireland's GDP directly increased Ireland's annual EU budget levy (which is decided as % of GDP) by an estimated €380m per annum.[19][20]

The Irish Government appealed to the EU to amend the terms of the GDP levy (to a GNI approach) so that it would not incur the full effect of the €380m increase. There were unsubstantiated claims by the Irish Government that the effective amount would be reduced to €280m per annum.[32]

The affair also prompted an audit by Eurostat into Ireland's economic statistics (including questions from the IMF); however no irregularities ensued and it was accepted that the Irish CSO had followed the Eurostat guidelines, as detailed in the Eurostat ESA 2010 Guidelines manual, in preparing the 2015 National Accounts.[33]

Proof of Apple

University College Cork economist Seamus Coffey has written in detail on Apple's Irish structure[34] and is often quoted in the International media.[35]

He is also Chairman of the State's "Irish Fiscal Advisory Council"[36] and authoured the State's recent investigation of Irish Corporate Taxation.[37][38]

Coffey had speculated, like other economists in Ireland[26], that Apple was the source of "leprechaun economics", when it restructured ASI in January 2015.

Apple had been using a hybrid variation of the "double Irish" tax scheme, but with one company (ASI) instead of two, which the EU Commission challenged as illegal State Aid.

However, nobody could confirm Apple was the source in the absence of full 2015 and 2016 Irish National Accounts Statistics.

On 24 January 2018, he published a long analysis on his respected economics blog confirming Apple was the source: (quoting from his article)[15]:

We know Apple changed its structure from the first of January 2015. This is described in section 2.5.7 on page 42 of the Commission's decision. This would be useful but bar telling us that the new structure came into operation on the first of January 2015 everything else is redacted. Although the details of the new structure were not revealed it was still felt that Ireland was still central to the structure and maybe even more so with the revised structure. Many of the dramatic shifts that occurred in Ireland's national accounts and balance of payments data were attributed to Apple but this was largely supposition – even if it was likely to be true. Now we know it to be true.

Coffey additionally proved that rather than use the standard "double Irish" scheme (this route was still open in January 2015), Apple opted for the Irish "capital allowances for intangible assets scheme".[15]

Further Apple controversy

Finance Minister Paschal Donohoe

It is prohibited under Ireland's corporation tax code (Section 291A(c) of the Irish Taxes and Consolation Act 1997) to use the Irish "capital allowance" scheme for reasons that are not "commercial bona fide reasons" and in for schemes where the main purpose is "... the avoidance of, or reduction in, liability to tax".[39][40][41]

The 2017 Paradise Papers leaks revealed that Apple and its lawyers, Applebys, were looking for a replacement for the ASI structure in 2014. They considered a number of tax havens (especially Jersey). Some of the disclosed documents leave little doubt as to the key drivers of Apple's decision making.[42][43][44]

If Irish Revenue waived its anti-avoidance measures in Section 291A(c) to Apple's benefit, it could result in a further EU Commission State Aid investigation.

Mr Coffey estimates that since the 2015 restructuring, Apple has avoided Irish corporate taxes totalling circa at €2.5-3bn per annum (at the 12.5% rate).[15][45]

The potential second EU Apple State Aid fine for the 2015-2018 (inclusive) period, could therfore reach over €10bn, excluding any interest penalties.[16][46]

The financial media noted that the then Finance Minister Michael Noonan, had increased the tax relief threshold for the Irish "capital allowances" scheme from 80% to 100% in the 2015 budget (i.e. reduce the effective Irish corporate tax rate from 2-3% to 0%). This was changed back in the subsequent 2017 budget by Finance Minister Paschal Donohoe, however firms which had started their Irish "capital allowances" scheme in 2015 (like Apple), were allowed to stay at the 100% relief level for the duration of their scheme [47][18], which can, under certain conditions, be extended indefinitely.[41]

The EU Commission has now asked for details on Apple's Irish structure post their January 2015 ruling.[17]

Estimated Apple cost

To the Irish financial media, it looked as if Apple would pay no Irish taxes on its new Irish "capital allowances" scheme; however, the Irish State would pay an extra €380m in its annual EU GDP levy.[19][20]

Irish media speculated that Finance Minister Michael Noonan justified this cost on the basis that the increase in Irish GDP/GNP (even if completely "artificial") would:[48][49]

  • reduce Irish borrowing costs (by reducing Irish Debt-to-GDP), and also
  • help to revive the "Celtic Tiger" animal spirits in the Irish consumer.

However, a similar "leprechaun economics" jump in Irish corporation tax ("CT") returns for 2015 (Irish CT rose 49%, or €2.2bn, in 2015 to €6.87bn) hinted that Noonan might have an additional incentive. Apple's main Irish subsidiary, ASI, was recording profits of €34.3bn in 2014 (pre restructuring),[15] while the total rise in 2015 intangible assets claimed under Irish "capital allowances" was €26.220bn.[50] This would have left over €10bn in unshielded annual Irish profits for Apple post its 2015 restructuring, which would incur annual Irish CT of over €1.3bn. This would have offset the extra EU GDP levies of €380m per annum "leprechaun economics" caused the Irish exchequer. The "step-up" in Irish CT in 2015 is mainly due to Apple and is expected to last until 2020 when Apple's new Irish "capital allowances" scheme ends ("clawbacks" expire after 5 years[51]). This puts a question over Irish CT sustainability beyond 2020, which the Irish Government recognises and is investigating.[37][38][52]

When Apple's increased Irish CT (offset by additional EU GDP levies) is added to Apple's annual payroll in Ireland (circa 6,000 employees at over €100,000 per employee in pay and taxes[53]), it shows that Apple provides, at least, over €2bn per annum to the Irish economy, which is expected to last until 2020 (when the "capital allowances" scheme expires).[52]

This figure compares with the latest estimate of Apple's EU Commission fine of €13.85bn[15] and interest penalties of another circa €6bn.[34][15]

Introduction of GNI*

File:Apple Sales International (ASI) Notional Tax Due.png
"ASI Irish Profits & Lost Taxes (2014-2004)" Mr. Seamus Coffey
"EU 2011 Ratio of GNI to GDP" (Eurostat National Accounts, 2011)

From the mid-2000s, US multinationals have materially increased their use of the Irish "double Irish" tax avoidance scheme (see table for Apple's ASI).[42]

By 2011, Ireland's ratio of GNI to GDP, had fallen to 80% (only Luxembourg was lower at 73%). The EU27 average is closer to 100% (see GNI table).[54][25]

An EU Commission report showed that from 2010 to 2015, over 23% of Ireland's GDP was represented by untaxed multinational net royalty payments.[55]

Irish financial commentators note how difficult it is to draw comparisons with other economies.[25] The classic example is the comparison of Ireland's indebtedness (Public and Private) when expressed "per capita" versus when expressed "as % of GDP". On a 2017 "per capita" basis, Ireland is one of the most leveraged OECD countries (both on a Public Sector and on a Private Sector Debt basis). On a 2017 "% of GDP" basis, however, Ireland is deleveraging rapidly.[56][57]

The "capital allowances for intangibles" scheme is even more distorting on Irish GNI/GNP/GDP as it behaves like a quasi-corporate inversion, as seen with Apple.

In response to these issues, and as a direct result of the "leprechaun economics" affair, the Governor of the Central Bank of Ireland convened a special steering group (Economic Statistics Review Group) to recommend economic statistics that would better represent the true position of the Irish economy. The result was the creation of a new metric - "modified Gross National Income" (or GNI* for short). The difference between GNI* and GNI due to having to deal with two problems (a) The retained earnings of re-domiciled firms in Ireland (where the earnings ultimately accrue to foreign investors), and (b) depreciation on foreign-owned capital assets located in Ireland, such as intellectual property (which inflate the size of Irish GDP, but again the benefits accrue to foreign investors).[58][59]

Post "leprechaun economics", 2016 Irish GNI* (€190bn) is 30% below 2016 Irish GDP (€275bn) and Irish Debt/GNI* goes to 106% (Irish Debt/GDP was 73%).[21][22]

Given that pre "leprechaun economics", Irish GNI (which is affected by the "capital allowance" scheme[23]), was over 20% below Irish GDP, commentators expected that post "leprechaun economics", Irish GNI* would be circa 40% below Irish GDP.[23][24][25]

Many economic commentators doubt the "leprechaun economic" effect (esp. gap between GNI* and "true" GNI) can be fully removed from Irish data.[23][60][61]

The problem of Ireland's economic statistics post "leprechaun economics" and "modified GNI", is captured on page 34 of the OECD Ireland survey:[62]:

  • On a Debt-to-GDP basis, Ireland's 2015 figure at 73% is not of concern.
  • On a Debt-to-GNI* basis, Ireland's 2015 figure at 103% is more serious.
  • On a Per Capita basis, Ireland's 2015 figure at over $60,000 per capita, exceeds every other OECD country, except Japan.

See also

References

  1. ^ "National Income and Expenditure Annual Results 2015". Central Statistics. 12 July 2016.
  2. ^ "Leprechaun Economics". Paul Krugman (Twitter). 12 July 2016.
  3. ^ "'Leprechaun economics' - Ireland's 26pc growth spurt laughed off as 'farcical'". Irish Independent. 13 July 2016.
  4. ^ "Concern as Irish growth rate dubbed 'leprechaun economics'". Irish Times. 13 July 2016.
  5. ^ "Blog: The real story behind Ireland's 'Leprechaun' economics fiasco". RTE News. 25 July 2017.
  6. ^ "Irish tell a tale of 26.3% growth spurt". Financial Times. 12 July 2016.
  7. ^ ""Leprechaun economics" - experts aren't impressed with Ireland's GDP figures". thejournal.ie. 13 July 2016.
  8. ^ "Irish tell a tale of 26.3% growth spurt". Financial Times. 12 July 2016.
  9. ^ "'Leprechaun economics' leaves Irish growth story in limbo". Reuters News. 13 July 2016.
  10. ^ "'Leprechaun Economics' Earn Ireland Ridicule, $443 Million Bill". Bloomberg News. 13 July 2016.
  11. ^ "Leprechaun Economics and Neo-Lafferism". New York Times. 8 November 2017.
  12. ^ "Leprechauns of Eastern Europe". New York Times. 4 December 2017.
  13. ^ "Housing data reveals return of 'leprechaun economics'". Irish Times. 21 April 2017.
  14. ^ "The U.S. Has a 'Leprechaun Economy' Effect, Too". Bloomberg. 19 July 2017.
  15. ^ a b c d e f g "What Apple did next". Seamus Coffey, University College Cork. 24 January 2014.
  16. ^ a b "Why €13bn Apple tax payment may not be the end of the story". The Sunday Business Post. 28 January 2018.
  17. ^ a b "EU asks for more details of Apple's tax affairs". The Times. 8 November 2017.
  18. ^ a b "Change in tax treatment of intellectual property and subsequent and reversal hard to fathom". Irish Times. 8 November 2017.
  19. ^ a b c "Now 'Leprechaun Economics' puts Budget spending at risk". Irish Independent. 21 July 2016.
  20. ^ a b c "Leprechaun economics pushes Ireland's EU bill up to €2bn". Irish Independent. 30 September 2017.
  21. ^ a b "CSO paints a very different picture of Irish economy with new measure". Irish Times. 15 July 2017.
  22. ^ a b "New economic Leprechaun on loose as rate of growth plunges". Irish Independent. 15 July 2017.
  23. ^ a b c d "Globalisation at work in statistics — Questions arising from the 'Irish case'" (PDF). EuroStat. December 2017.
  24. ^ a b "Ireland's deglobalised data to calculate a smaller economy". Financial Times. 17 July 2017.
  25. ^ a b c d e "CRISIS RECOVERY IN A COUNTRY WITH A HIGH PRESENCE OF FOREIGN OWNED COMPANIES" (PDF). IMK Institute, Berlin. January 2017.
  26. ^ a b "Apple tax affairs changes triggered a surge in Irish economy". The Irish Examiner. 18 September 2016.
  27. ^ "Absolutely Fascinating - Apple's EU Tax Bill Explains Ireland's 26% GDP Rise". Forbes. 8 September 2016.
  28. ^ "'Leprechaun Economics' not all down to Apple move, insists CSO". Irish Independent. 9 September 2016.
  29. ^ "Handful of multinationals behind 26.3% growth in GDP". Irish Times. 12 June 2016.
  30. ^ "Ireland Abolish Double Irish Tax Scheme". The Guardian. 14 October 2014.
  31. ^ "Economy grew by 'dramatic' 26% last year after considerable asset reclassification". RTE News. 12 July 2016.
  32. ^ "Ireland to avoid EU €280m 'leprechaun economics' penalty". Irish Independent. 23 September 2016.
  33. ^ "'Leprechaun economics': EU mission to audit 26% GDP rise". Irish Times. 19 August 2016.
  34. ^ a b "Apple Sales International–By the numbers". Seamus Coffey, University College Cork. 21 March 2016.
  35. ^ "Apple may have to repay millions from Irish government tax deal". The Guardian. 30 September 2014.
  36. ^ "Chairman, Fiscal Advisory Council: 'There's been a very strong recovery - we are now living within our means'". Irish Independent. 18 January 2018.
  37. ^ a b "Minister Donohoe publishes Review of Ireland's Corporation Tax Code". Department of Finance. 21 December 2017.
  38. ^ a b "REVIEW OF IRELAND'S CORPORATION TAX CODE, PRESENTED TO THE MINISTER FOR FINANCE AND PUBLIC EXPENDITURE AND REFORM BY MR. SEAMUS COFFEY" (PDF). Department of Finance. 30 January 2017.
  39. ^ "Capital allowances for intangible assets". Irish Revenue. 15 September 2017.
  40. ^ "Intangible Assets Scheme under Section 291A Taxes Consolidation Act 1997" (PDF). Irish Revenue. 2010.
  41. ^ a b "Capital Allowances for Intangible Assets under section 291A of the Taxes Consolidation Act 1997 (Part 9 / Chapter2)" (PDF). Irish Revenue. February 2018.
  42. ^ a b "After a Tax Crackdown, Apple Found a New Shelter for Its Profits". New York Times. 6 November 2017.
  43. ^ "BBC Panorama Special Paradise Papers Apple Secret Bolthole Revealed". BBC News. 6 November 2017.
  44. ^ "Apple used Jersey for new tax haven after Ireland crackdown, Paradise Papers reveal". Independent. 6 November 2017.
  45. ^ "Apple tax bill could climb by €9bn as firms dig in". New York Times. 28 January 2018.
  46. ^ "Apple could owe billions more in tax due to its restructured tax arrangements since 2015 - Pearse Doherty TD". Sinn Fein. 25 January 2018.
  47. ^ "Tax break for IP transfers is cut to 80pc". Irish Independent. 11 October 2017.
  48. ^ "Sean Whelan: Making the most of leprechaun economics". The Sunday Business Post. 19 July 2016.
  49. ^ "Leprechaun-proofing economic data is no easy task". The Times. 9 March 2017.
  50. ^ "An Analysis of 2015 Corporation Tax Returns and 2016 Payments" (PDF). Revenue Commissioners. April 2017.
  51. ^ "Corporate Taxation in Ireland 2016" (PDF). Industrial Development Authority (IDA). 2018.
  52. ^ a b "Strong corporate tax receipts 'sustainable' until 2020". Irish Times. 12 September 2017.
  53. ^ "Average earnings at semi-State top wages at Google". Irish Independent. October 2012.
  54. ^ "International GNI to GDP Comparisons". Seamus Coffey, University College Cork. 29 April 2013.
  55. ^ "Europe points finger at Ireland over tax avoidance". Irish Times. 7 March 2018.
  56. ^ "Who owes more money - the Irish or the Greeks?". Irish Times. 4 June 2015.
  57. ^ "Why do the Irish still owe more than the Greeks?". Irish Times. 7 March 2017.
  58. ^ "Report of the Economic Statistics Review Group". Central Statistics Office. 4 February 2017.
  59. ^ "Leprechaun-proofing economic data". RTE News. 4 February 2017.
  60. ^ "Ireland's economic figures still not adding up". Irish Times. January 2017.
  61. ^ "What is going on with GNP (again)?". Seamus Coffey, University College Cork. 27 March 2018.
  62. ^ "OECD Ireland Survey 2018" (PDF). OECD. March 2018.