The attraction of Ireland to (US) Multinationals – Is it the weather?

As part of our series of posts on the economy, retired Irish Civil Servant Niall MacSuibhne (formerly the Irish Revenue dept) writes this post on the how the republic attracts so many US Companies to Ireland. 

“Ireland works.”, a tax director from PwC once said to me. “It isn’t the lowest tax rate around, it isn’t the cheapest location in Europe, but the overall package works. Come to Ireland, you will make money and you will be able to keep most of it.”

Ireland clearly has worked for mainly US multinational business. But the pure density of US businesses in Ireland, surely asks another question, why does it not work for businesses from any other part of the world?

Very few European multinationals have significant operations in Ireland, other than to service the local market.

So why does it work for US based businesses and not others? I would suggest there are a series of complex interlinked reasons:

  1. Tax rules, both in the US and Ireland, but also a willingness by the authorities to do what is required.
  2. Legal system, both are common law jurisdictions.
  3. Time zone & location
  4. Language
  5. Historical links, a CEO with Irish roots may let you in, when you cold call him.
  6. Access to a skilled (not necessarily Irish) workforce
  7. Open access to the Civil Service and political structures.

I did not mention the tax rate, rather the tax rules, because most of these companies pay far less than the 12.5% trading rate.

Historically the cost of doing business could be added to the list, but this has not been true for about 15 years. The failure to control costs from 1997 onwards, saw no major capital investment in Ireland for approximately ten years from the late 1990s when the Wyeth Medica plant at Grangecastle and the Intel Fab 24 investment were approved.

Both were completed in 2002/2003. This led to an increasingly desperate pursuit of jobs, leading to the greater importance of the tax tool, or perhaps more correctly, the little or no tax tool.

I would add an eighth reason, amorality. Ireland is an amoral country, willing to act in any way to protect its links to US Foreign Direct Investment. It is this amorality that marks Ireland out as a winner.

So rather than have the normal discussion around Ireland, FDI, Taxation etc. let us talk about the role of (a)morality and how it helped Ireland get to the top. I will also try to keep away from tax jargon.

As already noted, little or no major new manufacturing operations moved to Ireland post 2000. This is despite the continued importance of high end manufacturing in many high cost countries such as Germany & Italy.

The IDA and perhaps more importantly the professional service firms moved towards attracting service related businesses. The Googles, Facebooks, PayPal, Ebay etc all expanded their Irish operations.

There is little long-term capital tied up by these companies in Ireland. In many cases Irish employees are in a minority, because the natives do not have the requisite skills. It also involves a strange thing called “Intellectual Property” or “IP” for short.

To understand how international tax works, you need to switch off from reality and move into a different realm. A product is not a complete thing, rather it is a series of transactions. For instance a bottle of whiskey dematerialised and translates:

  1. a secret recipe and a brand into ‘Intellectual Property’ (IP) and ‘high value’;
  2. a distillery making the product into ‘low margin toll manufacturing low value’;
  3. Storage and Maturation into financing of stock, and money costs money;
  4. Bottling, into ‘low margin toll manufacturing low value’,
  5. Marketing, label design etc, into ‘high value IP’.

The actual making of the product becomes a low margin activity remunerated with a small net profit, by a subsidiary for another company in one State but with all the real money and profits syphoned away to low or no tax regimes.  A product manufactured in the one place for hundreds of years changes overnight and the IP finds its way to Switzerland or Ireland.

To assist the multinationals pay little or no tax, the Irish Government introduced an IP write off some years ago. This enables a company to reduce their tax from a maximum rate of 12.5% to just 2.5% .

However the Government is in the process of amending that legislation enabling a company claiming the IP write off to pay no tax at all, (Section 35 of the current Finance Bill).

You must also corrupt language to justify your actions, for example, “competition” in the form of “tax competition”. Now businesses compete on basis of the quality of their product or service, even choice.

There is a competitive marketplace for a good or a service. Taxation is not a good or a service, it is a statutory charge levied on a real business activity or income. Until recently, multinationals did not worry too much about corporate taxes.

Profits were good, and while most used various arrangements to defer liabilities, which of course was of itself a successful strategy with inflation (time value of money), paying tax and improved returns were not incompatible.

Tax was just a cost of doing business, once it was kept under control, no one seriously complained.

Apple seems to have been an exception, but if you look at most large US multinationals, Intel, Microsoft, IBM, etc., they all had high effective rates of tax, say high 20s to low 30s (per cent).

In the past ten years, the rate of increase of profits has fallen. Businesses have looked at their expenses, whether staff or tax and cut them. The effective rate of tax has fallen dramatically and has been a major contributor to any increases in net earnings per share.

The Irish have been first in line to help. The Apple negotiations showed the willingness of the Irish Revenue to put a structure with minimal liabilities in place. But also the Google structure put in place by PwC and so brilliantly described by Jesse Drucker in his Double Irish Dutch Sandwich piece back in 2010 and not tackled by Ireland.

This forced the others to take drastic action to cut their tax bills and all found the Irish authorities able and willing to help, which of course makes Ireland even more attractive to firms wanting to cut their liabilities.

The use of the wider taxation tool has brought about an alignment in the interests of the larger accountancy and legal firms with the State. Tax accountants are ubiquitous and have also played a much wider role within the Irish economy than is normal or proper.

The State is a party to supporting the tax scheming of these firms and in their turn these firms attract companies to move to Ireland to use the created schemes. The by-product of which is jobs. As all five parties in the Dáil support the existing tax structures, the stability craved by multinationals is assured.

A recent DofF Techncial Paper included the following thanks to,

‘. . . PwC Ireland in supplying and explaining the data referred to in this Technical Paper is gratefully acknowledged.’

There is no longer any effort to hide it – Irish tax policy is now, if not run, then certainly influenced, by those advising multinationals on how to avoid or minimise their liabilities. And they have become important people, sitting on various boards, committees etc.

You would expect an “Innovation Taskforce” to be full of engineers, designers, academics etc, but in Ireland it has to have a Tax Accountant, in this case, Anna Scally The recent third Commission on Taxation included two, Feargal O’Rourke and Mary Walsh.

Blomberg’s investigative journalist Jesse Drucker wrote this “Local Hero” piece about Feargal in October 2013. In it, this excrescence explains his open access to the authorities and his ability to influence policy. In any normal country the subject of such a story would become the butt of jokes, but not Ireland.

A rueful tax consultant from KPMG said to me that O’Rourke’s reputation had been enhanced.

Any questioning of the tax structures, their morality or efficacy is stamped on ruthlessly. The attack dogs are let loose. The TCD academic Dr. Jim Stewart is attacked at all possible opportunities.

The Dept. of Finance issued a “Technical Paper” in April last to rebut Jim and his recent Financial Times opinion piece had the DofF trolls busier than SF trolls on Ms Cahill.

For an analysis of the Technical Paper, click here.

Drucker was described as “anti-Irish and references were made to his ethnicity. Jesse’s story on Google created a major stir, but an earlier story on Forrest Laboratories, best known in these part as the makers of Sudocrem is also worth reading.

For those who want to read more on the issue, there are links to three discussion papers below, which explain some of the issues in a straightforward manner.

Irish amorality is an all party comfort blanket. Of course Ireland complies completely with its tax obligations because the rules are adjusted to ensure that all is in order.

Tax laws are written backwards to ensure the required outcome complies with the law. Where multinationals are concerned they are above any blame.

Let us take the Israeli/Palestinian question. CRH, an Irish multi-national, gets abused for some involvement but, there of course was a much larger target that no one mentioned, Intel.

The largest single industrial plant in Ireland, with 4,500 workers employed directly in situ is of course also Israel’s largest private sector employer and its products are recommended as one of the 11 brands to let go if want to boycott Israel.

It is also a key company within the US military/industrial complex. Now every second leftie and Provo stuck a Palestinian flag on their Twitter & Facebook pages, but none of course called for action against Intel. (Both Twitter and Facebook “use” Ireland.)

The widespread acceptance of amorality has had political consequences. It helped Bartholomew Ahern to survive so long with his “dog ate my homework” explanations and in our current times helps to explain the survival of the increasingly bizarre Gerry Adams.

Neither shows any signs of a moral sensibility, indeed they display a complete disregard for any form of morality in both their actions and utterances.

Mick Wallace, the self proclaimed tax defrauder, and his parliamentary colleague Clare Daly may legitimately complain about the use of Shannon by the US military, but neither are willing to make the connection between US corporate investment and acquiescence with US foreign policy.

The real attraction of Ireland is its amoral nature and its understanding that once bought, you remain bought.