US multinationals do not just distort our GDP

In 2018, I attended a conference in Washington DC on challenges for national accounting in a globalised economy.

I thought I would have to explain to an international audience why Ireland prefers a measure like GNI* that strips out distortions from multinational activity, rather than GDP, which is the international standard measure of an economy’s performance.

However, most of those present, including the US statistical office, already knew all about GNI*. It wasn’t just that they were national accounting nerds – it reflected the reality that the arrangements of a handful of big multinationals in Ireland also matter for the data for other countries. It’s not just Ireland. The data for countries such as the Netherlands and Luxembourg are also distorted by globalisation trends.

Martin Arnold’s recent article in this paper (Ireland’s wild data, 23/8/2023) pointed out that the recent data for growth in the EU, especially for industrial production, was significantly influenced by the data for Ireland, resulting in a distorted picture of economic progress within the EU.

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This distortion resulted from the exceptional importance of foreign multinationals in Ireland, and their unusual impact on the Irish data, artificially raising Ireland’s weight in determining the overall outcome for the EU.

It is not just EU data that are distorted by the accounting practices of these companies. US data are also significantly affected.

If the foreign profits of all US multinational enterprises were added in to the US national accounts, total US profits would be 3.5 per cent higher than currently recorded, and US GDP would be 1.5 per cent higher.

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The scale of the distortion is even greater in respect of the IT sector, because so much of the profits of leading US IT companies are booked to Ireland’s rather than to the US’s GDP. In turn, this leads to an underestimate of productivity in the US IT sector.

Standard international rules that govern the definition of GDP no longer reflect the reality of today’s globalised production model. That’s why Irish GDP is so distorted.

These rules require that the profit on goods produced on contract accrue in the country where the parent company is located, rather than where the goods are produced. When iPhones are made in China, Apple’s profits are recorded in the country where the relevant Apple subsidiary is based, rather than in China. So in 2015 when Apple shifted the subsidiary that owns the iPhone intellectual property from the Caribbean to Ireland, its profits from manufacturing in China were then treated as part of Ireland’s GDP, rather than of the relevant Caribbean country.

[ Ireland’s increasingly remote GDP numbers ]

A crucial factor in treating these profits as Irish GDP is that the manufacturing is done on a contract basis. If Apple instead established a subsidiary company in China to make the phones, then the profit on the phones would be treated as part of China’s GDP.

Last winter there was serious disruption of manufacturing in China, partly related to Covid, which affected iPhone output. That probably put a short-term dent in measured Irish GDP. However, the disruption has also encouraged Apple to start shifting a lot of their phone production to Vietnam and India, which have fewer labour supply issues than China.

If Apple continues a model of contract manufacturing with its Indian and Vietnamese suppliers, Ireland’s measured GDP would be unaffected. However, if Apple sets up its own subsidiaries in Vietnam and India to make the phones, then the subsidiaries’ profits would be treated as Indian or Vietnamese GDP. Ireland’s measured GDP would drop accordingly.

However, such a drop in measured GDP would not reflect any change in the income of those living in Ireland. Irrespective of where the phones are produced, provided the profits are still eventually sent to the Irish subsidiary, Apple will still pay tax in Ireland.

The scale of distortion of Irish GDP figures by the activities of US multinationals is due to the quirks of the US tax system – equivalent issues do not arise with firms owned, for example, in the UK, Germany or France.

The US for many years has allowed companies to move ownership of intellectual property to a foreign country, where it involves production for sale outside the US.

As a low-tax country, Ireland has attracted much of this relocation of profits, and it has filled our corporation tax coffers. Most other countries do not permit such financial engineering to reduce their domestic tax bill. A change in approach by the US tax authorities could see a reduction in both Ireland’s corporation tax take, and in our measured GDP.