For a long time, Ireland has used taxes to aggressively attract incoming investment. Now this strategy is being questioned.
Ireland is a tax haven
The financial professionals and lawyers who have developed the corporate tax avoidance industry like to avoid terms such as “tax haven.” Instead, they prefer language about regulated entities that spread risk with efficient tax planning, aimed at facilitating a non-bank based structured finance regime. However, the Senate, the E.U. parliament and a growing list of social science experts prefer more straightforward language. As the recent research of Gabriel Zucman and the CORPNET research team at the University of Amsterdam shows, Ireland is a “conduit tax haven,” acting as a tax-avoiding funnel between nation-states and enabling the transfer of capital without taxation.
Ireland’s corporate-friendly tax policies have been controversial for decades. However, they were transformed during the financial crisis. When the Irish state was in major financial difficulty, it used a long-standing feature of the corporate tax code known as “Section 110″ to attract international investment. This feature basically allows for the legal creation of “special purpose vehicles” (SPVs) that can structure themselves to pay little or no tax. These Section 110 vehicles also tend to have few or no employees. They are legal constructs to store capital and wealth.
This is becoming controversial
Political scientists such as Pepper Culpepper have argued that complicated self-serving financial regulations such as Ireland’s tax system can thrive only in private. They require “quiet politics” — nonpublic discussions between the financial sector and the politicians and bureaucrats who draft regulations, and who begin to suffer when they become the target of public attention. These tax arrangements are being questioned as they start to bite Irish people, too.
Tax-excluded investment funds were not supposed to profit from domestic Irish assets. But in 2016, the then-Social Democratic opposition politician Stephen Donnelly began to highlight in parliament that the legal services sector had found a creative way to enable investment funds to avoid tax on commercial and real estate property investments. This gave wealthy investors privileged access to owning Dublin’s priciest asset: land.
None of this was accidental. During the crisis, Ireland needed to get rid of the bad debt and the distressed assets of its discredited domestic banks. The Irish government actively used the tax code to encourage global investors to buy up distressed assets, including large amounts of real estate, at low prices. But within a few years, house prices and rents began to skyrocket, and the public started to get angry with tax-avoiding property investors.
Language matters here, too. These actors are publicly referred to as “vulture funds,” which trips more easily from the tongue than “Special Purpose Vehicle” and their integration with “Irish Collective Asset Management Vehicles.”
The controversy is being stirred by guerrilla online campaigns
All this lies behind the story of the Irish Tax Agency. Local entrepreneur Paddy Cosgrave set up a campaign to publicly challenge media silence about Ireland’s economic model. His Facebook ads for the Irish Tax Agency explicitly advertised Ireland as a place to avoid corporate taxation, and offered a €1,000 prize to any journalist who could best defend tax avoidance.
This very public response by a domestic entrepreneur is what one would expect from standard political economy models. Local businesses don’t benefit from these schemes. The more plausible beneficiaries are rent-seeking global investors with a lot of footloose capital, and little long-term stake in Ireland’s domestic economy.
The campaign also drew attention to various Wikipedia articles that clarify the complexities of these tax-avoidance schemes. Politicians, policymakers, and the legal-finance profession responded vigorously and tried to discredit the Wikipedia articles. But none of these critiques have challenged their substantive truth.
What these campaigns do is to demystify complex-seeming technical language and explain what these corporate arrangements do. As Italian political scientist Giovanni Sartori says, we are prisoners of the words we use. As these tax avoidance schemes become more publicly visible, easier to understand, and more obviously linked to issues that Irish voters care about such as rapidly rising house and rental prices, they are, as Culpepper would predict, likely to move from quiet politics into noisy political discussion.
Aidan Regan (@aidan_regan) is an assistant professor in the School of Politics and International Relations (SPIRe) at University College Dublin (UCD) and director of the UCD Jean Monnet Centre of Excellence, New Political Economy of Europe.