The Irish Economy

The Foundation for Fiscal Studies awards an annual prize to recognise outstanding contributors in the area of Irish fiscal policy. A prize of €1,000 will be awarded, together with a commemorative Gold Medal.

Nominations are invited for work completed during the period 2014 and 2015 which has added to the public knowledge or understanding in areas such as taxation, public expenditure and other related fiscal policy topics. These contributions may include research papers, reports, books, book chapters, blog posts, opinion pieces or any other method which has publically provided new and relevant insights into these topics in Ireland.

Further details in relation to eligibility are contained in the attached call for nomination.

Last year’s prize was awarded in September 2015 to Rónán Hickey and Diarmaid Smyth for their paper – ‘The Financial Crisis in Ireland and Government Revenues‘ – which is available to read on the FFS website by following the link.

The authors presented their paper and received their prize from Minister Harris at an FFS event in the Mansion House – details here.

Interested parties should note that the closing date for nominations is 30th April 2016 and that nominations of worthy work are encouraged from any party including the authors themselves. Nominations for the Prize should be made by email to info@fiscal.ie.

The European Commission have responded to the recent interventions by the US Treasury into the tax related state-aid investigations with this letter from Margrethe Vestager to Jack Lew.

On one of the issues raised by the US Treasury the response is as would be expected:

I also hope we agree that the taxation systems of EU Member States entitle them to tax the profits generated by companies operating in their territory, including US companies.  The Commission has the duty to ensure that these rules are applied in a non-discriminatory manner by excluding preferential treatment in any form that constitutes incompatible State aid.  This does not put into question the US taxation system or go against double taxation treaties concluded by EU Member States.

So we await whether DG Comp are going to conclude that the estimated $120 billion of profits earned by Apple Sales International between 2004 and 2013 were generated in Ireland and so should be taxable in Ireland as opposed to only those profits earned by ASI’s branch in Ireland.  The Commission could also conclude that the allocation of profit to ASI’s Irish branch was “wrong” but if that was to be the case then this ongoing exchange of letters would have been wholly disproportionate.

The Commission are also investigating Apple Operations Europe (AOE).  AOE also has an Irish branch which undertakes manufacturing of a specialised range of computers.  However, ASI is the global hoover of Apple’s profits – it contracts with third-party manufacturers in China (with all agreements signed in the US) and sells on the products to Apple distributors at an “arm’s length price”.  The difference between the fee paid to the manufacturer and the price charged to the distributor is considerable.  Hence, the estimated $120 billion of profits earned by ASI between 2004 and 2013, with 90 per cent of that occurring in the final four years of the period.

ASI is a subsidiary of AOE so it is possible that the Commission could rule that the profits are taxable in Ireland when they are distributed as a dividend by ASI to AOE.  This could potentially bring our 25 per cent Corporation Tax rate into the equation.  But that seems very unlikely.  The focus will probably be on the trading profits earned by ASI, though if it ends up being a dispute over the profit allocated to ASI’s Irish branch we really will be left wondering what all the excitement was about.

How long more will they keep us waiting?  And if a decision is published by DG Comp is there a timeframe within which an appeal to the CJEU must be made?

One of the less notable events over the weekend was the publication of the European Commission’s Country Reports.  The report will form the basis for Country-Specific Recommendations (CSRs) which will be published in May.  Here is the Country Report on Ireland for the few who may be interested – Ireland: Country Report 2016

The Eurozone, Japan, Switzerland and some Scandinavian countries now have negative official interest rates, so they charge commercial banks for holding excess funds at the central bank. The idea is to incentivise them to lend more money instead into the real economy. This has not really been happening: business firms are too nervous to borrow and do not feel the need for extra productive capacity. The European Central Bank is considering whether its charge on bank credit balances should be increased to power up the incentive, that is, whether the negative rate should be even more negative. There are numerous snags attaching to this latest venture into unorthodox policy.
The first is that commercial banks, whose balance sheets remain fragile, find it very hard to make money when interest rates get this low. Healthy bank profits are hardly a priority for most people but loss-making banks are not a very attractive prospect either. The other problem is that negative official interest rates mean that monetary policy is already reaching its limits. Economists have long written about the ‘zero lower bound’ for interest rates: nobody will hold deposits at a cost and will resort instead to cash. Interest rates on demandable deposits are already zero in Ireland (or 0.01% to be more accurate) and some Swiss banks are now levying a charge. If you deposit €1000 they will pay you back only €999, or €995, a year from now. This is not an attractive deal and people will prefer to keep their money in banknotes.
The trouble is that most bank deposits by value are in amounts much larger than €1000. Many business corporations, nonbank financial companies and pension funds keep deposits in the multiple millions. They cannot stuff the filing cabinets with physical banknotes. But they are not captive customers of the commercial banks either. If they can find somebody trustworthy to hold banknotes on their behalf it might be a better deal even if there is a storage cost. It appears that storage costs could be cheaper than the negative interest rates now threatened, particularly given the availability of large denomination notes such as the $100 bill or, even more attractive, the €500 note in the Eurozone. You could fit a million easily into a briefcase in the form of €500 notes. The ECB’s negative rate is currently 0.3% and it may penalise depositors even further at its next monetary policy meeting on March 10th next. Wholesale interest rates on large deposits will inevitably follow the ECB rate. There have been calculations that storing millions in the form of €500 notes would cost less than the likely wholesale penalty if the ECB goes even more negative.
So somebody needs to come up with a cunning wheeze to escape this latest policy cul-de-sac and there are active proposals to, you guessed it, abolish the €500 note. It would not be acceptable to explain that this was necessary because of another policy misadventure, so the spin coming out of both Brussels and Frankfurt is that the €500 note is mainly used by criminals, and since nobody likes criminals, it has got to go. The coincidence of this discovery with the dilemma over negative interest rates is just that, a coincidence.
The logic is impeccable at first glance. Criminals use €500 notes, ban them and this will inconvenience the criminals. Like it did with machine guns. Ban them and, oops, the only ones with machine guns are criminals. Various international law enforcement agencies, including Interpol and Europol, have confirmed that the €500 note is popular with money launderers and drug dealers and there is no reason to doubt them. But there are many billions in €500 notes out there already and the ECB can hardly cancel them. They will continue to circulate in the shadows. There are lots of non-criminal users of large notes, not just horse dealers and bookmakers in Ireland but also wholesale traders in countries outside the Eurozone with dodgy currencies and unreliable money transmission systems. As much as half of all €500 notes is believed to circulate outside the Eurozone, especially in the Balkans, Turkey and Russia. Its predecessor was the German 1000 Deutschmark note which circulated widely in these places and the ECB version was consciously introduced so as to facilitate existing users.
As for the mafia, there have been prosecutions of numerous banks for facilitating their illicit transfers and it is hard to believe that the withdrawal of the largest ECB note will inspire their professional retirement. Readers will recall the spin justifying depositor haircuts in Cyprus including the assertion that the money belonged to the mafia, Russian chapter. They survived.
The proposal to scrap the €500 note is further evidence of the absence of a serious Eurozone macroeconomic policy.