Ireland’s tax system undermining developing countries, warns aid agency

Ireland’s tax system is undermining developing economies’ tax bases, a leading Irish aid agency says. And tax treaties being signed by Ireland with these countries are reinforcing the position.

An analysis of the possible effects of the Irish tax system on developing economies, carried out for the Department of Finance in 2015, found that the Irish tax system on its own "can hardly lead to significant loss of tax revenue in developing countries".

However, Christian Aid argues that the years selected for the study were in many cases unrepresentative of the true economic relationship between Ireland and these countries. It also notes that the study excluded most of those countries with which Ireland has more active foreign direct investment.

The aid agency also says that Ireland has been a much more significant player in the developing countries analysed since 2012 – the last year for which data was available for the 2015 study.

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The agency has re-examined some of the assumptions made and data used in the Government study and says that the impact of Irish tax laws on developing economies is likely much more significant than found in the study.

While the figures might be modest by global standards, they are considerably more substantial when measured against Ireland’s aid budget funding for the countries concerned, Christian Aid argues.

Zambia and South Africa

As an example, it cites the tax forgone by Zambia in the years up to 2015 as a result of the tax treaty between the two countries “may have been equivalent to up to 40 per cent of Irish development aid to Zambia in recent years”.

South Africa potentially lost out on withholding tax amounting to more than three times the value of the albeit fairly low level of Irish aid it received in 2015, the agency reports.

“Irish aid flows to these countries may be comparatively small compared to their overall economies; but if the Irish Government considers such aid donations to be significant enough to spend Irish taxpayers’ money on them, then it should also consider that revenue loss at a similar scale as a result of Ireland’s domestic tax regime or treaty network, is also significant,” the agency says.

The report notes that between $500 million and $1.6 billion may be earned by Irish investors every year from developing economies in interest payments and dividend and a further $1.1-$1.7 billion in returns on portfolio investments.

Even with conservative estimates of their tax treatment, Christian Aid says, they “constitute inflows to Ireland of approximately two to four times the size of the Irish aid budget”.

It also questions the impact of the treatment of revenues from royalties and payments for goods and services on the tax take of low income countries. Data on income from services and royalty exports to countries in Asia, Africa and South America – with the exception of China and Bermuda – is currently redacted to for reasons of commercial confidentiality.

Cross-border investments

The agency criticises the exclusion from the 2015 government study of capital gains made by Irish holding companies on the sale of cross-border investments, in contrast, it says, to a similar type of study by the IMF, which said it was “a macro-relevant concern for several low income countries”.

Many of Ireland’s bilateral tax treaties preclude countries from imposing capital gains on the sale of a business in those countries when they are owned by an Irish holding company. Irish tax law also exempts Irish holding companies from paying tax here on such transactions in a move the agency says incentivises such a structure for corporate tax planning.

The study comes against a backdrop of tax avoidance by Irish individuals and companies, including major multinationals, through the use of tax havens disclosed in the Paradise Papers.

At the time of the study, carried out for the Department by the Dutch-based International Bureau of Fiscal Documentation, then minter for finance Michael Noonan said he hoped the study would "provide a road-map for best practice in Ireland's future interactions with developing countries".

Sorley McCaughey, head of policy and advocacy at Christian Aid, said: “The 2105 analysis was an important contribution, but two years on, the findings of this report make a strong case for the government to revisit the issue.

“The international tax context has changed even in the last two tears, and I believe the public would welcome any new government initiatives to demonstrate that the benefits of our tax code are not at the expense of some of the poorest countries in the world.”