Never mind Scandinavia.. here’s Ireland

From Prof Reynolds blog comes this link to an article by three members of a Flemish think-tank, Work for All, taking issue with a recent call in Le Monde, echoing a report by a Brussels think-tank Bruegel, for EU states to adopt the Scandinavian socio-economic model. The article points instead to Ireland and argues that the combination of “the so-called “active welfare state” of continental Europe with the Anglo-Saxon liberal economy in a balanced fashion” cannot be ignored. The Irish Times today also looks at Ireland’s 12.5% corporate tax rate, and despite the concern in the title, “American rumblings of discontent over Irish tax benefits cause concern”[subs req], seems mostly in praise of the performance.From the Irish Times article by Arthur Beesley

Ireland’s corporate tax take has risen to some €5.5 billion this year from €2 billion in 1997. It has also delivered massive spin-off benefits for the accounting, audit and legal professions, not to mention a multitude of other businesses that provide services for the sector.

From the Brussels Journal

Ireland: the efficient alternative

Ireland has proved that a substantial lowering of the taxation level can become the motor for launching even the most slackish economy into full gear. A drastic reduction of the Irish tax rate, from 53% in 1986 to its current 35% , has led to a continuous boom of wealth creation at an average rate of 5.6% during the past two decades, while the number of jobs has grown by over 50%. In barely 18 years Ireland jumped from the 22nd to the 4th place in the OECD prosperity ranking. Ireland did not reduce its social welfare benefits. On the contrary. The unprecedented growth led to an increase of fiscal revenue and social expenditure. It was sufficient to improve the productivity of the government.

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One crucial element of the Irish model is its “fair tax” system, in which there is less emphasis on taxing labour and profit and slightly more on taxing consumption. This balance between direct and indirect taxation motivates labourers and entrepreneurs to make productive contributions. It stimulates new initiatives and guarantees a high degree of participation.

Such a fiscal system does not put the entire burden of financing social security on domestic production. Indeed, a consumption tax ensures that foreign production also contributes evenly.

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The Irish model combines the so-called “active welfare state” of continental Europe with the Anglo-Saxon liberal economy in a balanced fashion. The model is efficient. Ireland surpasses all other EU members in prosperity, job creation, social expenditure and productivity per working hour.

The the Irish Times article details the corporate tax side of the strategy –

The strategy that has proved highly successful:

Ireland’s corporate tax take has risen to some €5.5 billion this year from €2 billion in 1997. It has also delivered massive spin-off benefits for the accounting, audit and legal professions, not to mention a multitude of other businesses that provide services for the sector.

In a study last year, the influential American journal Tax Notes used official figures from the US Department of Justice to suggest that Ireland was the most profitable foreign location for US groups.

“Subsidiaries of US corporations now generate profits mainly in tax havens rather than in the locations in which they conduct most of their business,” it said. “In low-tax Ireland, for instance, profits of subsidiaries of US multinationals have doubled in four years, from $13.4 billion to $26.6 billion.”

This rise in pretax profits in the period 1999 to 2002 was recorded before the Irish corporate tax rate, which has being notched downward since 1997, finally dropped to 12.5 per cent in 2003. It is fair, therefore, to assume profitability has increased since then.

If harnessing the tax regime to encourage big companies here is a textbook case of pro-business thinking at the core of economic policy, multinationals are known to play the system to cut hundreds of millions from their tax bills. “It’s not an affinity to Ireland, it’s an affinity to profit,” says one Irish figure who is familiar with the operations of many multinationals.

At issue in recent scrutiny of US business in Ireland is a very well-informed Wall Street Journal report this month of Microsoft’s placing of intellectual property assets with its Irish unit to shave $500 million from its annual tax bill. This prompted a New York Times editorial that condemned the seepage of US jobs and investments into “tax havens” such as Ireland and Singapore.

But the “haven” tag, with all its connotations of shady dealings and covert transactions, troubles people in Dublin’s investment world. Businessman Eoin O’Driscoll – a leading adviser to the Government on enterprise, and president of the American Chamber of Commerce in Ireland – said last week that the description was a misrepresentation and was potentially damaging to Ireland’s reputation as a preferred location for investment.

The Government sees no issue with the way the tax rules are organised. “Fundamentally, Ireland is bound by the same rules on state-aid as every other EU state. This is all done in the open. This is all done above board,” said a spokesman.

But if the system itself is managed in a transparent way, the Irish performance of multinationals here is notoriously difficult to track from their public filings.

Such groups only rarely file a single consolidated set of accounts in Ireland, and they sometimes shield their operations from public glare by registering their operations under titles that bear little resemblance to their brands or trading names. For example, one of Microsoft’s core units here is called “Round Island One”.

According to IDA Ireland spokesman Enda Connolly tax havens are characterised by zero or low tax, a lack of transparency and the absence of any requirement to carry out real business in a jurisdiction. “In any technical fashion, you cannot describe Ireland as a tax haven. There’s genuine substance there,” says Connolly.

“Over-aggressive use of Ireland’s tax benefits in an international context by companies where there’s little substance or value-add activity taking place in Ireland, and, as a result, marginal benefit to Ireland, is not something the IDA advocates. We would never promote that to our clients. It’s not something we would.”

Greenwald, who advises many US groups in their dealings with the Internal Revenue Service (IRS), says he has never seen resistance from the US tax authorities to such groups doing business in Ireland. “There was never any mention in the discussions with me that they don’t like Ireland. I don’t think that the US looks at Ireland and sees the Bahamas or the Caymans or the British Virgin Islands at all.”

David Rosenbloom, director of the international tax programme at New York University, makes a similar point. “The name of the game is to keep as much money as possible in a low-tax jurisdiction such as Ireland,” he says.

“Ireland is attractive for a variety of reasons: EU membership, an educated workforce, acceptable infrastructure, and certainly less of a taint than some jurisdictions, which are more openly tax havens, let’s say Cayman Islands. The evasion community doesn’t like 12.5 per cent.”

Still, news last week that the IRS is seeking almost half a billion dollars in back tax from software group Synopsys over its Irish subsidiary’s transactions implies a level of concern about the activities here of some companies.

At issue was the price at which US technology was transferred to the Irish unit. However, the IRS won’t talk publicly about the tax strategies employed in Ireland by multinationals.

For all that, the debate about the flow of business and money away from the US is an emotive one there, where the Democratic candidate, John Kerry, attacked the outsourcing of industrial jobs to foreign factories relentlessly in his unsuccessful campaign for the White House last year. The introduction by President Bush of special incentives for companies to repatriate their foreign profits suggests that Kerry’s argument struck a chord.

The Bush scheme, which gave groups a once-off chance to return money to their home units at hugely reduced tax rates, has been used by US groups here such as Forest Laboratories and Dell. Irish banks are cashing in on the initiative, with AIB advertising in recent weeks that it had extended a $60 million loan to US group Stiefel to help it avail of the scheme.

Dan McLaughlin, chief economist at Bank of Ireland, said that such repatriations “may well be a feature” in what was a negative inflow of foreign investment late last year. It’s big money, too.

“In the fourth quarter of last year, the foreign direct investment inflows were negative. Foreign firms disinvested in the fourth quarter of the year by just over €3 billion,” he says.

As the Irish Ferries dispute worsens, the outsourcing debate is not without resonance at home. But it ties in also with IDA Ireland’s dogged insistence that the pursuit of future economic success lies in creating higher quality jobs, moving skills “up the value chain”.

In a globalised economy in which big companies can with ease move low-skill jobs to low-wage economies, high-cost Ireland will not appeal to basic manufacturers or the purveyors of call centre services. The slashing of corporate tax rates to below 20 per cent by new EU members such as Latvia, Lithuania, Hungary and Poland helps to explain the non-stop drive to drum up international business.

In this context the Government has proved remarkably adept at tapping into the thinking of multinational managers as they survey the world in search of business opportunities.

Arthur Beesley does highlight a couple of benefits in particular to investing companies –

Crucial here was the absence of Irish legislation on the price that companies must pay to transfer technology or intellectual capital from a unit in another country into Ireland. This makes it easier to execute such a transfer and, coupled with the stamp duty exemption, it also provides an incentive to do so.

By carrying on additional research and development work here on the US intellectual property, Irish-based units can reduce the transfer price they must pay for the property. Among the first to take advantage of these rules was Microsoft.

Another was Google, whose Irish unit spent $120.5 million research and development in its first full year of operation. Thanks to its Irish operation, the group “significantly lowered” its tax bill for the first three quarters of 2005.

In a separate provision in the Finance Act of 2003, the Government put rules in place that significantly reduced the tax on the profit an Irish-based holding company would gain on the sale of a subsidiary. This development was well received by the market. Kellogg, the world’s dominant cereal market, soon established a new European headquarters in Dublin.

But also points out that this is not such a new approach –

In style, at least, the newer incentives are nothing new to Ireland. As far back as 1956, the Government of the day introduced a tax-free scheme on the export of products manufactured in Ireland. That was followed in 1987 with the introduction by Charlie Haughey of the IFSC regime in Dublin’s docklands. In 1997 the Rainbow coalition took the decision to gradually decrease corporate tax from 36 per cent to 12.5 per cent by 2003.

Thus Ireland has been in the tax incentive game for close on 50 years. If the Celtic Tiger was built on the back of significant multinational investment in the domestic economy, no one here will let go of that any time soon.

Over a turkey lunch last Thursday with Silver Ridge Chardonnay and French Tom red, US-Irish business people celebrating Thanksgiving Day heard Brian Cowen pledge yet again to maintain the rate at 12.5 per cent.

As the boom times continue, they have much to give thanks for.