Witnessing the Catalan referendum firsthand

Below is an account of the visit by an international parliamentary delegation of 33 elected representatives and a number of their advisors to Catalonia, hosted by DiploCat, during the Catalan referendum. While the delegation programme lasted for several days, this account covers only Sunday October 1, polling day. I participated in the visit on behalf of Sinn Féin MEP Matt Carthy, who was unable to attend, and was joined by several Sinn Féin colleagues. This is not a political analysis of the Catalan referendum but my personal account of what we witnessed.

I left my hotel at 7am on Sunday morning to meet up with the international parliamentary group and our DiploCat hosts. It was still completely dark and pouring rain but I knew thousands of people would have been gathered outside polling stations since 5am to defend them from police attempts to shut them down, which had been rumoured the day before to be scheduled to begin at 5am or 6am.

The international visitors were scheduled to leave in 10 small groups from a central meeting point at 7.30am. I was in a group with Sinn Féin Senator Trevor O’Clochartaigh, Swedish Green MEP Bodil Valero, Welsh member of the Westminster Parliament for Plaid Cymru, Hywel Williams, and Magni Arge, a member of the Faroe Islands and Danish Parliaments for the left pro-independence Republic party. We spent the day with our helpful DiploCat host, a young woman called Irina.

The official plan was to visit three or four polling stations in Barcelona and the surrounding towns; meet the mayor of Solsona for lunch at 1pm; then return to Barcelona by 4pm.

Sarrià-Sant Gervasi

Our first stop was a polling station at a school (Col·legi Orlandai) in the Barcelona suburb of Sarrià-Sant Gervasi, close to Gràcia, where two of the international groups, or around 10 observers altogether, arrived at 8am. It was bright by then and the rain stopped temporarily. Hundreds of people were gathered outside the school, whose entrance gates were closed. They cheered when we arrived, seeing our ‘international observer’ lanyards.

Approaching the first school at Sant Gervasi

Approaching the polling station at Sarrià-Sant Gervasi

Two uniformed members of the Mossos d’Esquadra, the Catalan autonomous police, stood at the edge of the crowd and observed.

We started to speak to some of the voters gathered, sometimes in English and sometimes having the conversation translated by Irina or by Bodil from Sweden, who has fluent Catalan. They said the Mossos had earlier informed them they had been instructed to prevent voting, but that they did not intend to, in the interests of protecting public order and public safety.

Trevor suggested we speak to the officers. I hesitated for a second, not being a big fan of police, having both experienced and witnessed police violence at peaceful public gatherings and rallies on several occasions. But we went over to introduce ourselves. Both were polite and friendly, and chatted comfortably with us in English. One of them, finding out Trevor and I were Irish, told us he had lived in Dublin for close to a year. I asked if it was okay if I took a photo of them speaking to Trevor and they replied, “Of course it is”.

mossos-talking-to-trevor.jpg

Sinn Féin Senator Trevor O’Clochartaigh chats with the two Mossos officers at Sarrià-Sant Gervasi

Some of the assembled voters told us the majority of the crowd had been there since 5am, and that the school was one of those that had been occupied since Friday afternoon. The parents of the kids who attended the school had slept inside the school building on the Friday and Saturday nights. There were three or four young women half-asleep on thin mattresses just outside the building, under the shelter of an overhanging roof. People carefully stepped over them, as did we.

Just then, at around 8.15am or so, the parents began to exit the school building into the waiting crowd, carrying their mattresses and sleeping bags, to cheers and applause.

Internet shut down

Some of the organisers then invited us to come inside the school, and we squeezed through the voters to walk through the gate. The front rooms were set up with desks for ballot papers and ballot boxes, and around a dozen volunteers were working intently on computers and laptops. Voting was due to begin at 9am but their electronic electoral system was down and the entire internet seemed to be down too.

I tried to get online on my phone when inside the school and couldn’t – sometimes my phone would say  ‘No service’ but even when it didn’t, I was still unable to use the internet. I couldn’t get online for hours that morning. It was the same for the other visitors, though some of them seemed to be able to get online for two or three minutes at a time. Outside, one of the organisers called on the voters to all switch their phones onto airplane mode in the vain hope that it was a capacity overload problem, a request everyone quickly and willingly cooperated with.

Someone told us the polling station staff were attempting to get online by using a Belgian proxy; it didn’t work though. We heard through text messages that not only the electronic voting system was down, as was expected, but the entire internet was down at a number of other voting stations too. “Do you think it’s the Spanish government that’s responsible?” I asked one of the frazzled volunteers. She looked at me as though I were a moron and said, “Of course it is.” We both had to laugh.

The voters outside were patient and cooperative, occasionally breaking into chants of “Votarem! Votarem!” (“We will vote!). We could see each other through the gates; organisers outside communicated constantly with those inside, and passed phones, coffees and mini-pastries through to the volunteers. Bodil did an interview with a Swedish journalist holding a recorder through one of the gaps in the gate.

waiting-in-the-rain.jpg

Voters wait in the rain

When it rained, the voters shared large umbrellas through the crowd. At one stage an organiser was lifted on top of someone’s shoulders to call on the voters to clear a path for the elderly, people with special needs and people who had to go to work that day to be able to come up to the front and vote first. Two older women were brought into the school building so they could sit down; an elderly, frail man refused the offer of coming inside and continued to stand outside at the front of the queue using his umbrella to help support himself.

It was at that point that texts began to come through saying there had been attacks by riot police on other polling stations in Barcelona, including some that were close-by.

Shortly before 9am, the two Mossos officers entered the school building, with voters clearing a path for them. They asked the volunteers to assemble so they could speak to them all together. The international visitors hung back but within hearing distance, and Irina and Bodil translated for us.

The Mossos informed the workers that the National Police was attempting to close several polling stations in Barcelona. They repeated what they had told us and the voters earlier; that they had been instructed to prevent the vote from proceeding, but that they were not going to, as their intention was to act in the interests of preserving peace, public safety and public order. They added that if the Spanish police arrived, they would not be able to intervene, but that they would try to act as mediators between the Spanish police and organisers.

Mossos talk to organisers inside

The Mossos officers talk to polling station workers

One of the Mossos then approached the seated older women, crouching down to ask if they were feeling okay, and offered them water. Then they left through the gates, to applause.

The first votes

The volunteers resumed working to resolve the internet problem. I remarked to one of them that the voters assembled outside were incredibly patient, waiting for hours in the rain; no-one was acting annoyed or frustrated at the fact that the polling station was still closed at 10.30, an hour and a half after it was scheduled to open. “They have been waiting their whole lives to vote,” she said. “They don’t mind waiting a little longer.” But anxiety about the possibility of a police attack was growing.

The polling station workers thought that if they had computers with older technology they may be able to connect to a wifi system – so people outside ran home to bring in two or three old laptops and an old PC, which they passed through the gates. At around 10.40am a cheer went up inside the building and we all started clapping – it had worked! They were connected.

One man inside excitedly ran to inform the others, through the gate, that they were connected to the internet and voting was about to begin. “I’m going to be the first to vote!” he yelled excitedly, to laughter. The two elderly women and a handful of others inside took up their ballot papers and voted.

Elderly woman casts her vote

One of the women who came inside to sit down casts her vote

Then the gates opened and the first round of people walked through. Everyone was cheering and applauding jubilantly – the voters outside, the workers inside, us international visitors.

 

The faces of those who came through were still calm and resolute but some became tearful after they voted. It was a really moving moment, and it’s hard to accurately put it in words. The best way I can describe it to say there was an overwhelming sense of dignity about both the moment and the people.

As the voting got underway, our DiploCat hosts organised the two groups to start moving to our next location; we had been scheduled to leave shortly after 9am but had decided to stay until the station opened. The voters lined up outside the school cheered us and said “Thank you!” in English as we left.

At Manresa

We started driving to Manresa, an industrial province of around 75,000 people in the centre of Catalonia, about 45 minutes outside of Barcelona. We had already seen a small number of videos on Twitter of police seizing ballot boxes and beating voters with batons in the brief moments where anyone could connect to the internet in the polling station at Sarrià-Sant Gervasi.

Now we spent the journey uploading our own photos, footage and observations from the morning onto social media, and passing around phones between the seats so we could all view the latest footage of the police attacks – gasping, murmuring “Oh my god,” and exclaiming “Jesus Christ!” as the snippets of film from the other polling stations showed increasingly brutal violence and rubber bullets being fired into defenceless and panicking crowds. It was not just the National Police we saw in the footage anymore but also the Guardia Civil. Hywel was uploading live videos in Welsh to Twitter, describing our visit.

When we arrived in Manresa centre around 11.30am we stopped for a coffee for a few minutes and stood at the bar with our eyes glued to the TV which was, of course, broadcasting the footage from the polling stations. The building in the square were adorned with colourful flags saying “Sí!” and “Democràcia!”, like in Barcelona, and it had stopped raining entirely. Then we walked to a polling station, a school, where the people queuing outside again cheered as we approached. There were still large crowds waiting to vote as we entered at around noon, and spoke to the polling station workers. The National Police had not arrived at the station; the queues were orderly and  the mood bright. Two Mossos stood outside.

Voters queue in Manresa

Voters queue up outside one of the polling stations in Manresa

One of the polling station volunteers offered to walk us around to the second voting station open in Manresa centre, which was nearby, and we agreed. During the walk the volunteer said worriedly to our DiploCat guide, Irina, that the route we were taking to the second site wouldn’t show us the best side of Manresa; Irina translated her concerns while laughing kindly. Relaxing, the local volunteer then joked that we were walking down “Las Ramblas” of Manresa.

This station, too, was busy, but calm and orderly, having received no visit from the National Police or Guardia Civil. Each polling station had a ‘president’ – a coordinator or presiding officer. Many of the volunteers were wearing stickers that identified them as both activists of the ANC (National Assembly of Catalonia) and also of ERC (Republican Left of Catalonia). I spoke to the president at this site in English for some time about how the day had unfolded, and he outlined the same difficulties with their voting system and internet access that we had experienced early in the morning.

I asked him if he was a member of any political party as I was curious as to whether the volunteers were all affiliated to political parties or whether there were also unaffiliated community members and activists. Almost apologetically, he said he wasn’t a political activist, but worked in IT – and that his mother, an ANC activist, had called him the night before to say they needed people with technological expertise as they anticipated hacking attacks. “So here I am,” he smiled.

Baby on shoulders Manresa

Voters wait their turn to enter the polling station in Manresa

As we left, the crowd queuing outside applauded and started chanting “Thank you! Thank you!”. By this stage we had asked Irina to teach us how to say “Good luck” in Catalan, so we replied “Bona sort!” as we left. I grinned to hear a man in the queue describe us as “briagdistas internacionales” as we walked past; he and his friends laughed and waved goodbye.

Waiting in dread at Sant Joan de Vilatorrada

Irina told us there were fears of a nearby polling station being attacked so we drove to another school at Sant Joan de Vilatorrada, just a few minutes from Manresa centre. The atmosphere was different here, subdued. People queued outside, but quietly. There was no cheering.

Inside, the volunteers told us that the polling station had been attacked violently by the Spanish police that morning, before it had even opened. Witnesses told us that the National Police had used a battering ram to enter, and smashed a man’s finger in the door four times, crushing the bone and severing the tendons. They took the ballot papers, boxes and began attacking the voters outside.

A teenage girl explained to us that her and some other voters had run up to the two Mossos present and asked them to do something; they said they couldn’t intervene but called their superior officer who arrived and had a heated argument with his counterpart in the National Police, after which the Spanish police withdrew. The injured man had left hours earlier to get medical attention so we couldn’t speak to him.

On the lookout for police at Sant Joan

Voters wait anxiously following rumours the police were planning to return to the school they had attacked that morning

The organisers and locals were anxiously expecting the National Police to return – they had received encrypted WhatsApp messages from organisers and activists at nearby stations and on nearby roads who reported they had seen around 60 Spanish police officers in the area. The locals knew they didn’t have the numbers to resist another entry attempt by police. We walked up to a perimeter fence that voters and activists had gathered by, all of us peering through warily. An enormous cheer went up as a number of uniformed firefighters walked up the hill together to the school.

Firefighters talking to us by Bodil

The firefighters who outlined the situation to us.                   Photo by Bodil Valero.

We spoke to the firefighters and others for around an hour, waiting for the police to arrive, but they never did. One firefighter in particular spoke to us at length, describing his view of the general situation. “I’m not very political,” he said. “But we just want to vote. It’s simple.”

Then we heard through WhatsApp messages that the Guardia Civil had attacked another polling station just a five-minute walk away. The firefighters sprinted off down the road as a handful of teenage boys sprinted off another way, obviously knowing a short-cut. Irina said we should think carefully about whether we wanted to try to catch up with the police, but we all quickly agreed we did.

‘I had my hands up’

Our driver zipped us around to the school that was under attack and we arrived to scenes of lines of around 20 Guardia Civil officers jostling voters who had their arms raised. Several Mossos and firefighters formed a line of their own in between the voters and the Guardia Civil.

The people were peaceful but angrily chanting, “No passaran!”, “Catalunya! Catalunya!” and seemingly most infuriatingly for the Guardia Civil, “Mossos! Mossos!” After a tense and angry standoff of around 15 minutes, the police backed off and left.

We were on the street, and couldn’t see the school building through the crowd, so I misunderstood the situation we had walked into. I thought the Guardia Civil had arrived, realised they were heavily outnumbered, and decided to leave. But that’s not what happened – we had got there too late.

They had already smashed down the glass doors of the polling station, seized the ballot boxes and beat a 70-year-old man over the head with a baton – just because he was in the process of voting. As the Guardia Civil left, he was sitting outside being cared for by other voters.

(Below is footage from @QuicoSalles on Twitter of what happened in the moments before we arrived.)

We had all been separated, but the same teenage girl who had spoken to us at the previous school had come running up to find one of the international observers – my Sinn Féin colleague Trevor – who went and spoke to and filmed the injured man. He had had his head split by the baton. “I had my hands up,” he said. “I was voting, I had my hands up.”

We jumped back in the car based on more WhatsApp messages and tried to get to the next site we believed was going to being targeted before the police did, around five minutes away. People were gathered outside anxiously and some were clearly in shock, having arrived from the same polling station we had just come from.

I spoke in English to a teenage boy wearing a Nirvana T-shirt and told him we had just come from the school. White-faced and shaking, he said he had been inside the polling station with his grandfather when the Guardia Civil had burst in and started hitting people with batons. Every few words he would almost choke, finding it hard to speak. “I need to go home,” he said after telling us what he saw. I patted him on the shoulder in a gesture that felt painfully inadequate.

The firefighter who we had earlier befriended at the first school we had visited in Sant Joan de Vilatorrada came up to us and told us that the organisers had just shut the polling station voluntarily in order to try to prevent an attack. They wanted to protect people from violence and also protect the ballots they had from being seized. It was around 3.30pm. He told us of their standoff with the Guardia Civil and said that like us, the firefighters had arrived too late to do anything to prevent the attack.

“But the fact that you guys and the Mossos got there stopped them from beating the voters on the street after they had taken the ballots,” Magni, the Faroese visitor, said.

The firefighter wasn’t going to be consoled. “Now they are laughing at us,” he said, meaning it both literally – the Guardia Civil had taunted and laughed at them during the stand-off – and figuratively, as in, they had left with people’s votes. He said the words with such a sense of powerlessness and humiliation that, for me, it was the lowest point of all that we observed that day.

As people began to disperse after the closure of the polling station we got back in the car; one of the volunteers had suggested we could drive to the local Spanish police station to see it, perhaps to try to speak with some of the officers. A number of roads were closed, though, so we couldn’t get there.

We saw one of the empty roads closed off by Guardia Civil vehicles and Hywel wanted to go and speak to them and take photos. I told the others that our phones might be confiscated if we tried to take photos because of the (2015) Spanish gag law that, among many other restrictions, banned taking photos of police officers. We all left our phones in the car and walked down to around eight officers who were blocking the road with large vehicles. Bodil translated our questions for them and their responses. She asked why the road was blocked; they replied that it was because someone had been taking photos of the police, which was illegal.

“Because of the gag law,” Bodil replied, provoking protest at the phrase. They said they were “just doing their job”, but then moved one of their vehicles to clear the blockade of the road. We weren’t going that way anyway, so, to the confusion of the Guardia Civil, drove off in the opposite direction.

At Solsona

We had been due to have lunch with the mayor of the town of Solsona at 1pm and were now at least three hours late. Irina insisted that we had to eat something, so we set off further inland to Solsona, another 45 minutes or so away, though I think it’s safe to say all of us had lost our appetites. Back in the car we took turns charging our phones, and passed around the phones in use to see the latest images and footage of attacks at the polling stations. Hywel delightedly informed us that his press officer told him he was trending on Twitter in Wales due to the updates and images he had been sharing all day, which lifted our spirits a little.

festival atmosphere

Voters gather outside in tents and with music playing at Solsona

We arrived at the main polling station in Solsona, a town of around 9,000 people in the province of Lleida, at close to 5pm. The mayor, David Rodríguez, and others came out to welcome us. As well as being the mayor of Solsona, David is also a member of the Catalan Parliament for the ERC, the Republican Left of Catalonia. The polling station was striking for how well organised it was.

Two massive tractors formed the main part of a barricade at the entrance of the centre, and another tractor blocked off a smaller way in on the footpath. You could still enter, but only on foot. There were very large crowds of people gathered on a grassy area outside of the building in a sort of festival atmosphere with some music and tents, and several firefighters, who got an enthusiastic round of applause every time they waked from one place to another.

Tractor barricades

Tractors forming barricades at Solsona

The polling station itself was a large gymnasium-style building. The volunteers inside were on edge and were expecting police to arrive shortly. They were preparing to shut down the station and hide the ballot boxes at the first sign of a raid.

I spoke to one of the volunteers, a young man, at length about their high level of organisation. “We don’t think they will be able to get in,” he said. “We think the doors and walls are strong enough to keep them out, none are made from glass. The only way they could get in is if they use vehicles to smash through the walls.” He paused, realising the absurdity of it, and shook his head, saying, “It’s so strange to talk like this, of vehicles smashing through walls. It’s like a war.”

Trevor with David

Trevor O’Clochartaigh with Solsona Mayor and ERC MP in the Catalan Parliament, David Rodríguez

He explained to me that they believed there were enough hiding places in the building that they could temporarily hide the ballot boxes if the police managed to enter. They had taken the step of stuffing two ballot boxes with empty envelopes and “hiding” them in an easy-to-find spot.

I laughed at the ingenuity. Everywhere we had visited, people were dealing with the problems they faced collectively, with great creativity and even with humour.

David asked us to come and have lunch at a Japanese restaurant, a couple of minutes’ walk away. We were reluctant to leave as people were expecting the arrival of the Guardia Civil, but he assured us we would all return immediately if we heard any reports of their arrival.

He introduced us to the owner of the restaurant, who greeted us warmly and told us he had moved from Japan to Solsona 27 years ago. Then for 30 rather surreal minutes we ate sushi and talked across the table, finishing with more coffee. The owner’s son, around seven years old  and playing outside in an FC Barcelona jersey, kept running up to the window to wave excitedly at us. We grinned and waved back.

David led us back in to the polling station and on the way back I spoke to a young woman who was shortly due to sit examinations to become a judge. She thought there was a good chance that her role in assisting the local referendum process would destroy her chances of becoming a judge, and said that one of her fellow students was too scared to even vote for the same reason. “But it’s worth it,” she said. Having done countless all-nighters for law exams myself I was left in awe.

David told us the organisers were still on stand-by to shut down the polling station. One of our group remarked to him that it must be a difficult decision – to close the polling station early before everyone had had the chance to vote.

“No,” he replied firmly. “There is no question. Our responsibility is to protect these people from violence. If we have to close the voting station early, even if the votes are stolen, the people here will be safe.”

We were scheduled to meet with the rest of the international delegation at 8.30pm to prepare a joint statement about the conditions in which the referendum was held, and both Magni and Bodil needed to get back to Barcelona to do media interviews before that time, so we began the drive back. Irina asked the rest of us if we wanted to take a break or visit another voting site, and Trevor suggested we go to the Josep-Maria Jujol school in central Barcelona – which both of us had visited during the occupation the day earlier. Trevor had also visited it at around 6am that morning and wanted to see how they had survived the day.

Back in Barcelona

There was a huge number of people gathered outside the school, possibly a couple of thousand, and they cheered loudly when we entered. “Gracias, bona sort!” we called back. It was around 7.30pm and they had been undisturbed all day – in my view, because they had the numbers required to deter any police intervention. Excitement was rising that they would manage to make it to 8pm, the end of voting time, without a police attack. Two Mossos walked around the entrance and they too were cheered.

A political scientist who taught at one of the Barcelona universities was the president of the polling station and showed us how they had been dealing with the technological problems in order to ensure the highest electoral standards were maintained.

At Jujol

The polling station president (centre) and other volunteers  speak to the international guests at Escola Josep-Maria Jujol

“We had people changing our IP addresses every 30 minutes to try to stay ahead of the hackers,” he explained. “If the system was down at any particular moment, we would mark people off on the paper electoral roll but put an asterix next to their name. Then when it was up and running again we would enter their names into the electronic system. So there may have been periods of up to 20 minutes at most where the system was down, but it would be virtually impossible for a person to vote twice at different polling stations in that time due to the queues.”

Inside the polling station I ran into a number of Basque friends who were visiting Barcelona in a show of solidarity. I joked darkly to them that they must have felt the same way right then as Irish republicans did when the DUP formed a coalition with the British Conservatives earlier this year – for a brief moment the world’s media attention shone a light on problems and outrageous behaviour that we struggle constantly to draw attention to. Of course this was on an even bigger scale. They laughed in grim agreement.

The author Liz Castro was also at the school, and interviewed Trevol, Hywel and I about what we had observed as we waited for 8pm. She tried to broadcast it live on Twitter’s Periscope feature, but the internet was too patchy, so she filmed it to upload later instead. At about 7.59pm a rumour spread through the building that the police were coming to seize the ballot boxes, causing a brief moment of panic. A minute later we were assured by the tense polling station president that the rumour was false.

Celebrating keeping the polling station open

At 8pm, a huge cry of celebration went up in the crowd outside and they began to sing the Catalan national anthem. They had made it to 8pm without an attack. The school gates were closed as they sang the final bars. (You can watch my video of this here.)

Inside, photographers and media camera crews filmed the two young electoral officers who began the official count of the ballots.

Officials start the count

Electoral officers begin the count at Escola Josep-Maria Jujol

I asked the volunteers if they had heard of any plans for mobilisations in Barcelona that evening, saying we had heard that there would be demonstrations in several cities in the Spanish state against police brutality.

“I’m not a political activist,” the polling station president replied, “so I can’t tell you about the mobilisations outside. My role, and one I take very seriously, is to facilitate the vote of the people here today and to defend those votes. But I can say that as a political scientist, the mobilisation of Catalan society is something that is fascinating to see and something that will not disappear overnight. Of course we can’t keep up this level of mobilisation constantly,” he said as other exhausted volunteers gathered around him nodded in agreement, “but this movement is not going anywhere.”

As we left to get to our meeting with the rest of the international delegation, we walked out behind the electoral workers. The people who had defended the polling station all day – and all weekend in fact, for many – again applauded us. You guys are the ones who deserve the applause, we kept saying as we shook their hands. I don’t think I’ve ever made such an understatement in my life.

@emmaclancy123

 

 

What Spain’s King means when he calls for the Constitution to be upheld

This is a brief outline of some of the key relevant legal issues in the Spanish Constitution and the Treaty on the Functioning of the European Union in relation to the crisis in Catalonia.

The King of Spain made a speech tonight (October 3) which is seriously concerning. The notes below are not intended to address the fascinating political situation in Catalonia right now, but simply aim to outline some of the key legal issues and constitutional articles you may have heard bandied about regarding the Spanish Constitution and the EU Treaty.

Speech by King Felipe

Leaving aside his description of Catalans as being “unacceptably disloyal”, and his failure to condemn the violence on Sunday, King Felipe VI made repeated calls on the Spanish government to act. He stated repeatedly that the duty of the Spanish state is to uphold the Constitution, and to ensure the constitutional basis for Catalonia and its institutions.

The Spanish Constitution (adopted in 1978 during the so-called “Transition” from Francoist fascism) includes several relevant and well-known articles – namely Articles 2, 8 and 155 – which have led Catalans and observers to believe this amounts to a call for the suspension of the Catalan government at the very least; the likely imposition of a state of exception (emergency); or an outright military coup at worst.

Article 2 of the Spanish Constitution affirms the “indissoluble unity” of “the Spanish nation”.

Article 8 states it is the mission of the Armed Forces to “defend the territorial integrity” of Spain. Usually, in the international arena, this means defending the state from external attack, but in the Spanish state is has been interpreted politically and legally to mean defending the state from both invasion and secession.

The United Nation’s Independent Expert on the Promotion of a Democratic and Equitable Social Order, Alfred De Zayas, yesterday tweeted: “The principle of territorial integrity protects States from other States, but cannot prohibit the self-determination of peoples”.

And Article 155, the most important in this case, states that if any of the autonomous communities fail to meet their obligations under the law and Constitution,  or “act in a way seriously prejudicing the general interests of Spain”, the Government can control of the bodies of the autonomous government and impose  the “measures necessary in order to compel the latter forcibly to meet said obligations, or in order to protect the above mentioned general interests” of the Spanish state.

In other words, Article 155 is the Direct Rule provision. Of course, the suspension of the Catalan government in this way would probably have to be backed up by jailing the government representatives, and the likely mass deployment of the Guardia Civil, and possibly troops, given the mass mobilisation of Catalan society.

To me the King’s speech sounded very much like an indication that Art 155 will be triggered. The leader of Ciudadanos has already called for Art 155 to be triggered in order to prevent a declaration of independence by the Catalan government.

The Catalan government has not yet declared independence following the results of Sunday’s vote. Obviously they must be engaged in behind the scenes efforts with the international community in particular, but they run the risk their government will be suspended before the declaration.

Tonight Catalan President Carles Puigdemont told the BBC that the Catalan government will declare independence “at the end of this week or the beginning of next”.

Sanctioning of EU Member State under EU Treaty

The other issue I wanted to reflect on is the possibility to initiate action against Spain under the Treaty on the Functioning of the EU (TFEU) in response to Sunday’s violence, or in response to the possible future triggering of Art 155 of the Spanish constitution/a state of exception/martial law being imposed in Catalonia.

Some Catalan representatives and international supporters have called for the triggering of Article 7 of the TFEU against Spain in response to the violence in Catalonia.

This is definitely something European progressives should call for in relation to both their own governments and the European Parliament.

However, the EU procedure is designed to be so difficult and to require such a strong majority that it makes it virtually meaningless (surprise).

It has never yet been invoked, despite the possibility of it being raised in relation to Hungary and Poland recently.

Article 7 can be invoked in order to defend the “EU values” specified in Article 2 of the TFEU.

These are: respect for human dignity, freedom, democracy, equality, the rule of law and respect for human rights, including the rights of persons belonging to minorities.

Article 7 has three stages of procedure ending in sanctions:

1) A procedure to declare the existence of a clear risk of a “serious breach” of Article 2 values. The procedure must be invoked by a “reasoned proposal” by either: one-third of Member States/the European Parliament/the Commission.

So a call for the European Parliament to make a reasoned proposal is definitely an option; as is a call for the Irish government or other EU governments to make such a reasoned proposal to the Council and seek the support for at least one third of Member States.

Then the Council, acting by a majority of 4/5 of its members, and after getting European Parliament consent, “may determine that there is a clear risk of a serious breach by a Member State of the values referred to in Article 2”.

Before making such a determination, the Council will allow the relevant Member State to respond, and may propose recommendations to the State.

2) The second phase is a procedure to determine whether a “serious and persistent breach” of Article 2 values has occurred. This requires the Commission or one-third of Member States to call on the Council to declare unanimously that a breach has occurred, with the European Parliament’s consent.

This is where the process goes from unlikely to virtually impossible given the strong backing of the Spanish position by both conservative and social-democratic forces in power across the EU.

3) The third step is sanctions. If the conditions of (1) and (2) are met, the Council can suspend rights of the relevant Member State with a qualified majority, which includes suspending the Member State’s voting rights in Council.

Let me finish by reiterating the point above – that despite the legal obstacles, progressives should absolutely attempt to invoke Article 7 of the TFEU.

But the limitations on progressive actions imposed by the EU’s architecture, treaties and procedures are similar to the limitations of achieving progressive change under the Spanish Constitution.

We certainly can’t rely in the slightest on the legal or procedural mechanisms of the EU in order to effectively display solidarity with the Catalan struggle for self-determination.

We need to do this with the tried and tested methods of old – pressuring our governments and EU leaders to support the Catalan people by all available means, including by exerting maximum pressure on the streets, and in local, state, EU and international political institutions; and by pressuring national governments to summon Spanish ambassadors and to suspend diplomatic ties with Madrid.

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SPANISH CONSTITUTION

Article 2

The Constitution is based on the indissoluble unity of the Spanish nation, the common and indivisible country of all Spaniards; it recognises and guarantees the right to autonomy of the nationalities and regions of which it is composed, and the solidarity amongst them all

Article 8

1. The mission of the Armed Forces, comprising the Army, the Navy and the Air Force, is to guarantee the sovereignty and independence of Spain and to defend its territorial integrity and the constitutional order.

Article 155

1. If an Autonomous Community does not fulfil the obligations imposed upon it by the Constitution or other laws, or acts in a way seriously prejudicing the general interests of Spain, the Government, after lodging a complaint with the President of the Autonomous Community and failing to receive satisfaction therefore, may, following approval granted by an absolute majority of the Senate, take the measures necessary in order to compel the latter forcibly to meet said obligations, or in order to protect the above-mentioned general interests.

TREATY ON THE FUNCTIONING OF THE EU

Article 2

The Union is founded on the values of respect for human dignity, freedom, democracy, equality, the rule of law and respect for human rights, including the rights of persons belonging to minorities. These values are common to the Member States in a society in which pluralism, non-discrimination, tolerance, justice, solidarity and equality between women and men prevail.

Article 7

1.   On a reasoned proposal by one third of the Member States, by the European Parliament or by the European Commission, the Council, acting by a majority of four fifths of its members after obtaining the consent of the European Parliament, may determine that there is a clear risk of a serious breach by a Member State of the values referred to in Article 2.

Before making such a determination, the Council shall hear the Member State in question and may address recommendations to it, acting in accordance with the same procedure.

The Council shall regularly verify that the grounds on which such a determination was made continue to apply.

2.   The European Council, acting by unanimity on a proposal by one third of the Member States or by the Commission and after obtaining the consent of the European Parliament, may determine the existence of a serious and persistent breach by a Member State of the values referred to in Article 2, after inviting the Member State in question to submit its observations.

3.   Where a determination under paragraph 2 has been made, the Council, acting by a qualified majority, may decide to suspend certain of the rights deriving from the application of the Treaties to the Member State in question, including the voting rights of the representative of the government of that Member State in the Council. In doing so, the Council shall take into account the possible consequences of such a suspension on the rights and obligations of natural and legal persons.

The obligations of the Member State in question under the Treaties shall in any case continue to be binding on that State.

4.   The Council, acting by a qualified majority, may decide subsequently to vary or revoke measures taken under paragraph 3 in response to changes in the situation which led to their being imposed.

5. The voting arrangements applying to the European Parliament, the European Council and the Council for the purposes of this Article are laid down in Article 354 of the Treaty on the Functioning of the European Union.

The (grim) state of the Union

Juncker’s vision is for full EU control over members’ economies

Some quick first impressions of the economic aspects of today’s State of the EU address by European Commission President Jean-Claude Juncker.

Jean-Claude Juncker’s State of the Union address was remarkable for its strident, defensive and utterly oblivious tone, but for little else.

On deepening the Economic and Monetary Union, he outlined several proposals that have already been floated several times by the Commission in recent years. The most significant of these are to introduce a euro-area budget line within the EU budget, and to create a European Monetary Fund and a European Finance Minister to take over responsibility for administering the EU’s debt and deficit criteria – the austerity agenda currently administered by the Commission.

There are two main goals evident in the Commission’s proposal. The first is to ensure that the current informal economic governance structure that exists in the Eurozone – outside of the Treaties and beyond democratic oversight – is extended across the EU as a whole in order to pressure the non-euro member states to join the common currency as soon as possible, and to give the Eurogroup the veneer of legitimacy.

The second is to implant Germany’s failed and ideologically-driven deficit fetishism ever more firmly in the structure of the EU by creating a Ministry to surveil and structurally reform the economies of Member States, and to surveil and control their spending, taxation and borrowing through budgetary control.

After the election of President Macron in France this year, Germany and France set up a working group to discuss the creation of a European Monetary Fund, or EMF, to deal with future crises. The states who may require the aid of the European Monetary Fund are those of us in the periphery of the EU – the Irish state, Greece, Spain, Portugal – who are suffering debt crises largely as a result of Germany’s massive and damaging current account surplus.

Yesterday, El País reported that Germany is proposing that a German-dominated EMF take fiscal oversight away from the Commission – but that it is attempting to win the support of France and Italy for the move by including the promise that Germany, France, and Italy can each have a veto over its decisions. This will essentially give Germany strict control over the oversight of budgets of all the EU states who require the assistance of the fund, with only France and Italy having the right to reject the EMF’s conditions.

The French side has been pushing for the EMF to also require more risk-sharing and debt-sharing, which would benefit the peripheral states more. The Commission’s final proposal regarding turning the current crisis fund, the European Stability Mechanism, into an EMF, will be published in December. It is unclear from Juncker’s speech and its accompanying documents which aspects of the German and French proposals will form the basis of the detail of the EMF proposal – but if Juncker’s other proposals are an indication of the general balance of power, it’s safe to bet on the German proposal winning the day.

For several decades now, France’s demand for a European monetary union was always met with the German response that it must be accompanied by fiscal union, or German-led surveillance and control over national budgets. The same argument continues today, based on the same failed ideology.

Juncker’s speech was as significant in what it didn’t propose as what it did propose – it looks like the Commission is already walking back from, or at least stalling on, ideas it had previously floated in its ‘reflection paper’ on deepening the Economic and Monetary Union released earlier this year. These included ideas of creating a European unemployment insurance scheme and an investment protection scheme, both of which would go some way towards meeting longstanding French calls for some form of financial transfers from the core (Germany) to the small and mid-sized economies in the EU, albeit with destructive conditions attached.

There was no mention of these proposals today, and Juncker firmly told the periphery states that their hope for a common bank deposit insurance scheme (which would amount to one form of financial transfer from the core to periphery) is on ice until they start following Germany’s orders on risk-reduction. His exact words were: “To get access to a common deposit insurance scheme you first need to do your homework.”

Over decades of core vs periphery fights over debt and investment, the outcome is always the same – the so-called peripheral states surrender more and power over their spending, borrowing and taxation to German-dominated institutions in exchange for the promise of aid or financial transfers that simply never come.

So, no big surprises here: just confirmation that the brief talk of fundamental change of the structure of the EU that followed Macron’s election was just that – talk.

 

 

The future of the Eurozone

Eurotower

Below is an abridged version of a speech I gave on behalf of Sinn Féin at a GUE/NGL conference on the ‘Future of the EU’ in Donostia/San Sebastian on 5 June 2017.

Last week the Commission released a ‘reflection paper’ on deepening the Economic and Monetary Union (EMU).

There is one positive element of this reflection paper – the Commission finally admits that the status quo, and the divergence it has led to, is unsustainable and has to change.

But the proposals to deepen the EMU entirely fail to address the problems caused by the structural flaws of the euro, which are becoming clearer and clearer and are now acknowledged by mainstream economists.

The reflection paper is not so much a new proposal from the Commission as it is the product of a political compromise between German chancellor Angela Merkel and French President Emmanuel Macron arising from their recent discussions.

Reading between the lines, we can see that the longstanding French demand for some limited financial transfers is proposed, in exchange for not taking any action against the massive and destructive German current account surplus, and for handing over yet further economic powers to the Commission.

The German surplus is the cause of existing debt crises in the Eurozone and will be the cause of future crises. If one country is constantly exporting more than it imports, other countries – in this case, the EU peripheral countries – will have to import more than they export.

This doesn’t just hurt the so-called periphery, or the South – German workers are also suffering the consequences of this strategy as their wages are kept permanently low, often at poverty level.

But while the EU’s “rules” set a limit for current account balances of plus-six per cent of GDP, no sanctions have been imposed against Berlin despite the fact Germany has exceeded this limit for 21 consecutive quarters and for 31 out of 40 quarters since the start of 2007.

The idea that every Eurozone country should adopt an export-led growth model should not only be rejected because it’s based on exploitation, but also because it’s just not economically possible.

Ireland, poster child for austerity

The Irish state is the poster child for the memorandum countries in terms of its recent economic recovery. The narrative goes that the Irish state followed all of the EU rules, swallowed the structural reforms and experienced export-led growth.

Leaving aside last year’s ludicrous 26% growth rate in GDP, based on Ireland’s facilitation of massive levels of corporate tax avoidance, there has been a certain of level of growth in employment over the past two years.

It’s important to note that these growth areas for jobs have not come from FDI or the Irish government’s tax-haven strategy.

Growth took place in the agriculture and food sectors, and in accommodation and tourism.

This growth was based on two related factors. The first was the devaluation of the euro as a result of the crisis, and the second was the relatively higher economic growth in Britain and the US, the Irish state’s two largest trading partners.

Devaluation of the euro was critical to the recovery experienced in the Irish indigenous sector.  The relative growth in the US and Britain was also influenced by the fact that these two states are not constrained by the Fiscal Compact rules – borrowing in the US and Britain did not fall below 3% since 2008.

But the specific circumstances of the Irish state also mean that this recovery cannot be transposed or replicated in other member states of the EU.

It also poses significant risks, especially the risk of a significant devaluation of sterling as a result of Brexit. The devaluation of sterling post-Brexit would likely have a devastating impact on this fragile recovery.

The Irish recovery happened in spite of, not because of the EU austerity recipe.

What Ireland is actually a poster child for is the role currency devaluation can play in recovery, when you’re trading predominantly with other currencies.

Transfers in exchange for rights?

Despite acknowledging that the status quo of the EMU is unsustainable, the Commission declares its firm support for the continuation of the European Semester and the Fiscal Compact.

Probably the three most significant aspects of the reflection paper from our point of view – all of which have been floated before – are its proposal of the creation of a European Unemployment Insurance Scheme, the proposal for an EU finance minister, and for an ‘investment protection programme’ to ensure public investment is maintained during an economic downturn.

In typical Commission fashion, the idea of a European Unemployment Insurance Scheme is dangled to gain public support – while the trade-off is the ‘harmonisation’ of labour relations and anti-worker reforms.

As for the proposed ‘investment scheme’, it is contradictory nonsense to create a scheme to protect investment during economic downturns while at the same time insisting on keeping the macroeconomic straitjacket of the Fiscal Compact firmly in place.

Limited transfers would require permanent structural reforms for Member States under the supervision of an EU finance minister.

We don’t oppose redistributive transfers to the so-called peripheral states to correct the imbalances that damage our economies, and of course we’re in favour of protecting investment levels in the crisis-hit countries.

But the point is that these measures are both utterly insufficient to address the underlying structural problems in the EMU, and they all demand trade-offs in rights, democracy and popular sovereignty.

So there will be a deepening of two major discussions in the EU in the near future – one on the EU budgetary capacity and one on improving social rights, linked to the Social Pillar but also linked to these proposals in the reflection paper, such as the unemployment insurance scheme.

We don’t oppose transfers to correct imbalances caused by the euro – but we will definitely oppose them if they are linked to conditionality. Social rights cannot be dependent on economic performance or a state’s following of the fiscal rules. Rights are rights.

The left in Europe shouldn’t fall for the trap of surrendering more ground to the Commission in exchange for these crumbs from the table.

New drive towards deregulation

 At the same time as you have these plans for deepening and completion of the EMU based on permanent austerity, and the dubious economic model of export-led growth, we also have a drive to dismantle the limited financial regulation that was enacted after the crisis.

We have a new drive too for the public to bail out the banks – we can see it both in the Commission green-lighting the Italian bailout last week using a loophole in the Banking Union legislation that you could drive a truck through, and through the EBA and ECB recently pushing the idea that public funds should be used to solve the ‘non-performing loan’ problem.

So taking all of this into account, the challenges for the left in the coming period will continue to be on the one hand defensive in order to try to halt the march of permanent austerity. We need to prevent the deepening and expansion of the EMU.

In the short term we need to campaign for effective sanctions against current account surpluses; for investment to be excluded from the fiscal rules; to try to reject the attempt to incorporate the Fiscal Compact into the Treaties at the end of this year; and for a real public investment plan to stimulate growth. We’re open to examining options for fundamental reform of the euro towards flexibility mechanisms or other possibilities. Some of the ideas outlined in Joseph Stiglitz’s book on the future of the euro are definitely worthy of consideration by the left.

But the option of an exit from the eurozone should also be viable and supported for member states that choose to do this as a result of their economic circumstances, just as states who want to remain within the eurozone should not be blackmailed or kicked out of the common currency against their will.

I’ll finish with a few comments on some recent and current election campaigns. We’ve all seen the elites across the EU celebrating the election results in the Netherlands and France, fostering a sense of triumphalism and complacency when what we should all be experiencing is alarm at the growth of the far right. But it is not inevitable that popular anger at the status quo is channelled into the far right.

We face the urgent challenge of developing, communicating and organizing around a programme that can win popular support, and the effective, bold and principled Labour campaign in Britain under the leadership of Jeremy Corbyn is something we can learn a lot from across Europe. Corbyn successfully managed to shift the debate from a narrow discussion on the terms of the British exit at the start of the campaign to one about what kind of country do people want to live in, what kind of world?

Gernika: The beginning of aerial terror

Gernika Belfast

A mural of Pablo Picasso’s Guernica in Belfast

The following excerpt on the 1937 attack on the Basque village of Gernika is taken from an incomplete history piece on the Basque Country, from a chapter on the Second Republic and civil war. Tomorrow (April 26) is the 80th anniversary of the bombardment.

In early 1937, with Madrid still putting up a stiff resistance, Franco set his sights upon Bilbo with the aim of capturing the city’s iron ore and heavy industry to support his war effort. The Francoists quickly planned a northern offensive to be led by General Emilio Mola, who issued an ultimatum on 31 March in broadcast and printed leaflets dropped on Bizkaian towns saying: “If submission is not immediate, I will raze Vizcaya to the ground, beginning with the industries of war. I have the means to do so.” Most of the infantry on Franco’s side were raised from Nafarroa. The 50,000 heavily armed troops in four Nafarroan brigades were backed up by two Italian divisions, the Spanish Air Force, the Italian Aviazione Legionaria and the Condor Legion of the German Luftwaffe. Mola had 120 aircraft and 45 pieces of artillery at his disposal. The Republican Army in the North had almost as many troops but far less firepower, half the artillery and just 25 ineffective aircraft. The offensive began with an act of brutality when the village of Durango – not on the front line and undefended – was bombarded for four days by the Luftwaffe, with 248 civilians killed. Republican positions were falling fast and on 20 April 1937 a new Francoist offensive began in Bizkaia.

Gernika has long had a sacred status among Basques as the site of the ancient Basque parliament of Bizkaia, the Casa de Juntas, and of the legendary Gernikako Arbola (Tree of Gernika), an oak tree that has been a symbol of Basque sovereignty and the rights of the Basque people for close to a thousand years. In 1937 the town had a population of around 7,000 people, and Monday 26 April was a busy market day in the town centre. At 4.40pm the Luftwaffe’s Condor Legion and the Italian Aviazione Legionaria launched an aerial bombardment of the town that lasted for three hours, with waves of planes hitting the town centre every 20 minutes with high explosives and incendiary bombs of up to 1000lbs. each. Those who tried to run from the town or hide in the fields were machine-gunned. At 7.45pm, after the last planes had dropped their bombs, the centre of the town was destroyed. The assault killed 1,654 of the town’s 7,000 inhabitants. Gernika was 30 kilometres from the front. The Casa de Juntas and the Tree of Gernika had incredibly survived untouched.

A report by British journalist George Steer, war correspondent for the London Times, was published in the Times and the New York Times on 28 April. Steer had rushed to the town the evening of the attack to interview survivors and witness the devastation firsthand, and reported: “The most ancient town of the Basques and the centre of their cultural tradition, was completely destroyed yesterday afternoon by insurgent air raiders.”  His report from Gernika was all the more significant because Franco’s forces claimed the Basques had burned the town themselves as a propaganda stunt; then they claimed the Communists had bombed it. Franco denied that German forces were even participating in Spain’s Civil War. In response to the Nationalist propaganda, Basque lehendakari (president) José Antonio Aguirre made a public declaration : “I maintain firmly before God and History, who will judge us, that during three and a half hours German planes have bombarded the defenceless civilian population of the historic town of Gernika, pursuing women and children with machine-guns, and reducing the town itself to ashes. I ask the civilized world whether it can permit the extermination of a people who have always deemed it their duty to defend their liberty as well as the ideal of self-government which Gernika, with its thousand-year-old Tree, has symbolized throughout the centuries.” Franco replied: “Aguirre lies. We have respected Gernika, just as we respect all that is Spanish.” Mola was more forthright, saying: “It is necessary to destroy the capital of a perverted people who dare to oppose the irresistible cause of the national idea.”

Basque priest Father Alberto Onaindia witnessed the carnage in Gernika and wrote in desperation to the Primate of Spain, Cardinal Gomá: “I have just arrived from Bilbao with my soul destroyed after having witnessed the horrific crime that has been perpetrated against the peaceful town of Guernica… Senor Cardinal, for dignity, for the honour of the gospel, for Christ’s infinite pity, such a horrendous, unprecedented, apocalyptic, Dantesque crime cannot be committed.” He begged the Cardinal to intervene to sure the Francoists’ threat – that Bilbo was next – was not implemented. Gomá responded by insisting that Bilbo must surrender. Referring to the Basque Nationalist Party’s (PNV) loyalty to the Republic, he added: “Peoples pay for their pacts with evil and for their perverse wickedness in sticking to them.” Francoist forces viewed the scene a few days later, and a Carlist soldier reportedly asked a senior officer in Mola’s staff: “Was it necessary to do this?” The lieutenant colonel replied that it had to be done in all of Bizkaia and Catalunya. In 1970  PNV member Joseba Elosegi, one of the Basque soldiers from the Battalion Saseta which had withdrawn to Gernika for a period of recuperation and was present on the day of the bombing, carried out an act of self-immolation in a protest against Franco in Donostia, shouting “Gora Euskadi Askatuta!” (Long live the free Basque country!). Elosegi was badly burned but survived and described his protest as the desperate act of a man who had “obsessively remembered” for more than three decades the scenes he witnessed at Gernika.

Steer immediately understood the significance of the attack on Gernika, and in his Times article he wrote:  “In the form of its execution and the scale of the destruction it wrought, no less than in the selection of its objective, the raid on Guernica is unparalleled in military history. Guernica was not a military objective. A factory producing war material lay outside the town and was untouched. So were two barracks some distance from the town. The town lay far behind the lines. The object of the bombardment was seemingly the demoralization of the civil population and the destruction of the cradle of the Basque race.” His report was reprinted in the French communist newspaper L’Humanité on 29 April, where Pablo Picasso read it. The artist captured the international outrage over the attack in his world-renowned painting. He had been commissioned earlier that year by the Spanish Republican government to paint a mural for the Spanish government building at the World Fair in Paris. On 1 May 1937, he dropped his original plan and produced his most famous work, Guernica, instead.

How do vulture funds manage to pay practically no tax in Ireland?

Tyrellstown.jpg

This is the fourth in a 4-part series on tax avoidance in the Irish state.

1.Irish state marketed for tax avoidance since 1950s

2.Yes, we’re still a tax haven for tech giants

3.Ireland’s IP Knowledge Box – another tool for tax dodgers

4.How do vulture funds manage to pay practically no tax in Ireland?

The three key mechanisms for tax avoidance that have been used by multinational corporations (MNCs) in the Irish state over the past decade have been the Double Irish, inversions, and the use of Special Purpose Vehicles (SPVs) under the Irish state’s lax securitisation regime introduced in Dublin’s International Financial Services Centre (IFSC) under the Taxes Consolidation Act 1997.

Bloomberg reported in February this year that a survey by the Financial Stability Board found that the Irish state’s shadow banking sector ranked third with China as the largest in the world after the US and Britain, and at more than 2.3 trillion euros it was 10 times the size of the Irish economy. Half a trillion euros were held by unregulated SPVs, the FSB found. A Financial Vehicle Corporation (FVC) is a securitisation instrument as defined by the European Central Bank FVC Regulation, but while SPVs share many of the same features they are outside the Regulation.

Screen Shot 2016-07-27 at 7.16.14 am

The Central Bank estimated that in 2015 there were 779 FVCs holding €415 billion – required by the ECB to report quarterly data since 2009 – and 600 SPVs in 2012 holding €150 billion. In its Macro-Financial Review published in June this year, the Central Bank said there was, as of December last year, 820 SPVs holding €322 billion in assets. SPVs were not required by the Central Bank to file reports until last year. SPVs are generally used for loan origination but can also carry out securitisation activities.

Section 110 companies

The Central Bank says that tax provisions introduced in the 1991 Finance Act aimed at allowing the creation of structures that were broadly profit and tax-neutral in order to facilitate the securitisation of mortgages. This was then expanded beyond the IFSC with Section 110 of the Taxes Consolidation Act 1997, which came into effect in 1999.

The assets that could be held, managed or leased by a Section 110 company was extended by the Finance Acts of 2003, 2008 and 2011. SPVs and FVCs use “orphan companies” usually held by a charitable trust in order to keep assets off the balance sheet of their true parent companies. The originating companies of the majority of SPVs in Ireland are from the US, Britain, Germany, France, Italy and Russia. The collapse of two Dublin-based SPVs that originated from German bank Sachsen Landesbank in 2007 led to a €17 billion emergency banking bailout by the state of Saxony.

To qualify under Section 110 the company must be resident in Ireland; acquire qualifying assets of at least €10 million; and notify Revenue that it wants to fall under the Section 110 framework. The qualifying assets can include shares, bonds, securities, insurance and reinsurance contracts, hire purchase contracts, money market fund investments and more. Since 2012, qualifying assets can include commodities, carbon credits, plant and machinery.

While an SPV is a taxable entity, and should be taxed at the non-trading corporation tax rate of 25 per cent, under Section 110 its taxable profit will be measured according to the rules of a trading company – so the SPV is entitled to a tax deduction for all trade expenses, such as interest paid. As a result, SPVs “can utilise various techniques to strip profit out on its underlying investments and can reduce or eliminate the tax it is required to pay” according to law firm Dillon Eustace. The International Tax Review states that Section 110 companies are “typically structured so that income earned is matched with its expenditure resulting in minimal taxable profits”.

The result is that SPVs, in particular vulture funds buying up distressed mortgages in Ireland, are earning millions of euros annually from mortgage-holders and shifting it offshore but are paying as little as €250 in tax to Irish Revenue. According to various media reports, between 2011 and April 2016, vulture funds in the Irish state purchased loan portfolios worth €62.9 billion against the backdrop of a mortgage arrears, housing affordability and homelessness crisis.

Banks are increasingly selling off distressed mortgages to vulture funds at reduced prices, who have proven to pursue repossessions of homes even more aggressively, fuelling the housing and homelessness crisis. In May Ulster Bank announced the sale of 900 family homes with distressed mortgages as part of a €2.5 billion property loan portfolio to vulture funds. This follows the purchase in March of 200 family homes by a Goldman Sachs vulture fund in Tyrellstown, Dublin.

It has been reported that the largest purchasers were Goldman Sachs, Cerberus, Deutsche Bank, Lone Star, CarVal and Apollo. In 2014 the Irish arm of US vulture fund Lone Star, which holds distressed German mortgages, generated €1.24 billion but paid less than €1 million in tax. Cerberus’s 2014 accounts show it generated more than €140 million of revenue on its Irish assets, but paid less than €2,500 in tax.

Goldman Sachs subsidiary Beltany’s 2014 accounts show that it generated income of €44 million – but paid just €250 in corporation tax. Cayman-linked Mars Capital generated revenue of €14 million in 2014 but also paid just €250, as did Launceston Property Finance, which originates from Luxembourg-registered CarVal and generated €16 million. Some of these banks are under the direct supervision of the European Central Bank, leading Sinn Féin MEP Matt Carthy to write to the ECB in June to request it to investigate the relationship between these banks, their associated vulture funds, tax avoidance and evictions in Ireland.

SPV structure

Source: Grant Thornton law firm, ‘SPV taxation’, 30 September 2015

Irish tax law enables tax avoidance by Section 110 companies

The specific features of Irish tax law that enable Section 110 companies to do this include the fact that there are no ‘thin capitalisation’ laws in Ireland (there is no minimum profit required for a company for tax purposes, so an SPV can strip out all of its taxable profits if it chooses). Any costs of raising finance are tax-deductible under Section 110.

The most important provision of the law has been Section 110(4) which permits a Section 110 company to take a deduction for “profit participating interest” if certain conditions are met. The Finance Act 2011 introduced anti-avoidance provisions that sought to deny deductibility for that profit element of interest, but included exceptions that made the measures meaningless.

The anti-avoidance provisions do not apply (so interest is fully deductible) where the recipient of the interest or other distribution is either a person resident in Ireland, or a person (resident in an EU Member State or tax treaty country who is not “connected” with the SPV) who is a pension fund, government body or other person who is exempted from tax which generally applies to profits, income or gains in that jurisdiction. Just in case any of those exemptions do not do the trick, the Finance Act 2011 also introduced an exemption on withholding tax on interest paid through quoted eurobonds.

The Finance Act 2011 also expanded the list of qualifying assets from only financial assets to also to include commodities, carbon credits and plant and machinery, aimed at making Ireland more an attractive site for the aircraft leasing industry. Tax treaties can be used to reduce withholding taxes on inbound payments for lease rentals, and Irish-resident SPVs can receive incoming investment management services without being subject to Irish VAT.

Section 110 companies are allowed to calculate profits according to the old Irish generally accepted accounting principles (GAAP 2004) instead of the new Irish GAAP or International Financial Reporting Standards (IFRS). Dillon Eustace law firm, which advises Ireland’s National Asset Management Agency and Lone Star, among others, says the legislation was amended after industry successfully lobbied Revenue over concerns that International Accounting Standards “could compromise the profit neutrality of an SPV”.
The 2010 transfer pricing rules do not apply to Section 110 companies.

Total return swaps, where the SPV swaps all of its receipts with another company in its group in return for enough funds to discharge liabilities, should be liable to tax but apparently are not in practice and are used as a profit-extracting mechanism. Dillon Eustace advises clients: “There may be a technical liability to Irish income tax for recipients (i.e. the swap counterparty) who are not resident in a country with which Ireland has a double tax treaty but, in practice, this liability is not enforced by the Irish tax authorities.”

Ireland’s membership of the EU and OECD (and its ‘white-listed’ status) and the listing of securities on the Irish Stock Exchange are further incentives for SPVs to domicile in Ireland.

SPVs generally use an orphan entity ownership structure that ensures the entity is not owned by its originating bank or hedge fund but by a charitable trust. Revenue have raised concerns about the use of charities for this purpose as revealed through Sinn Féin TD Pearse Doherty‘s Freedom of Information request last month. Dublin’s corporate law firms generally establish the charitable trust or provide the use of their existing charitable trusts to SPVs.

For example, Matheson has established its own charity, the Matheson Foundation, which it regularly uses to help incorporate SPVs for its clients. Its website says: “The Matheson Foundation has two clear goals: to help children in Ireland to fulfil their potential; and to encourage corporate philanthropy in Ireland.” The Central Bank has found that most FVCs and SPVs incorporated in Ireland have no employees.

Qualifying Investor Alternative Investment Funds

A second key instrument used by international banks and hedge funds to avoid paying tax in the Irish state is the Qualifying Investor Alternative Investment Fund (QIAIF), which replaced the Qualifying Investor Fund (QIF), which was originally established by NAMA in 2012. The QIAIF is primarily a structured fund for real estate investment and is often used together with an SPV to ensure access to double tax treaties. QIAIF assets in Ireland are valued at €302 billion. They require a minimum subscription per investor of €100,000 and are subject to almost no other requirements.

QIAIFs are entirely tax-exempt from income tax and capital gains tax regardless of where the investors are resident, as well as being exempt from withholding tax for any payments made to non-Irish resident investors. Irish Real Estate Investment Trusts (REITs), a vehicle with a collective ownership structure for real estate investment established in 2013, are also exempt from income and capital gains tax from rental payments in most conditions.

The Irish Collective Asset Management Vehicle

The Irish Collective Asset Management Vehicle (ICAV) Act 2015 came into effect in March last year. It introduced a fifth type of corporate fund structure, alongside the investment company, unit trust, common contractual fund and investment limited partnership, and appears to have been established with the explicit goal of facilitating tax avoidance by US investors.

Matheson law firm describes the ICAV as “the culmination of a joint government and industry project to make available to promoters a legal framework for a corporate fund vehicle that is specifically designed for investment funds. Matheson partners were extensively involved in the industry project to introduce the ICAV.” It adds that “it is expected to become the vehicle of choice for UCITS and Alternative Investment Funds in Europe”. If the government’s reaction to accusations it was facilitating tax avoidance by SPVs was disingenuous, its claims to be unaware of the use of the new ICAV structure for tax avoidance is ludicrous.

The ICAV has several features that distinguish it from other fund vehicles:
*An ICAV can classify itself as transparent under the US check-the-box rules in order to avoid taxation that may apply in the US to passive foreign investment companies.
* An ICAV has its own legislative code that will allow it to avoid compliance with several Irish and EU company law requirements.
* It is not required to spread risk, unlike an investment company.
*An existing Irish investment company can convert to an ICAV easily, and a foreign corporate investment fund can domicile in Ireland and convert to an ICAV without incurring Irish tax in either case. Matheson suggests the jurisdictions where migration to Ireland will occur are the British Virgin Islands, the Cayman Islands and Jersey.

Despite the Irish government’s formal support for the OECD-BEPS process and its limited moves to respond to international pressure since 2014, there are a large number of significant legislative gaps that remain in place in the Irish state that not only allow tax avoidance by MNCs and global financial giants, but actively encourage it. Each step forward has been accompanied by “exemptions” that serve to make the reform ineffective, and appear to have been directly designed by the US Chamber of Commerce, the Big Four accounting firms and the major Dublin corporate law firms: Matheson, Arthur Cox, William Fry, Dillon Eustace and others, in a stark illustration of the “captured state” concept applying in Ireland.

Some of these legislative problems will be addressed to a certain extent by the transposition of the European Anti-Tax Avoidance Directive over the next period (though certain provisions, such as exit taxation, won’t take effect until 2020). There are a number of issues that will not be addressed by the ATAD, and a number of glaring loopholes that need to be closed in the meantime – Section 110 being the most urgent of all.

Ireland’s IP ‘Knowledge Box’ – another tool for tax dodgers

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This is the third article in a 4-part series on tax avoidance in Ireland.

1.Irish state marketed for tax avoidance since 1950s

2.Yes, we’re still a tax haven for tech giants

3.Ireland’s IP Knowledge Box – another tool for tax dodgers

4.How do vulture funds manage to pay practically no tax in Ireland?

US technology and pharmaceutical giants in the Irish state have benefited from varioustax credits, incentives and loopholes specifically relating to intellectual property and research and development, in addition to the low Irish corporation tax rate. But very little actual R&D is carried out in Ireland as a result of FDI, with US MNCs preferring to base R&D centres in Israel, China and India.

R&D tax credits against corporation tax were introduced in 2004 and expanded in Budget 2015 as the news that the Double Irish was to be phased out was announced. A 25 per cent tax credit is available on all qualifying R&D expenditure in addition to a 12.5 per cent tax deduction – so, a total of a 37.5 per cent tax deduction on such expenditure, or in other words, a corporate tax rate on R&D activity of around 3.3 per cent. Any company which trades in the Irish state and carries out R&D activities in Ireland or in the European Economic Area and incurs expenditure is eligible.

Before 2015, a base year of 2003 was in place – ie, a company could only claim credit for expenditure over and above what it incurred in 2003. This was to be a rolling base year in order to incentivise companies to spend more but the year didn’t change, and the base year was abolished altogether in Budget 2015. Under a Freedom of Information request, the Irish Times found in January 2015 that Department of Finance officials “expressed concern that changes to tax breaks in Budget 2015 would cost at least €50 million in foregone taxes annually and reward a relatively small number of companies” – just 15 firms, in fact, including one that would benefit by €14 million. The names of the companies were blacked out in the FOI release, but according to the Irish Times, “records indicate many of the firms that stood to benefit lobbied in favour of the move”.

There were no audits carried out on the tax credit scheme for the first decade of its existence. It was reported in September 2015 that 200 audits carried out in 2013 found “several multinational firms have been found to be aggressively and improperly claiming tax credits for research and development to lower their corporation tax bills” and resulted in firms being made to repay €21 million in back taxes. Revenue has identified the tax credit as a “significant risk” and used scientists and technical experts in its audits to determine if the companies were genuinely carrying out R&D.

The OECD modified-nexus regime

Also announced in Budget 2015 (with the phasing out of the Double Irish), and introduced in Budget 2016, was the Knowledge Development Box, a corporate tax rate of 6.25 per cent for profits arising from certain forms of IP. Ireland had already introduced the first “patent box”, a lower rate of tax on IP-related profits, in 2000 before the introduction of the 12.5 per cent corporate tax rate. A British patent box with a rate of 10 per cent from British and/or European patents was introduced in 2013. Luxembourg, the Netherlands, Cyprus, Spain, France, Portugal, Belgium and Malta have all introduced special low tax rates for profits from patents.

Patent boxes have been described as mechanisms for tax avoidance. The OECD-BEPS project proposed action to reduce the potential for profit-shifting abuse through patent boxes by ensuring there was a genuine link, or nexus, between the lower tax rate and R&D that was initially developed in the home state. A German-British compromise in November 2014 resulted in the so-called modified nexus approach being adopted by the OECD, which retained requirements for genuine local initial IP development but added concessions for Britain including a transition period and a 30 per cent “uplift” in what counts as qualifying expenditure to reflect outsourced intra-group research activities and costs.

While the Irish government initially opposed the modified nexus approach publicly during the German-British negotiations, and actively sought the advice of US MNCs in drafting its own legislation, Finance Minister Michael Noonan clearly saw the writing on the wall. Part of the OECD agreement was that all new entrants into existing patent box schemes that did not comply with the modified nexus approach would have to cease by 30 June 2016 and be abolished by 2021. When introducing the KDB in Budget 2016, Noonan stated that it would be the first and only patent box in the world to be fully compliant with the OECD’s modified nexus approach. Following the adoption of the German-British modified nexus approach, the European Commission withdrew its investigation into patent boxes.

Ireland’s Knowledge Development Box

The Irish KDB took effect on January 1 this year. It will apply a 50% allowance in tax relief to “qualifying profits”, resulting in a 6.25% tax rate. Qualifying profits arise from specified trade in “qualifying assets”, being intellectual property resulting from research and development carried out in Ireland or an EU member state. The intellectual property forms that can be qualifying assets are defined as being copyrighted computer software, inventions protected by patents and supplementary protection certificates, and plant breeders’ rights. The formula for calculating the qualifying profits under the KBD is below:

Qualifying Expenditure + 30% Uplift Expenditure  x  Qualifying Asset = Qualifying Profit
Overall Expenditure

Qualifying expenditure is expenditure incurred in R&D activities that lead to the development, improvement or creation of the qualifying asset. Cost-sharing agreements where costs are outsourced to intra-group parties are excluded, but such intra-group expenditure and acquisition costs can be added as uplift expenditure up to 30 per cent. The overall expenditure is the full amount of costs incurred in the R&D and acquisition of the IP, so the qualifying expenditure is measured as a proportion of this. The qualifying asset is the profits made by the specified trade in the IP product and can include any royalty or other sum received in respect of the use of that qualifying asset – including sales income attributed to the qualifying asset on a “just and reasonable basis”.

The specified trade in the qualifying asset can include:
– the managing, developing, maintaining, protecting, enhancing, or exploiting of the IP;
– the researching, planning, processing, experimenting, testing, devising, developing or other similar activity leading to an invention or creation of intellectual property; or
– the sale of goods or the supply of services that derive part of their value from the activities described  above.

KBD open to abuse

The corporate lobby initially expressed disappointment about the government’s use of the modified nexus approach, with one lobbyist saying: “What the Government could have done is waited longer to produce it. If they waited a few years more the temperature could have dropped and there would have been less focus on international tax, and they may have been able to pick up ideas from other countries… It has certainly impacted on how effective the KDB will be for the future in terms of an incentivisation vehicle.”

The Big Four accountancy firms and some corporate law firms have been more optimistic – while they have criticised the “onerous” tracking and tracing provisions that require a separate profitability stream to be accounted for each asset, they have nevertheless welcomed the KBD as a means to reduce tax bills that will specifically benefit the technology and pharmaceutical MNCs provided they jump through a few extra hoops. For example, the pharmaceutical sector generally uses “serialisation” features that correspond with the tracking and tracing provisions, but these would need to be developed in the technology sector.

Deloitte stated: “In our view, the introduction of the Irish KDB regime is welcome, although the narrow scope of IP assets that will qualify for the regime ultimately will result in limited uptake [ie, not trademarks] outside of the pharmaceutical and technology sectors.” William Fry law firm has said: “Overall, the KDB is to be welcomed as it bolsters Ireland’s competitive tax regime and complements existing tax benefits for IP such as research and development relief and the capital allowances available in relation to intangible assets. Given the limitations where research and development is carried out by group companies, in the first instance, the KDB relief may be more beneficial to indigenous companies. However, with proper planning, the relief may also prove to be of benefit to multinational enterprises.”

There is no doubt that the KBD will benefit MNCs disproportionately and that the KBD is wide open to abuse. The definition of R&D activities is identical to the definition in the R&D tax credit legislation, and it too can be self-reported by corporations when filing their accounts. The hugely problematic nature of measuring the value of intangible assets remains. The weak existing transfer pricing regulations on the arm’s length principle from the 2010 legislation will be applied. There is a right for Revenue to consult with experts on the R&D being claimed if it wishes to, as under the R&D tax credit regime, but a corporation can appeal against such consultation on the grounds that disclosure would be prejudicial to its business.

Put simply, there is nothing in the KBD legislation to prevent it from being used to concentrate profits offshore. The Double Irish system where all non-US sales pass through Irish subsidiaries to dramatically reduce the tax bill can continue but in a simplified way, with both Irish subsidiaries being tax-resident in Ireland, with one that can collect sales profits and another that holds IP rights and receives royalties that are taxed at the 6.25 per cent rate.

Inevitable profit-shifting – a theoretical example

Here is just one theoretical example of how the KBD can be exploited: a technology MNC, Pear Inc, is headquartered in Silicon Valley where 90 per cent of its overall R&D is carried out. It has two subsidiaries in Ireland called Pear Ireland Ltd and Pear Ireland Holdings. Pear Inc develops a software programme, called iThing, with 100 per cent of the R&D carried out in San Francisco. Pear Ireland Ltd then works on the next generation of the product – iThing 2.0.

It could claim to spend 70 per cent of the relatively small amount of R&D expenditure needed to make a few changes or improvements to the original iThing programme in Ireland, resulting in the creation of iThing 2.0. The new programme would not need to be patented with the Irish Patent Office because computer programmes are generally excluded from patentability but are specifically included in the qualifying asset IP definition in the KBD.

Because the new variation of the programme is in itself a qualifying asset, the overall expenditure does not necessarily need to include the original expenditure incurred in San Francisco, only the 30 per cent of expenditure not attributed to Ireland. As intra-group cost-sharing agreements are not allowed under the KBD, Pear Ireland Ltd can under certain circumstances add 30 per cent uplift, equaling 100 per cent of overall expenditure.

To be sure, Pear Ireland Ltd can simply obtain an advanced opinion from the compliant Irish Revenue to affirm its calculation that it incurred 70 per cent of the R&D costs, as the track and trace provisions are only required to be checked by the home state. Pear Ireland Ltd then licenses the IP to Pear Ireland Holdings, which collects all of the non-US sales profits from iThing 2.0 but reduces its taxable income through paying royalties and/or licensing fees to Pear Ireland Ltd under the clearly ineffective existing arm’s length legislation.

Then 100 per cent of the royalties and licensing fees received are attributable to the R&D expenditure carried out in Ireland, calculated as qualifying profit under the KBD and taxed at 6.25 per cent (this is on top of the 37.5 per cent tax deduction available for R&D expenditure through the combined R&D tax credit and the 12.5 per cent R&D tax deduction). This is an extremely simplistic example of a structure but it could obviously be improved in terms of tax avoidance through the more creative use of royalty payments and subsidiaries around the world including in tax havens.

No evidence that patent boxes stimulate R&D

There is little evidence that patent boxes do anything to increase genuine R&D or attract FDI in the productive economy in the states they exist in. Speaking in Dublin in March this year, the head of the OECD’s centre for tax policy Pascal Saint-Amans, said the development of knowledge or patent boxes does little to actually foster innovation and the creation of intellectual property.

This was followed by an OECD report in June this year which said Ireland’s public financial support to R&D businesses was “skewed” towards R&D tax credits that benefited MNCs, and explicitly called for public resources to be redirected away from MNCs to local SMEs, where there was little growth, in order to develop indigenous enterprise and increase productivity. Despite more than a decade of generous R&D tax credits and other tax incentives to promote FDI, less than one-third of IDA Ireland companies invest in R&D at all.

But despite its limitations and potential for abuse, a system of R&D tax credits, targeted towards SMEs and indigenous enterprise, has a broader economic and social value if implemented correctly – whereas there is no such corresponding social and economic benefits arising from a patent box regime. A research paper on patent boxes in 2014 argued: “Tax incentives for R&D expenditure reward firms for the societal benefits from innovation that they themselves are unable to appropriate. It is hard to make the argument that a patent box serves the same purpose: patent boxes introduce a preferential rate for income from innovations that are already protected by Intellectual Property Rights (IPRs). IPRs enable firms to capture a large part of the societal benefits, such that the need for a tax incentive for protected innovations becomes unclear.”

The supposedly limited opportunities the modified-nexus compliant KBD presents for US MNCs to reduce their tax bills makes it all the more likely that it has been introduced in the full knowledge that it will be exploited, while the government will turn a blind eye. Based on the form of successive Irish governments in relation to tax avoidance, we can guess that the government had two goals with introducing the KBD: to send a political message to US MNCs that the Irish government remained committed to ensuring the Irish state could continue to be used as a conduit for tax avoidance despite the phasing out of the Double Irish; and to introduce yet another mechanism that is wide open to abuse in order to please MNCs.

In the context of the phasing out of the Double Irish and an international crackdown on the use of offshore tax havens, the Irish KBD is an attractive mechanism for creative “onshore” tax avoidance. Matheson law firm advises its clients that offshore tax havens such as Bermuda and the Cayman Islands don’t have “the necessary economic infrastructure to which value and ultimately profits can justifiably be attributed”, whereas Ireland on the other hand can construct “profit-generating centres defensible by reference to functions, risks and tangible assets of the Irish operation,” advice that has become all the more relevant in the post-BEPS context.

Continued: How do vulture funds manage to pay practically no tax in Ireland?