Gap Between GNP and GDP An Illustration of Ireland’s Tax Haven Status

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The significant difference between Ireland’s GNP and GDP has been so normalised that even newscasters on the 9 O’Clock News, reading out a report on a very small increase in Ireland’s GDP now usually follow it up with a comment that Ireland’s GDP can’t be taken as an accurate indicator of economic performance. Instead GNP, Gross National Product, must be used they stress as this does not include the profits that MNC’s earn tax free by taking advantage of Ireland’s loose transfer pricing regime.

The following is an entry called GDP/GNP in a glossary published on the RTE News site:

“Gross Domestic Product (GDP) is the total value of all goods and services produced in an economy in a given time period.Gross National Product (GNP) is the total value of all goods and services produced in an economy in a given time period which accrues.

The difference is made up of net factor flows, which in reality includes net profit repatriation by multinationals and interest on the foreign component of the national debt. In Ireland’s case, GDP is significantly larger than GNP because of the large US multinational presence here.”

….”which in reality”. It’s a bit like the reality where it’s perfectly normal that one person could hold a directorship on the boards of 256 companies.

However, to provide some perspective on this reality its worth reading Note 10 on page 5 of Simon Johnson’s recent statement presented before the US Senate Committee on Foreign Relations Subcommittee on European Affairs hearing on “The Future of the Eurozone: Outlook and Lessons” (dated 1st of August 2012).

“Ireland’s GNP is substantially smaller than its GDP. Due to its role as a tax haven, many foreign companies have set up operations in Ireland, with a controlling shell company located in a tax-free nation, in order to take advantage of Ireland’s regulations that specify that the controlling owner, rather than the resident company, is subject to tax. For this reason companies such as Google, Yahoo, Microsoft, Forest Labs, and many others channel license revenues and royalties through Irish subsidiaries. These royalties and revenues are in large part excluded from the tax base in Ireland. These companies would move if Ireland changed rules and made such revenues taxable. Since the relevant concept for fiscal sustainability is the taxable base, it makes sense that this should be used to measure Ireland’s indicators. No other nation in Europe has a large difference between GNP and GDP. The IMF regularly reported Irish GNP in its staff reports but recently removed all reference to GNP. This raises concerns that the IMF is attempting to mask fiscal sustainability problems by not reporting these data.”

That’s the reality, but there is nothing normal about it.

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Donagh is the editor of Irish Left Review. Contact Donagh through email: dublinopinionAtgmail.com
 

5 Responses

  1. CMK

    August 23, 2012 10:06 am

    The points made deserve relentless publicity. Does this mean that things are actually worse than most people think? That we should be looking at the national debt as a percentage of GNP and not GDP, which would push that up to a worst case scenario of 150% of GNP? Does it mean also that the cuts agenda, measured as % of GDP, is actually more regressive in that with GNP reckoned at about 75% of GNP we’re taking a percentage of the large figure (GDP) and using it to cut from the smaller figure (GNP). That’s all based upon the reasonable presumption that the multinational profits that make up the gap between GDP and GNP are immune to the austerity agenda. There may well be a concerted effort among the senior managements of multinationals here to try to maximise their tax contribution to the Irish state but until I see pigs flying over the IFSC, or a Fianna Failer admit that their entire political life’s work has been an enormous waste of time and other peoples lives, I’ll work on the basis that it’s unlikely.

  2. CMK

    September 13, 2012 1:01 pm

    Just as a follow up to this post I see today’s Fiscal Council comes up with a ‘hybrid’ formula for the GNP v GDP debate regarding which measure is applicable for analysing the state’s fiscal position.

    It’s interesting, though, that their hybrid measure leaves a political hostage to fortune as it’s a good bit higher than GDP and the debt situation relative to the Fiscal Council’s hybrid is much worse than appears in media discourse to date. Every politician supportive of the reigning economic orthodoxy, to a man and woman, uses GDP as the denominator for discussions of debt, but the state’s own economic advisers seem to know that’s bullshit and that GNP is the more accurate measure in the Irish context with the Fiscal Council’s hybrid measure a politically useful compromise once the penny drops that debt/GDP ratios mean nothing here.

    Anyway, the discussion is on pp.51-54 of today’s report (pp.61-64 of the document itself).

    http://www.rte.ie/news/2012/0913/fiscalreport.pdf

  3. Donagh Brennan

    September 13, 2012 4:49 pm

    Thanks very much for that CMK. It’s very important to highlight. Given that the Fiscal Council has form at just making stuff up I think that we can take this hybrid notion with a pinch of salt. For a start, is the measure recognized by those the government is supposed to be negotiating with on the repayment of debt? Are government ministers willing to talk frankly about the anomaly of GDP/GNP figures? I’d say no to both, but there is more to this that is worrying.

    For a start, as the Central Bank of Ireland admit, they simply do not know how money moves through the country. Given that the country, Bermuda, that provides the largest Foreign Direct Investment inflow into Ireland also provides the largest outflow out of Ireland, and that that outflow is larger than the inflow they believe that GNP is overstated. And it goes without saying that its hardly likely that investment from Bermuda brings jobs or, well, any investment in the real economy.

    The other problem is that the Fiscal Council and many rightwing economists are using the fact that the GDP/GNP figures are bullshit as a way of arguing that we *really* need to make larger cuts, and to keep on cutting because the money simply isn’t there, any direct investment is just money moving through the country.

    This is the Gurdgiev line, which is basically to advice people to take their money out of Ireland because there’s no hope for it here. Fortunately, he’ll say there’s the new Swiss Asset Management company http://bit.ly/OkOyGX