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News : Innovation Last Updated: Sep 29, 2013 - 9:23 AM

Irish Innovation: EU indicator rating based on fake computer services exports
By Michael Hennigan, Finfacts founder and editor
Sep 19, 2013 - 10:10 AM

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Irish Innovation: Last week we reported that the European Commission announced that Sweden, Germany, Ireland and Luxembourg are the EU member states getting the most out of innovation, according to a new innovation indicator. However this was based on fake services exports.

We said it can only be termed a fantasy indicator as Ireland's patent filings at the Irish Patents Office in 2012 were at the lowest since 1982 while the Commission treats an increase in tax-related services revenue diversions to Ireland that are booked as exports, as a indicator of rising innovation output. Since then, we have been in touch with the Commission.

We asked for clarification of the data:

1) Patent filings at the Irish Patents Office were at a 30-year low in 2012 and 2011;

2) PCT (multi-country) patent filings in 2012 are below the 2011 and 2006 level;

3) The jump in Irish computer services exports in 2012 resulted from tax-related revenue diversions from other markets. They are fake exports;

For example, Google books almost 50% of its global revenues in Ireland; Microsoft's 2011/2012 exports jumped by 37% but this does not reflect activity in Ireland;

4) Most of the Irish-based staff in Apple and Google are working in sales and general administration.

Irish data may count them as being S&T (science & technology) workers when they're not."

The European Commission responded:

First, on patents, the reference year is not 2012 but 2009. We operate on the basis of the most recent comparable figures available across all Member States. On patents alone, Ireland ranks 11th – and if there has been slippage since 2009 then this will naturally be reflected in future indicators.

The fact that, despite this under-average performance on patents, Ireland ranks higher in the overall scores reflects the fact that the indicator doesn't over-stress technology-based innovation and gives importance as well to services (which usually do not patent much) and jobs, in order to be representative of the actual structure of the economy.

The structure of Ireland's economy is well known, and it is clear it generates jobs in export sectors and has a lot of inward investment. The indicator is not measuring science and technology workers only (these are well covered by other data) but any employment in innovative sectors ,found in business activities which count on a relevant share of high skilled people and in fast growing firms. As stated, the indicator is seeking to measure outputs arising from innovation.

More details – including all the caveats that we are aware of - are contained in the Staff Working Document that was cross-referenced in the MEMO [pdf] accompanying the press release. We have stated clearly that there are areas for future analysis to bring the indicator up to its full potential, but we are confident it is an extremely useful and promising tool for its purpose, i.e. a specialised synthetic measure of innovation output."

Also feeding into the fantasy indicator is that 8 of 14 'Irish' companies are only Irish because of the location of their head offices.

As damning is the 2012 "EU Industrial R&D Scoreboard," which notes:

Three companies based in Ireland contributed 68% of that country's R&D investment: Seagate Technology (15.0%), Covidien (23.9%) and Accenture (31.2%)."

These 3 companies do little if any R&D in Ireland.

European patents data from the European Patents Office on Irish resident applicants in 2012, show that the majority are in respect of foreign inventions and the filings from Ireland likely reflect tax strategies.

Computer services exports rose 15% in 2012 to €36.5bn while in the past decade, there has been a small rise in in employment.  The Commission conveniently ignored the real origin of what it views as Irish innovation activity.

Merchandise exports have been static since 2000 and overall full-time employment in the indigenous goods and services sectors in 2012, was 20,000 below the level in 2000 when the workforce was 20% smaller.

In 2011/2012, Microsoft reported a 37% surge in revenues booked in Ireland to €13.7bn. Google Ireland's revenues in 2011 were at €12.4bn and this level likely exceeded €13bn in 2012. Add in Oracle and Facebook and the total would exceed €30bn.

Microsoft employed 94,300 in 2012 and 1,200 in Ireland were responsible for 24% of global revenues!

Microsoft Inc.'s net income ratio was 30% and 7.5% in Ireland.

Its global profit before tax in 2012 was $22bn; in Ireland profit was reported at $1.3bn and a provision for tax was $170m compared with $5.3bn at Microsoft Inc.

The US Permanent Subcommittee on Investigations said last year that Microsoft’s Irish operating centers accounted for roughly 30% of the company’s global revenue in 2011, so the Irish entities contribute 30% of the cost of research and development to the global cost share pool.

However, Microsoft Ireland Research (MIR) in Dublin only accounts for less than 1% of the company’s total R&D.

MIR has about 390 employees and its chief function is to then license rights to a wholly owned subsidiary, MIOL (Microsoft Ireland Operations Limited), which has about 660 staff in Dublin. For this role, MIR reported $4.3 bn of profits in 2011, with an effective tax rate of 7.2%.

So most of the value of Irish computer services exports come from four American firms and most of their reported revenues in Ireland result from tax-related intercompany accounting transactions not economic activity or  innovation in Ireland.

Anyone who has been following the international corporate tax avoidance debate over the past year knows that diverting end user revenues from the UK, France or Australia for tax purposes and then Ireland treating them as exports does not make what is fake real.

For the self interested this is the modern miracle of the loaves and fishes but it's a fantasy.

Microsoft's 1,914 employees in Ireland, Singapore and Puerto Rico from Microsoft’s total head count of 90,000, were responsible for 55% of 2011 profit before tax.

All miracle workers!

The European Commission has made an unintentional mistake with the misleading data it was given and of course now cannot handle the truth as it would be embarrassing .

This nonsense has consequences as it enables Irish policy makers to brush of serious criticisms of the failing innovation policy that were made last week in a report from the Organisation for Economic Cooperation and Development (OECD. It called for sunset clauses for all innovation and enterprise supports and it slammed the 11-agency funding structure.

Finfacts reports::

Irish Innovation: Evidence of science policy failure mounts

Irish Economy: GDP up 0.9% in 2012; US MNC tax moves raised computer services exports by 15%

Irish Economy 2012: At least a third of value of Irish services exports is overstated

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