by Conor McCabe
‘IT IS A NATURAL RIGHT FOR CITIZENS AND COMPANIES TO ENGAGE IN TAX AVOIDANCE’
Editorial, Finance Dublin, May 2013.
On 9 March 2013 the Financial Times published an article by the writer Christopher Caldwell which dealt with the rising stock market, and why its fortunes seem to have little effect on the majority of the population. ‘Part of the reason people get less giddy about the Dow [Jones Industrial Average] than they did five years ago’ he wrote, ‘is because they have learnt a bit about inequality.’77 Since 2008 it has become increasingly clear that a significant proportion of national and international economic activity oversteps the lives of ordinary people, and that ‘what looks like a recovery, a rally or an increase in consumer confidence may just be the effect of elites passing money among themselves.’ Caldwell said that the ‘tide of liquidity’ unleashed by central banks in response to the crash, ought to have lifted all boats in the harbour. ‘But when the harbour is an equity market,’ he concluded, ‘you won’t find your yacht lifted unless you own one.’
In Ireland the facilitation of elites passing money among themselves is national economic policy. For all intents and purposes, the State is a tax haven.78 The maintenance of this merry-go-round lies at the heart of State legislation regarding business, finance and tax. And although this system is portrayed by the State as dynamic and entrepreneurial, the administrators are as grey and banal as the professions to which they belong. This is the world of stockbroking, accountancy, banking, law and property.
None of this is by accident. The past forty years have been marked by the re-emergence and dominance of rentier capital – that is, income drawn from ‘owning financial assets, rather than working or from owning productive assets’.79 It was facilitated by a profound shift in economic policies around the world, away from the embedded social contract of the post-Second Wold War period and towards so-called free market neoliberalism. And Ireland did not escape this trend, although it did not quite walk the same path as its more progressive brethren in social democratic Europe. Indeed, it could be said that when neoliberalism arrived on European shores, Ireland’s response was: what took you so long?
The type of business activities in Ireland which have the deepest influence over national economic policy today are defined not by production but by administration. This is not to say that indigenous producers of goods are non-existent, but in terms of national economic policy the influence of administration – and in particular financial administration – is out of proportion to that sector’s size and population within Irish society.80 The repeated defence by politicians and professionals of Ireland’s ‘sacrosanct’ corporation tax rate and tax haven status, the lack of proper investigation and prosecution regarding the financial industry, the long history of outright criminality regarding tax, finance and banking involving the highest echelons of the political system – in all of this we are witnessing an indigenous Irish class using the State to protect itself from the State, that is, from the democratic oversights within the State (however truncated those oversights may be), as well as from its own socially destructive behaviour. It would be quite a sight to behold, were it not so depressing.
Ireland’s tax avoidance industry came under the spotlight in May 2013 when the US Senate Permanent Subcommittee on Investigations conducted a hearing into the offshore strategies of the American multinational corporation, Apple Inc. ‘Sending valuable intellectual property rights offshore together with the profits that follow those rights,’ said the subcommittee’s chairman, Carl Levin, ‘is at the heart of Apple’s tax-avoidance strategy.’81 He explained that ‘the key to offshore tax avoidance is transferring the profit-generating potential of that valuable intellectual property offshore so that the profits are directed not to the United States, but to an offshore tax haven.’ In the case of Apple, the company uses ‘a variety of offshore structures, arrangements, and transactions to shift billions of dollars in profits away from the United States and into Ireland, where Apple has negotiated a special corporate tax rate of less than two per cent.’82
The Irish State brought its diplomatic corps into play to defend itself. On 29 May the Irish Ambassador to the US, Michael Collins, wrote to Senators Levin and McCain to tell them that the ‘tax rates attributed to Ireland in the Memorandum… are wrong and misleading.’83 He said that Ireland’s ‘tax rates are set out in statute – so there is no possibility of individual special tax rates being negotiated for companies’ and that either way ‘the companies concerned are not tax-resident in Ireland.’ He finished by expressing his hope that the information provided would be ‘of assistance’ to the senators in their on-going work.
Senators Levin and McCain responded with a joint statement. ‘Records obtained by the subcommittee clearly reflect that, for years, Apple paid Irish tax authorities a nominal rate far below Ireland’s statutory rate of 12.5 per cent, on trading income,’ they said.84 The senators highlighted the fact that Apple’s special arrangement with Ireland was mentioned in evidence given to the subcommittee by Apple executive Tim Cook and the head of tax operations Philip Bullock. ‘Most reasonable people would agree,’ said Levin and McCain, ‘that negotiating special tax arrangements that allow companies to pay little or no income tax meets a common-sense definition of a tax haven.’
This was not the first time Ireland’s (tax-funded) ambassadors had been used to defend tax avoidance. The previous month the Irish Ambassador to France, Paul Kavanagh, wrote to Le Monde to complain about an article which had called Ireland a ‘palm tree tax regime’ that facilitated money laundering and financial fraud.85 Mr Kavanagh, as with Mr Collins in Washington, outlined that the corporation tax rate was 12.5 per cent on trade and 25 per cent on non-trade activities. He said that Ireland does not favour ‘letter-box’ companies which are registered for tax avoidance purposes only. Finally, Mr Collins said that Ireland was using its presidency of the EU to combat tax evasion and to ensure that steps were taken against it. The response of the government to the Permanent Subcommittee seems to have been based on the premise that if you keep on waving your hands and saying you are not a tax haven, somehow the evidence will go away.
The British Prime Minister, David Cameron, when asked about Ireland’s tax policy at the G8 summit in Fermanagh, replied that where a country has a low rate, ‘we need to make sure that the tax is actually paid.’86 It was a somewhat hollow answer – the square mile of the City of London is a global tax avoidance centre that Cameron fully supports – but nonetheless it contained a kernel of truth. The tax rate for corporations in Ireland – especially for multinationals, brass-plates and individuals registered as companies – is in many ways a token figure. The tax benefit comes not so much from the rate itself but from the accountancy procedures and legal structures which envelop it.
Ireland’s corporation tax rate is essentially a totemic figure. The real selling point is the ‘can-do’ approach towards tax avoidance, both at a legislative and regulatory level. In the words of Tax Justice Network founder, Richard Murphy, the real benefits to corporations registered in Ireland comes from the Republic’s ‘relaxed approach to the taxing of foreign dividends and to transfer pricing regulation, [its] relatively easily achieved corporate secrecy’ as well as the fact that it ‘has no controlled foreign company laws or thin capitalisation rules.’87
Ireland’s tax avoidance laws exist for a reason, and that reason has nothing to do with growth or investment. The Irish State is dominated by, and shaped towards, the interests of an indigenous middleman, or comprador, class. This class acts as an intermediary between foreign capital and the resources of the State. This is not a new class within Irish society, nor is this a new relationship. It is one that routes itself through the very structures of the State, and has done so since that State’s formation in 1922. In the past the middlemen were strongest in the cattle industry and banking, in construction, real estate and the sale of natural resources. Today there is an added element to all of this. It is the highly lucrative
trade in the ability of a nation-state to set tax laws and to have those laws recognised internationally. Today, this class – via finance, stockbroking, accountancy and law – trades on that ability, and it has made that class, collectively, very rich indeed.
The best trick the devil ever played, wrote Baudelaire, was to convince the world that he did not exist. The merging of the interests of Ireland’s comprador class with that of the State – not only structurally but with the flag, the culture, the ‘green jersey’ so often referenced by politicians and business leaders – has had the same effect. When a millionaire declares on TV and radio that austerity is in the national interest, he is in fact telling the Irish people that the class he comes from – the class he protects – does not exist. But it does. And it is the Irish people that carry the burden of its continued presence.
CONCLUSION
The 2008 banking crisis was not caused by an outbreak of moral failure or individual weakness. The significant power of Irish banks to dictate economic and monetary policy, and to protect themselves against the negative consequences of such policies, had developed over decades. The social and economic forces which fed and sustained that power run deep within Irish society. The exploration of those power dynamics, their significant strengths and structural weaknesses, has been the central theme of this book, and what follows is a brief summary of those main points.
At the time of its independence, the Irish Free State was a fully-integrated part of the UK economy. Its role within that economy was primarily agricultural, more specifically, the provision of livestock for the finishing farms and slaughterhouses of England. This relationship, not surprisingly, benefitted livestock breeders and traders, who had come to prominence in the post-famine era, as land was cleared and secured for grazing rather than tillage. This became a source of conflict within Irish rural society, between small farmers and graziers. Upon independence, however, it was the graziers who were in the ascent and Irish economic policy developed with their interests very much at heart. The end of formal political links with Westminster meant that the Free State was now an independent country but without an independent economy. In order to secure its future, it needed to expand its industrial base and develop new markets. For this it needed credit, something that a central bank based around a national currency could provide.
The Irish banking system, however, was entirely focused towards the London financial markets and resistant to the development of a national currency subject to democratic oversight and focused on the economic demands of the state. The first banking commission rejected outright any move towards fiscal independence and Irish parliamentary control. The need to expand agricultural and industrial output, in order to provide an economic base for sustainable communities, was pushed to one side. The result was increased emigration, with the Free State providing not only cattle and finance to the UK, but also a steady stream of labour. The lack of industrial growth also meant that there wasn’t a sufficiently strong economic base to provide the standard of living demanded by the aspirational Irish urban middle class, who turned to the state for grants and tax relief in order to fund the type of home ownership and petit-bourgeois lifestyle they read about in the newspapers, and watched on cinema screens.
The emergence of Fianna Fáil as a political force in 1927, followed by its rise to power in 1932, saw a change in aspects of economic policy, with greater use of tariffs to encourage industrial growth. These initiatives were soon hampered by self-inflicted blows. The party kept the parity link with sterling. It also decided to focus on the expansion of production for the home market only. The structural deficiencies within Irish agriculture, including the continued use of the Shorthorn for both dairy and beef production and the serious lack of a food processing industry, remained untouched, as did any attempt to expand exports to anywhere except Britain. The second banking commission recommended the establishment of a central bank, which in its first act outlined its commitment to parity with sterling, a move which immediately undermined the very reason for its existence. Irish credit remained pitched at sterling levels, stifling growth.
The demands placed on the Irish economy in order to maintain parity included periodic deflations, which were timed in line with the dynamics of the British, not Irish, economy, and an obsessive concern with inflation at home. By the end of the 1940s the Irish state was more dependent on Britain then it had been at the time of independence, while an overweight Irish pound stood drenched in sterling and out of breath, its hands on its knees, desperately trying to take a few more steps towards expansion before it collapsed from exhaustion.
The 1952 Ibec report was clear as to the changes in economic policy which Ireland had to undertake in order to expand its economy and provide opportunities for job creation. Its authors simply could not understand why the state persisted in exporting livestock to Britain, given the potential for industrial growth which the slaughter and processing of animal produce would provide. Similarly, the practice by Irish banks of investing in British securities with the full support of the central bank and Irish government seemed bizarre, given the fundamental need for credit and investment in Ireland. Its calls for an expansionary policy, with a fully-funded central bank using deposits to underwrite the Irish pound and provide credit, as well as an agricultural policy which would see the creation of a viable and profitable food processing industry on Irish shores, were dismissed in favour of the pursuit of foreign investment. Such a move allowed the Irish state to appease the banking sector and its cheerleaders in the Department of Finance. It allowed credit and foreign investment to enter the Irish economy without a revaluation of the Irish pound – something that was needed in order for indigenous businesses to attain the level of credit needed for sustainable growth. The state was on a path to industrial expansion, but one which was centred on tax breaks and financial incentives to multinational companies, and not necessarily the development of local industry and indigenous exports.
The expansion in financial investment, construction, and land sales, gave rise to a particular type of Irish capitalist entrepreneur. There was money to be made by providing services to foreign investors. Construction, banking, insurance, property, road haulage, and legal services – these were the areas of commercial activity that gained a commanding presence in the Irish economy, all of which directly benefited from the influx of American, German, British and Dutch companies. At the same time, there was also money to be made by speculating on the boon to the economy which foreign investment brought.
In the 1960s and 1970s the state started to provide these entrepreneurs with a similar range of grants and tax incentives as those offered to multinationals. In the case of office blocks in the 1960s, the state not only funded the speculation, it acted as tenant as well. The PAYE system, first introduced in the late 1950s, became a cash faucet for the government. The revenue generated through the direct taxation of ordinary workers was fed directly to speculators and foreign investors via the litany of tax havens which propped up these new industries. Such was the lack of concern about developing indigenous growth that the country’s natural resources were sold off wholesale without a second thought. In Ireland, the handshake did not secure the deal, the handshake was the deal. The middleman became the dominant force in modern Irish capitalism. The type of local business interests which expanded on the back of foreign finance were all about making the deal happen. Construction, finance, land and law: this was the four-leaf clover, the new lucky charm for the modern Ireland of Lemass.
By the 1970s the trick of foreign investment, and speculation on same, was running out of steam. Growth in the Irish economy relied more and more on construction, both commercial and residential. The notion that exports needed to be linked to the wider economy was given lip-service but little else. The growth in building societies and the entry of banks into the private mortgage market took place alongside moves to strangle public housing as a viable option for working people and the increased use of tax incentives to bolster
owner-occupancy as the only real option open to families. Housing was increasingly portrayed as a cure for all social ills, a bulwark against inflation, a nest-egg for retirement, a full-proof pension plan for the honest worker. It was also a multi-billion pound industry, where standards and security played a very minor role. The Kenny Report was shelved precisely because it threatened to upset the speculation machine. It threatened the livelihoods of the various politicians, bankers, builders and landowners who profiteered from the rezoning game. By the time the Telesis Report was published, only eight per cent of all materials used by foreign companies in Ireland were sourced from Ireland. This was in spite of repeated calls by foreign companies for the development of secondary industries to act as feeders for production. In the late 1980s, the widening of Ireland’s tax relief schemes to include financial services helped to turn the state into a glorified offshore bank.
The 2008 crisis was not a natural disaster. No dams were breached, no bridges destroyed. The crisis was a paper crisis. The scramble to protect that paper brought a wave of destruction across Europe, one that has affected the lives of millions of people. The decision by the Irish government to guarantee the deposits and liabilities of the Irish banking system was a bailout of well-connected bankers, speculators and builders, and their standing army of lawyers, accountants and administrators. It was done to protect a particular strata of society.
Such was the sale of the crisis that not everyone, even of the inner circle, could be saved. There have been bitter fights along the way, and the high-profile case of Sean Quinn and Anglo is one such example. This was not a conflict between classes, however, or two different visions of how Ireland should be. Neither Quinn nor Anglo were calling for the democratic transformation of finance in this battle.