Ireland: Cash outflows amounting to €20bn at the peak of the economic crisis in 2010 and 2011, remain unexplained and are likely to remain so.
Philip Lane, Whately professor of political economy at Trinity College Dublin, wrote Thursday that the CSO's Balance of Payments (BoP) detail for 2014 (see Table 1) "shows little progress in recovering/identifying the cumulative €20bn (approximately) in “net errors and omissions” (a proxy for unrecorded financial outflows) during 2010-2011."
In 2010 there was an unexplained outflow of €8.3bn and this rose to €11.7bn in 2011. In 2014 there was a minor difference of -€180m while a -€2.9bn in 2012 was followed by a +3.4bn in 2013.
In a December 2011 paper, Prof Lane wrote: "A substantial proportion may be attributable to unrecorded financial outflows since the current BoP measurement procedures do not directly capture acquisitions of foreign assets by households that are not intermediated through the domestic financial system. This may be especially a problem in relation to high net worth individuals. In particular, the large residual in 2010 may be related to capital flight during the financial crisis, with fears about the banking system prompting the transfer of assets to foreign bank accounts. Disregarding the (positive or negative) returns earned on these unrecorded foreign assets, the implication is that the net foreign asset position may be substantially less negative than the official value, with 12% of GDP (the cumulative level of net errors and omissions) a relevant benchmark estimate."
He adds: "Alternatively, it is possible to argue that there were historical errors in the valuation of Ireland's foreign assets and foreign liabilities, with the capital gains on Ireland's foreign assets over-stated and/or the capital gains on Ireland's foreign liabilities under-stated."
Tracking household capital flows is a problem in other countries such as Sweden and Finland where taxes are high and a Deutsche Bank report is cited in a Financial Times FT Alphaville blog: "Swedish households have long been subject to comparatively high tax rates. A wealth tax was abolished in 2007 after years of debate. By this time, however, much private wealth had been transferred abroad. Many still seek to avoid capital gains taxes by moving assets abroad. Such investments abroad are not typically illicit. Since 1993, Swedish households have been legally entitled to hold foreign bank accounts and equity portfolios.
The Riksbank has admitted in the past that household direct investment abroad is 'only captured to a very minor extent in the balance of payments statistics.' Yet although interest and capital gains are taxed abroad, after-tax profits tend to be repatriated and declared."
Separately, the CSO said yesterday in relation to the national accounts in relation to booking of overseas manufacturing in Ireland: “In the case of the additional products made under contract manufacturing arrangements for Irish companies in 2014, the related addition to added valued over and above wages and salaries paid is not particularly significant in explaining the recent growth in Irish GDP (+4.8 per cent in 2014).”
However, the CSO should do more than telegraphic notes to explain the impact of distortions:
1) Goods exports valued in the national accounts exceeded the CSO's value of €89bn based on custom statistics by €18bn and imports in the national accounts exceeded the custom statistics by €7.4bn;
2) The Double Irish tax dodge artificially boosts services exports by almost 50%;
3) GNP and Balance of Payments data are distorted by the requirement to include the undistributed profits of large American companies that become Irish for tax purposes in the national accounts. In 2013 a BoP surplus was a deficit when these faux-Irish companies were excluded.
Last January, Medtronic became Ireland’s largest company when it started trading on the New York Stock Exchange. This week shareholders of Actavis Plc, an American-turned Irish company and Allergan Inc. approved all proposals related to Actavis's planned acquisition of Allergan.
This quarter these two groups that are nominally Irish will have a combined payroll of 110,000 and their accounts will be included in Irish data.
The CSO provides to estimate of the impact of the so-called tax inversions.
In 2010, Prof John FitzGerald who was then at the ESRI estimated that in 2010, the booking of the undistributed profits of the faux-Irish companies, boosted GNP by 2.9%.
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