Looming closure of tax loopholes prompts surge in asset transfers

Imminent closure of the controversial double Irish tax loophole prompted a surge in intellectual property transfers in the second quarter.

The move led to the State’s balance of payments current account, a measure of transactions with the rest of the world, falling to a €26.5 billion deficit in advance of the closure of the loophole in December next year.

According to quarterly national accounts and international accounts released by the Central Statistics Office, the current account deficit compared with a €10.6 billion surplus for the same period last year.

The CSO's assistant director general, Jennifer Banim, noted the change in the balance was driven by an increase in intellectual property imports, with imports of business services, which include the substantial IT sector, increasing to €54.8 billion during the three-month period compared to €16.7 billion a year ago.

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The global clampdown on multinational tax avoidance has precipitated a massive transfer of assets to the Republic, which is expected to continue well into next year.

Also on Friday, the CSO said the State’s economy grew 0.7 per cent in the second quarter, with “globalisation events”, such as the import of intellectual property, having an impact on the results. That’s down from the revised 2.7 per cent growth rate seen in the first quarter, with the difference largely reflecting a reversal of stockbuilding seen at the start of the year. Gross national product, a measure of activity in the domestic economy, recorded a 2.8 per cent decline. In the year to the end of June the economy expanded by 5.8 per cent, the GDP figure shows. GDP growth in the year to date was 6.6 per cent.

‘Solid growth’

Minister for Finance Paschal Donohoe welcomed the "broad-based" growth, adding: "Early indications suggest solid growth in the third quarter as well."

Against an increasingly positive backdrop, however, he said: “There is a continued softness in the international environment, particularly in the manufacturing sectors in some of our closest trading partners.

“The risk of a no-deal Brexit hangs over the economy, with business and consumer confidence softening as a result.”

And while the State’s growth rate was strong in the context of its European peers, with growth more than three times higher than both the European Union and euro-zone average, the UK economy contracted by 0.2 per cent in the second quarter.

Across the larger sectors of the economy, the industry sector, dominated by multinationals here, grew 5.7 per cent while the IT sector grew 8.1 per cent. Domestically-focused sectors such as construction advanced 0.4 per cent while the distribution, transport, hotels and restaurants sector actually decreased by 0.2 per cent. There was also a 1.3 per cent fall in the professional, admin and support services sector which includes aircraft leasing. This sector, however, is extremely volatile and experts warned against reading too much into the move.

On the spending side, personal consumption increased 0.8 per cent and accounted for almost a third of domestic demand. This was seen as an unusually low percentage contribution to domestic demand resulting from the significant increase in capital investment, which rose by €31.4 billion in the quarter.

And while there was a big increase in investment, there was also a higher volume of profit shifting, with €18 billion of net profit outflow in the period.