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.

  • Zeno3

    “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).”

    ========================

    Lets hear all those calls from local businessmen to cut our Corporation Tax Rate so we can bring in Jobs and Investment. What rate should we cut to so we can compete with zero?

  • Sergiogiorgio

    It’s 35 odd % tax in the US compared to a 12.5% maximum in Ireland dummy.

    It’s Peurto Rico with crap weather.

    All the rest is just flannel.

  • Jon Hope

    We’re competing with southern CT rates whether we devolve Corporation Tax powers or not.

    The devolution, and presumed reduction, of the tax would remove the element of competition between North and South that would usually queer our pitch for FDI on the first pass.

    In other words, it should stop conversations going like this:

    “Hi! Would you like to invest in Northern Ireland?”

    > “What’s a Northern Ireland?”

    “It’s like an Ireland but where you’ll pay twice as much… tax”

    > “…”

    🙂

    I want to stress, before I get hounded, that this just helps the ‘first pass’ problem. If you think 12.5% CT rate is going to suddenly put Belfast on par with Dublin for attracting FDI you’re sorely mistaken. I’d guess it will make negligible difference in the short-term. It’s still worth doing.

    I think the article has some interesting perspectives, but this bit had me scratching the head:

    “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?”

    The US companies are establishing EU headquarters in Ireland. The EU multinationals already have EU HQ’s in their own countries.

  • Zeno3

    The tax rate in ROI for multi nationals can be reduced to zero. Do you want us to go to minus 5% or 10% and pay them to come?

  • New Yorker

    Companies in the same industry tend to cluster, like likes being where like is. This is especially true of IT. I believe that is the major reason the ROI has such large FDI in IT. The other reasons above while important are secondary. The same probably applies to Pharma. The major achievement is getting the first one or two companies, then the others will follow.

  • Jon Hope

    You, sir, are referring to a subsidy – and we definintely already do that!

    We should lower ours to match the South’s. Which is unlikely to ever be 0%.

  • Eugene McConville
  • Jon Hope

    Ah yeah I’ve read the ICTU report, a few years ago unless I’m confusing it.

    There are large parts I agree with actually. Probably most of it, it’s just the conclusion I differ on!

  • NMS

    NY, I agree with you that there is a degree of clustering in Ireland. The best example is probably medical devices, particularly stents. However, in relation to IT, by which I presume you mean software, the level of investment involved in Irish operations is very low and the type of work done for the most part is low to middle level. There is a focus on sales management rather than the development of products. The post 2000 expansion is very clearly based on tax arbitrage and access to suitably qualified workers, many of whom are not Irish.Easy access to work permits (something UKNI even with a 0% rate would not be able to offer) and the ability to attract EU nationals, which again I cannot see UKNI, specifically Belfast achieving.

    Since the Wyeth Medica plant, there has been no significant new Pharma plant built in Ireland. There has been some extensions and improvements to existing plants.

    The Irish authorities have been willing to do anything to attract US business and all policies flow from that. The effective rate of tax is approx. 3.5% with many such as Google well below even that.

    Post 2000, tax and legal “flexibility” have been key.

  • NMS

    Serg, It is not as simple as Ireland or Puerto Rico, Ireland offers far more. Access to the EU market is one but I am not aware of service type businesses opening up large operations there. The ability of the Irish authorities to dance on the head of a pin for their US masters is incredible to watch. I remember once being advised prior to going to an International meeting, not to defend the indefensible, rather stay quiet. Binn bhéal ina thost

  • NMS

    Zeno (of Verona?) Yes, UKNI cannot compete against Ireland in the tax arena or any other

  • NMS

    Jon, Yes, you are correct. A suitable tax offering might just get UKNI on to the table. However as it cannot offer anything else, it has a problem.

    In relation to why there is little investment from continental businesses in Ireland, they are investing heavily in other EU states. I think there are cost, language and skills issues.

    There has been a reasonable level of investment in the IFSC type of operations by the likes of DB.

  • NMS

    Lads, The Irish Government is restricted in offering grants in the Dublin & Cork areas, where most of these businesses are based.

    However a company can have a negative CT rate by using refundable tax credits for Research & Development.

  • Zeno3

    We would basically be taking money out of the public purse to give to multinational corporations in the hope that jobs would be created.
    All profit making businesses that are already here would instantly benefit and would not be required to create any jobs.

    Why not just simplify the whole process and pay businesses to create jobs insteading of throwing money at them and hoping they do?

  • NMS

    Zeno – The relationship is a lot more complex. First of all, other taxes would have to go up to replace the taxes forgone. These are likely to fall disproportionately on local businesses either directly in the form of higher charges or indirectly by way of cuts in services.

    However competition for the best workers would also push up wage costs as the better qualified move to the multi-national sector. This could be a serious problem for local businesses, if multi-national activity ever took off in UKNI.

  • Zeno3

    The vast majority of businesses here are very small, usually in Retail or or some sort of Service. All of the businesses here making say 100k would be £7.5k better off with a reduction to 12.5%. It is extremely unlikely that they will create any jobs. A nice business making £300k a year would be around 20k better off. Will they be creating more jobs? It seems unlikely.
    Then we have the problem that most of our unemployed workforce are not well qualified IT or Pharma engineers, so the bulk of the jobs would have to be filled by other European Nationals moving here. That could cause recruitment problems for any company setting up in NI.
    We do only have around 70,000 on Job Seekers.

    My point is that throwing money at already profitable businesses with no guarantee that they will create a single job is extremely foolish and our Politicians would not be doing it, if it was their own money.

  • Sergiogiorgio

    I disagree NMS – it really is that simple. I work with a lot of US Pharma companies that have tax inverted simply to leverage the tax rate. You are talking hundreds of millions and in some cases billions of dollars in tax savings just by having an office in Dublin with a few warm bodies and SAP. If you want EU access you locate in Germany, as its central to the market and has a strong employee pool. You don’t locate yourself on the furthest western edge of the EU with a very limited employee pool.

  • NMS

    Serge – Tax inversions are a completely different kettle of fish. Firstly, they do not even need a few warm bodies, secondly the majority of the inversions are not from the US, they are British. Thirdly, there was no red carpet rolled out for them.

    They have moved their head offices for a variety of different reasons. Indeed many of the US linked companies were previously headquarter in Bermuda.

    I deliberately did not mention the inversions for these reasons.

    In relation to locating in Germany, I can’t agree with you. It may be easier to attract staff to Dublin than Hamburg or Berlin. The cost of employing staff is also far less in Ireland.

  • NMS

    Point taken about the numbers and likely educational standard of the registered unemployed. However these MNCs are not interested in them – they will end up taking new graduates and employees from existing businesses. The likely loss in employment numbers from Public Service adjustments, not just those announced but those that will be the norm for the next five years as the UK Government brings their finances into balance.

    You raise a very important question, “Will they be creating more jobs?” My guess is that UKNI will lose thousands of Public Sector & Public Sector funded jobs over the next few years. Much of the existing private sector is dependent on the Public Sector. Something will be needed to replace them, but there may be a huge skills mismatch.

    Certainly looking at many of the larger MNCs around Dublin, a high proportion of the workers are not Irish.

    May I refer to other discussions here such as the discussions on education and the manner of the adjustments. It strikes me that education spending will be key and should be not just protected but increased. Other areas should take the slack, but it probably won’t happen that way.

  • Jon Hope

    There’s evidence of salary inflation already in my industry, software development. This is particularly alarming because the Govt seems fixated on attracting more software FDI with the main pitch that we’re a low-wage, low-cost economy.

  • Sergiogiorgio

    A miniscule corporate tax rate and cheap labour…and let’s not even mention the black stuff. Cue another ROI bubble.

  • NMS

    Jon, I agree, I have seen very substantial pay increases, however there has been a serious decline in working conditions. Many people being treated as “self-employed” contractors where even a cursory examination of the http://www.revenue.ie/en/tax/it/leaflets/code-of-practice-on-employment-status.pdf would see that they are employees.

  • tmitch57

    In Germany although many people–especially the college educated–speak English, the native language is still German; in Ireland the native language today is English.

  • kensei

    Firstly you need to look at the margins. There will be a certain number of businesses that wish to expand but are limited by costs. The tax cut will take a certain percentage over the edge.
    Second, some business will spend the money on increasing wages, some might invest in new equipmentnor office or shop improvements, some might increase their advertising spend. Some of this money will be recycled and there will be a multiplier effect.
    Some will just sit in the bank and not do very much.
    Whether or not it works out as value for money will depend on the mix and how much FD that can be attracted. The article is right to point out there are many other factors.
    It’s not a zero sum game. I think Invest NI and the Assembly could put together a package that increases our FDI and gives the economy a boost even if it isn’t as good or successful as the Republic. If the 12.5% is an initial block we should do it. If it’s not we should spend as much as needed on tax and the rest on our things to improve the package.

  • Zeno3

    I think it is a zero sum game. If businesses benefit by say £300 million due to the CT cut to 12.5% then that £300 million has to come out of Public Spending. So we are moving £300 million from the public purse into the pockets of already wealthy profit making businesses. Essentially we are trying to buy jobs by enticing FDI with tax cuts. So why not just simplify the whole thing and pay companies for creating jobs? That way, companies that creat no jobs get no money from the public purse.

  • NMS

    Kensei & St. Zeno – May I suggest that there are alternatives, rather than to follow Ireland down the US FDI route. This would involve picking areas where UKNI has traditional strengths and developing either local businesses with those strengths or going out and inviting those businesses to come to UKNI.

    It does not appear that such a policy is feasible within the political structures, because for every winner selected there will be a number of losers, particularly in the “other” community.

    FDI is the easy option to promote when there is no willingness to take hard decisions. For example, if it was decided to create an engineering hub around Belfast, the money to develop it would automatically mean that other areas would lose out as expenditure is diverted. Imagine the screams from West of the Bann.

    One of the points rarely mentioned in Ireland is that FDI is not a source of continuous job growth. There is a broadly similar number of people employed in the multi-national sector now as ten or fifteen years ago. The type & quality of work has changed and pay rates have moved positively too, but not the total number has not moved.

    My own view is that the Irish FDI strategy has been a failure. The economy has not moved on at all and has been forced into more “creative” & desperate policies to even hold on even to the existing job numbers.

  • Jon Hope

    Sorry NMS, I was referring to the North. The South isn’t as sensitive to salary inflation in the tech sector as NI, because we bill ourselves as a low-wage economy.

    Secondly the fact that people are being treated as self-employed contractors is NOT a decline in working conditions. Believe me, I’ve done my fair share of it. Contracting pays twice as much as a salaried role, brings a ton of freedom and is often more interesting work.

    Workers realising their worth and forming their own consulting companies to manage their work/revenue is exactly the kind of empowerment you want.

  • NMS

    57, I think there are a variety of reasons why businesses opt for specific locations, proximity to market, if items are bulky, language issues, access to qualified staff etc. The cost of employing staff in Germany is considerably higher than Ireland. Germany also has a very high employment rate, leaving it hard to get employees. It is also a Civil law country.

  • NMS

    Jon,

    Apologies for the mix up. I accept that contracting may work for some, but I wonder when you take into account National Insurance Contributions, paid holidays, pension contributions, share options or other benefits, whether the difference is so great? As you are also aware the continual cost of training is also moved to the individual, which in the tech area, may not be cheap.I won’t even go into the hassle over tax, which if you are not careful, can be huge.

    There has been a noticeable movement of UKNI workers into the Dublin software area lately, which may be explained by higher pay rates available.