# Is Ireland Really the World's Richest Country?

An episode of [Patrick Boyle On Finance](https://invisiblenetwork.ai/podcast/1547740313), 14 Oct 2023, 24 min.

Audio: https://anchor.fm/s/fc0914e0/podcast/play/92761809/https%3A%2F%2Fd3ctxlq1ktw2nl.cloudfront.net%2Fstaging%2F2024-9-8%2F387759563-44100-1-bfe5f89699b41fd7.mp3

Send us a textOil rich countries have long used sovereign-wealth funds to store their windfall profits from periods of high prices for future years when hard times might arise. Ireland on Tuesday created its own sovereign wealth fund thanks to outsize tax revenues from international companies seeking to lower their tax bills. In the past eight years, the country of five million people has watched its corporate tax income triple to the tune of 22.6 billion euros last year, equivalent...

## Transcript

[0:00] Hello and welcome you are listening to Patrick Boyle on
[0:03] Finance, a podcast exploring ideas from quantitative finance,
[0:08] examining events occurring in markets right now and financial
[0:11] history to see what lessons can be taken away, including
[0:15] interviews with some of the most interesting people in the world
[0:18] of finance. To learn more about the podcast,
[0:20] visit on finance.org. If you look at a list of
[0:29] countries ranked by GDP per capita, Ireland comes in as one
[0:34] of the richest nations in the world.
[0:36] According to the IMF, Irelande GDP per capita is $145,000, the
[0:42] highest in the world and nearly three times that of the UK.
[0:46] Ireland also has the fastest growing economy in the EU.
[0:50] The country's GDP grew 12.2% last year despite a significant
[0:56] slowdown in the global economy. The Irish economy's growth in
[1:00] the fourth quarter of 2022 was so strong that it's single
[1:04] handedly kept the eurozone out of recession that year.
[1:08] Corporation tax receipts have more than tripled in the past
[1:12] eight years, hitting a record €22.6 billion last year.
[1:18] Tax receipts have been coming in so fast that the government
[1:21] expects a €10 billion surplus this year and the country is
[1:26] setting up a sovereign wealth fund and a public investment
[1:29] fund to finance infrastructure projects in the country.
[1:34] It may not surprise you that these figures have provoked some
[1:38] skepticism, As for most of Ireland's history, the economy
[1:42] underperformed, and when you visit, it doesn't necessarily
[1:46] strike you as an unusually wealthy place.
[1:50] Ireland's current unemployment rate of 4% contrast strikingly
[1:55] with its 15% level in the early 20 Tens when the country needed
[2:00] an EU lifeline amid the debt crisis that engulfed countries
[2:04] like Greece, Spain and Ireland. So how did all of this happen?
[2:09] Well, we need to look at some of Ireland's economic history.
[2:13] Ireland won its independence from Britain in 1922, but as a
[2:18] result of the Civil War the Free State started out with a very
[2:22] serious budget deficit which wasn't fully cleared until 1931.
[2:27] In 1985 Ireland's GDP per capita was around 6000 U.S. dollars.
[2:34] This compared to around $9000 for France, Germany and the UK.
[2:39] According to the economic historian Kevin O'Rourke, the
[2:43] Irish economy remained underdeveloped for an extended
[2:47] period of time after partition from the UK due to its continued
[2:51] excessive dependence on an underperforming British economy.
[2:55] He argues that European integration, which reduced
[2:59] dependence on trade with 1 country, substantially improved
[3:04] the Irish economy. In the 1990s, Ireland's GDP per
[3:08] capita began converging towards its European neighbors, but it
[3:12] really took off towards the end of that decade.
[3:16] Between 1995 and 2000, Ireland's growth averaged 9.4% and in 2001
[3:23] it had the highest GDP per capita in Western Europe,
[3:27] earning it the nickname the Celtic Tiger.
[3:31] Ireland's economy was helped by its membership of the EU, which
[3:35] invested billions of dollars into Irish infrastructure.
[3:39] But other countries that joined the EU around the same time saw
[3:43] nothing like the growth experienced in Ireland.
[3:46] It was really when the iPhone, the search engine and social
[3:49] networks were invented in Ireland that the economy took
[3:53] off. Now, I know a few of you are
[3:56] already disputing that these technologies were invented in
[3:59] Ireland. You're looking at the back of
[4:01] your iPhones that, say, designed in California, assembled in
[4:04] China, thinking Patrick's got this wrong.
[4:07] But if they weren't invented in Ireland, why would so much of
[4:11] the intellectual property of firms like Apple, Alphabet, Meta
[4:15] and so on be held in their Irish corporate entities?
[4:19] We'll get to that in just a minute.
[4:22] According to Patrick Hanahan, the former governor of the
[4:26] Central Bank of Ireland, Ireland is a prosperous country, but not
[4:30] as prosperous as is often taught.
[4:32] Because of the inappropriate use of misleading, albeit
[4:36] conventional, statistics. Ireland's GDP is distorted by
[4:41] the presence of more than 1500 multinational firms and the fact
[4:46] that it's the world's leading hub for aviation leasing.
[4:50] A handful of these multinationals, which include
[4:53] most of the world's top tech and pharma firms, are so big that
[4:58] when they make accounting changes, the nation's GDP
[5:01] figures can be pushed to breaking point.
[5:04] Let's look at the drivers of Ireland's economic success over
[5:08] the last few decades. Why it now has a sovereign
[5:11] wealth fund. Try to understand how it
[5:13] transformed from one of Europe's poorest countries into one of
[5:16] its richest. And understand how accounting
[5:19] changes at Apple led to Ireland's 34.4% rise in GDP in
[5:25] 2015. In the 1990s Ireland became a
[5:29] hotspot for U.S. companies due to business friendly
[5:32] legislation, a well educated English speaking workforce and
[5:37] its EU membership meaning that it could provide tariff free
[5:41] access to the EU. Its transformation from an
[5:44] agrarian economy to a knowledge based economy began when the
[5:48] nation adopted sound fiscal and monetary policies, slashed its
[5:53] corporate tax rate from 40% to 12 1/2% and reduced red tape.
[5:58] The 2002 Index of Economic Freedom, published by the Wall
[6:02] Street Journal, ranked Ireland the world's fourth freest
[6:06] economy in the world at the time.
[6:08] It was suddenly a great place to do business.
[6:12] Unemployment fell rapidly in the 1990s.
[6:15] About 415,000 extra jobs were filled in the country, an
[6:20] increase of 35%, virtually all of it in the private sector.
[6:25] By 2001, Ireland's unemployment rate was below that of the
[6:30] United States. Net migration changed from 5000
[6:34] people leaving the country in 1993.
[6:38] To almost 23,000 people moving to Ireland in 1998.
[6:43] By last year there were 950 US businesses operating in Ireland,
[6:49] employing just under 10% of the workforce, the biggest being
[6:53] Apple, Facebook, Alphabet, Amazon and Pfizer.
[6:58] The passing of the 1997 Taxes and Consolidated Acts laid the
[7:04] legal foundations for what are known as Base Erosion and Profit
[7:08] Shifting or BEPS, tools that are used by US multinationals in
[7:12] Ireland to achieve an effective Irish corporate tax rate of
[7:16] between 0 and 2 1/2%. This is, of course, the reason
[7:21] that so much tech and pharmaceutical IP is held in
[7:25] Irish corporate structures. US multinationals invested
[7:30] billions of dollars in Ireland because the country provided
[7:33] them with a stable low tax rate. The low corporate tax rate was
[7:38] so important to Ireland that during Europe's debt crisis in
[7:42] 2010, the Irish government refused to raise corporate tax
[7:46] to secure a bailout from the IMF, opting instead to cut the
[7:50] minimum wage and social safety net to make austerity savings.
[7:56] The Economist magazine described how Ireland had dealt with the
[7:59] economic problems, saying that among the bailout countries in
[8:03] Europe, Ireland had become a star pupil, enacting reforms
[8:08] with an almost masochistic relish, while other countries in
[8:12] a similar position complained. In 2013, Apple CEO Tim Cook and
[8:18] Philip Bullock, the company's head of tax operations, were
[8:22] called in front of Congress to defend.
[8:25] Apple's tax tactics. US corporations were taxed at
[8:29] 35% at the time on their worldwide income, but levies on
[8:34] overseas income were deferred until the funds were brought
[8:37] back to the United States. Cook told the senators that
[8:41] Apple Pay all of the taxes that they owe around the world.
[8:45] But that they keep their foreign income in their Irish
[8:48] subsidiary, Apple Operations International, as it would make
[8:52] no sense to repatriate those profits to the United States and
[8:56] be taxed 35%. Philip Bullock, Apple's tax
[9:01] expert, explained to the Senate committee that Apple Operations
[9:05] International is incorporated in Ireland.
[9:08] Thus, under U.S. tax law, it's not tax resident in the United
[9:12] States. That seemed clear enough until
[9:15] his next sentence. AOI is also not tax resident in
[9:20] Ireland because it doesn't meet the residency requirements of
[9:24] Irish law. This is because it was managed
[9:27] from abroad. It's Irish according to American
[9:31] law, but not Irish according to Irish law, and neither country
[9:35] taxes foreign companies. In 2016, the European Commission
[9:41] ruled that Apple had to pay Ireland 14 1/2 billion dollars
[9:46] in taxes. This was the largest tax fine in
[9:49] history. The ruling said that Ireland had
[9:52] given Apple tax breaks that were illegal under EU law and that
[9:57] the country had to recover that money with interest.
[10:01] When interest and penalties were included, the fine would have
[10:04] reached close to €20 billion. Many outsiders thought of this
[10:09] as a huge win for Ireland, a tax windfall.
[10:12] The Irish government instead disagreed with the ruling, as
[10:16] did the majority of the country's population, which may
[10:20] seem odd in light of the economic difficulties the
[10:23] country had just gone through. The banking crisis a few years
[10:27] earlier had led to an €85 billion bailout, a housing price
[10:32] crash, an economic depression and unemployment reaching 14.6%
[10:37] in 2012. The Irish government appealed
[10:41] the European Commission ruling. Saying that there had been no
[10:45] violation of Irish tax law and that the Commission's action was
[10:49] an intrusion into Irish sovereignty as national tax
[10:53] policy is excluded from EU treaties.
[10:57] So why did Ireland not want to accept this tax windfall?
[11:01] Well, US controlled multinationals make up 25 of
[11:05] Ireland's top 50 companies pay over 80% of all Irish corporate
[11:11] taxes. Directly employ 10% of the Irish
[11:15] labor force, indirectly pay half of Irish payroll taxes and their
[11:20] 57% of all non farm OECD value add to the Irish economy.
[11:26] The Irish Government deemed that missing out on this $20 billion
[11:31] tax gain was worthwhile as it was more important to make the
[11:36] country an attractive home for large companies than to get a
[11:40] one time windfall. In July 2020 the appeal was
[11:44] granted and the fine was struck down by the European General
[11:48] Court. So why do accounting changes at
[11:51] firms like Apple have such a big effect on the Irish economy
[11:55] then? Well, in 2015 Ireland bowed to
[11:59] international pressure and abolished a tax loophole that
[12:02] was known as the Double Irish. The effect of closing this
[12:06] loophole meant that some large companies who had used Caribbean
[12:10] islands to house their intellectual property broaded
[12:14] onshore to Ireland instead. US businesses quickly began
[12:19] moving hundreds of billions of dollars in intellectual property
[12:22] to Ireland, things like patents and research.
[12:26] Moving this intellectual property allowed some companies,
[12:30] especially tech giants, to register their profits in
[12:33] Ireland, even if much of the output was made and consumed
[12:37] elsewhere. This is because it's easy to
[12:40] argue that the patent for a pharmaceutical product or the
[12:44] computer code at a tech firm generated the profit rather than
[12:49] the manufacturing or sale of a physical product.
[12:53] U.S. companies rushed to transfer patents from the
[12:56] Caribbean or other low tax jurisdictions like Jersey to
[13:01] Ireland in order to remain tax compliant, which resulted in
[13:05] greater profits accruing to the balance sheets of companies
[13:09] domiciled in Ireland. The effect was large enough that
[13:13] it inflated Ireland's GDP by 26% that year.
[13:18] This number was later revised to 34.4%.
[13:22] Even if much of the increase wasn't visible in terms of the
[13:26] real economy, Ireland got a further boost in GDP during the
[13:30] pandemic due to the surge in sales for the big US digital and
[13:34] pharma companies that operate in the country.
[13:38] The reason this happens relates to how GDP is measured.
[13:42] GDP is supposed to measure a country's economic output by
[13:47] summing up four things. Government spending, Household
[13:50] consumption. Investment and the difference
[13:53] between exports and imports. In practice, more exports means
[13:58] higher GDP. However, GDP doesn't really
[14:01] distinguish between different types of exports.
[14:05] To take advantage of Ireland's low corporate tax rate, many
[14:09] multinational companies claim that most of their business
[14:12] takes the form of exports from the Irish subsidiaries.
[14:16] The precise mechanism is a bit complicated, but the basic idea
[14:20] is that when a company like Apple sells an iPhone outside of
[14:25] the United States, it claims that most of the value comes
[14:29] from research and development operations in Ireland.
[14:33] In other words, despite the fact that an iPhone is designed in
[14:36] California and built in China, when you buy one, most of the
[14:41] money goes to Apple's Irish subsidiary.
[14:44] This is why in 2018, the IMF calculated that 1/4 of Ireland's
[14:49] growth was actually down to iPhone sales.
[14:53] The economist Paul Krugman described this boost to the
[14:56] Irish economy as leprechaun economics on Twitter at the
[15:00] time, a term that would get you cancelled today.
[15:03] You can't just throw around the L Word like that, but this was
[15:07] seven years ago when you could say whatever you wanted.
[15:10] Brad Setzer, a senior fellow at the Council on Foreign
[15:14] Relations, explains that a lot of the crazy growth being seen
[15:18] in Ireland is often phantom growth when the Irish subsidiary
[15:23] of AUS Multinational buys the IP of another subsidiary of the
[15:28] same group, like the way Apple Ireland bought Apple Jersey in
[15:33] 2015. It raises Ireland's reported GDP
[15:37] without changing really anything about Ireland's real economy.
[15:42] This is well understood in Ireland, where the Central
[15:45] Statistics Office produces a data series GNI star that is
[15:50] meant to describe the actual Irish economic activity, which
[15:54] is about half the size of the reported Irish economy as
[15:58] expressed by GDP. Irish economic statistics make
[16:02] very little sense because of these distortions.
[16:06] Apple Ireland buying intellectual property from Apple
[16:09] Jersey looks like an import in Irish economic statistics even
[16:14] though no real economic activity has taken place.
[16:18] Apple is just making accounting changes to minimize their
[16:21] international taxes. Philip Lane, the former chief
[16:25] economist of the Irish Central Bank, explained in a paper that
[16:30] things like the depreciation of intellectual property, the
[16:34] depreciation of aircraft leases and the factor income of re
[16:38] domiciled companies, companies being headquartered in Ireland
[16:42] for tax purposes but having little economic activity in the
[16:45] country needs to be accounted for if Irish economic statistics
[16:50] are to make any sense at all. These adjustments, according to
[16:54] his calculations, subtract €90 billion in 2021 from Irish GDP,
[17:01] 70 billion for the depreciation of intellectual property and 10
[17:05] billion each for both aircraft leasing and the factor income of
[17:10] redomiciled companies, while Ireland adjusts their economic
[17:15] data for these distortions. Ireland's measured GDP gets
[17:19] entered into the euro area's aggregate GDP data, which messes
[17:24] up European trade statistics. Brad Setzer argues that since
[17:28] 2015, a significant amount of the volatility in overall
[17:33] European investment is tied to Irish tax transactions rather
[17:38] than real economic activity. While a double digit percentage
[17:42] move in industrial production is rare for almost any country,
[17:46] Ireland has recorded 14 of them in the last 24 months.
[17:51] Ireland detailed plans this week to transform one of Europe's
[17:55] rare budget surpluses into a sovereign wealth fund.
[17:59] This is expected to grow to over $100 billion in the next 12
[18:04] years and hopefully protect the economy from future downturns.
[18:08] Usually you see sovereign wealth funds in countries like Saudi
[18:12] Arabia or Norway with windfall profits from high commodity
[18:16] prices, not in countries that have just collected a lot of
[18:20] taxes, like Ireland did. Ireland has been extremely rich
[18:24] before, during the Celtic Tiger boom that ended with the credit
[18:28] crunch at the time, Charlie Mccreevey, the finance minister,
[18:32] was quoted as saying. When you have it, you spend it.
[18:36] On his watch, public spending doubled and most of the wealth
[18:40] was squandered. This time around, the government
[18:43] in Ireland is being more careful.
[18:46] Irish central bankers, politicians and economists today
[18:50] constantly warn that Ireland's corporation tax bonanza could
[18:54] disappear just as quickly as it appeared.
[18:57] The Irish government is very reliant on taxes on American
[19:02] businesses to fund spending on healthcare, education and other
[19:06] essential services. In 2021, it derived 17% of its
[19:11] tax revenue from levies on corporate profits.
[19:14] By comparison, the US government derived just 5.3% of its revenue
[19:20] from taxes on profits. According to the Irish Fiscal
[19:23] Advisory Council, just three companies paid a third of all
[19:28] corporate tax revenue between 2017 and 2021.
[19:33] They didn't name those companies in their report, but Brad Setzer
[19:37] told the Wall Street Journal the tax records indicate they were
[19:41] Apple, Microsoft and Pfizer. The tax revenues could disappear
[19:45] for Ireland if one of these huge multinationals went the way of
[19:49] Nokia or BlackBerry. Another fear is that the US
[19:53] government could change its tax code to make it more attractive
[19:56] to move intellectual property back to the United States, or
[20:00] make it more expensive to locate intellectual property abroad
[20:05] before getting too upset about companies minimizing their
[20:08] taxes. We should remember that the
[20:11] politicians who complain about this also set these rules and
[20:15] are aware of how companies work around them.
[20:18] When Tim Cook and Apple's head of taxes testified in front of
[20:22] Congress a decade ago, they did not conceal any of Apple's tax
[20:27] strategies. They explained why they were
[20:29] doing what they were doing and what changes in American tax
[20:33] policies would encourage them to repatriate profits.
[20:37] Ireland has benefited greatly from attracting multinational
[20:40] companies to do business in the country.
[20:43] But we have to be careful when looking at the economic
[20:46] statistics as they don't necessarily represent what's
[20:49] happening on the ground. In Ireland, A2 tiered economy
[20:53] has emerged 1 measured by GDP. That's distorted by
[20:57] multinationals and the value of their intellectual property.
[21:01] And then a far less exciting one exists that relates to the real
[21:05] economic activity occurring in the country.
[21:08] The trillions of dollars of international business that's
[21:12] passed through Irish corporate structures over the last few
[21:16] decades have drawn a lot of international attention.
[21:20] This attention triggered the state aid lawsuit from the EU
[21:23] back in 2016 and drove support for a new global minimum
[21:28] corporate tax rate of 15%, which Ireland has agreed to implement
[21:33] next year. It's unlikely that this change
[21:36] from 12 1/2% to 15% will crush the Irish economy, as the
[21:41] country will make efforts to keep its tax system as
[21:44] attractive as possible and will aim to maintain its position as
[21:49] a great place for multinationals to base their European
[21:52] operations. Ireland has one of the fastest
[21:55] growing populations in the EU. The population has grown by
[22:00] almost a third in the last 20 years, mostly driven by
[22:04] immigration. In the year to April alone,
[22:07] Ireland's population has grown by almost 100,000 people.
[22:12] It also has the EU's fastest aging population, with the
[22:16] number of retirees as a share of the working age population set
[22:21] to almost double to 46% in 2050 from 25% in 2020, according to
[22:29] Irish government figures. The nation needs to find at
[22:32] least an extra €7 billion per year to fund age-related costs.
[22:38] Full details on how Ireland's sovereign wealth fund will be
[22:42] invested and used will be contained in legislation
[22:46] expected to be put to Parliament by the end of this month.
[22:50] Much of the rest of the surplus being generated will be used to
[22:54] reduce general government debt, which Ireland expects to fall
[22:58] below €200 billion by 2030 from €225 billion at the end of 2022.
[23:07] Thanks for tuning into this week's podcast.
[23:09] If you don't already know, these podcasts are all available on
[23:13] YouTube in video format too. Have a great day and talk to you
[23:18] again soon. Bye.
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[23:41] Thanks for listening. Bye.

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