IRELAND IS A HIGHLY PROFITABLE LOCATION FOR MULTINATIONALS
George Lee, RTE Economist
The most recent statement from the Industrial Development Authority, on July 17th this year represented quite an optimistic note about Ireland’s economic prospects despite the tough economic times we are living through. The IDA statement was designed to give some guidance to the public regarding the foreign direct investment inflow into the country so far this year, and the prospects for new jobs from foreign direct investment for 2013 as a whole.
Last year, IDA sponsored companies had been responsible for the creation of almost 13,000 new jobs, which – when the job losses in existing IDA sponsored firms were taken into account – translated into a record number of net new jobs from the IDA sector in 2012.
The good news was that the number of new investment projects for the first half of 2013 was running in the region of 15 per cent higher than 2012. The agency said that 70 new projects had been secured in six months, half from multinational corporations already based here, and half from multinational companies who had agreed to invest in Ireland for the first time. The expectation is that 7,000 new jobs will result from that six months haul of multinational investment into Ireland. If that trend can be maintained into the second half of this year it would amount to 14,000 new jobs, a 10 per cent increase on last year.
This is a really good performance in a very tough global economic climate. It demonstrates very clearly that Ireland remains an attractive location for multinational investment. And it suggests that, regardless of the many aspects of our economy that remain in intensive care, at least our industrial strategy is still fit for purpose and the country remains well served by the efforts of the IDA. However, the IDA statement carried a warning that, despite the glut of unsold properties nationwide, we are fast running out of the kind of office and industrial property stock required to house multinational corporations in the Dublin area. It highlighted three projects in the pipeline for the second half of 2013 that would take up 600,000 square feet of accommodation in Dublin over the coming months. The warning concerned the fact that once those 600,000 square feet of accommodation were used up there was very little spare capacity remaining. They pointed out that the majority of the type of foreign direct investment available to Ireland these days wants to locate in Dublin. The implication is that for 2014 we are likely to run into significant problems housing the type of multinational companies which want to come to Ireland.
The signal was clear. If we do not get new commercial property design and development going again in the Dublin region very soon we will in effect have to turn away foreign direct investment, and lose the high quality internationally traded jobs that such investment would bring. For a country struggling to recover from the great economic recession, such a loss of much needed employment would be a travesty.
What the IDA has outlined is a significant challenge for the policy makers in government and for organisations like NAMA who need to consider how best to respond, and what incentives might be possible to deliver the critical infrastructure required. In an era when jobs are so scarce and positive economic stimuli so rare there will be much public disappointment if they fail.
The fact that Ireland has been so successful at attracting inward investment and the jobs that come with them is a reflection of the fact that Ireland is great at facilitating multinationals’ desire to maximise and retain profits.
In 2005, for instance, there were 1,023 IDA client companies. They accounted for sales of €90 billion, €14.6 billion of expenditure in the Irish economy and 155,000 various jobs. The average payroll cost was €38,600. Today, the number of companies and the number of jobs are very similar. But sales have risen by 40 per cent. Spending in the economy is up by 28 per cent to almost 19 billion euro. Meanwhile average payroll costs have risen by 24 per cent to €48,000 per worker.
While benefits such as these are immensely important to the Irish economy, it is hard not to notice that the sales of multinational corporations based in Ireland have been growing far faster than the contribution of the multinationals to the Irish economy, either in terms of jobs, wage levels or spending in the Irish economy. This is surely a reflection of just how profitable Ireland has become as a location for such corporations.
After all of the bad economic news and reputational damage that Ireland has suffered since 2008, it is reassuring to learn that we are still winning the foreign direct investment game. On another level, however, it is hardly any wonder that Ireland has scored so well when it comes to attracting multinational investments. It would be an understatement, after all, to say that people have been surprised to learn – from recent revelations in the United States and in Britain – just how well multinational corporations have been doing from their activities in Ireland.
The term “Double Irish” entered the public discourse with a vengeance when it was revealed in recent months that some of the largest and most profitable multinational corporations in the world have managed to exploit Ireland’s corporate tax laws in a manner that enables them to be tax resident nowhere in the world. In this regard the New York Times identified the technology company, Apple, as a pioneer which has used Ireland to take tax avoidance to a new extreme, by structuring companies so that they do not incur tax liabilities anywhere.
The so called “Double Irish” is an arrangement under which corporations like Apple are able to divert incomes out of Ireland into low tax regimes in places like Bermuda and the Cayman Islands. It is made possible by the fact that Irish tax laws allow two companies to be set up here side by side, with one of them resident here while the other one is resident in a tax haven. Funds can then be transferred from one to the other so that cash can be held free of US tax obligations in the offshore location.
Apple has three subsidiaries based in Ireland which are not classed as resident in any country for tax purposes. The company makes no secret of the fact that it uses its Irish subsidiaries to shelter, from tax, the profits made by Apple in the rest of Europe, and Asia.
In fact, Phillip Bullock, Apple’s head of taxation, estimated that one of its Irish subsidiaries, Apple Operations International, had channelled $30 billion in global profits over the past five years without filing a single income tax return. Some small taxes were paid as a result of the interest earned on the cash it was hoarding and some other small local liabilities. But US Senate investigators allege that the true amount sheltered from tax in this fashion by Apple over the past four years is as much as $70 billion dollars.
But Apple is by no means the only high profile IDA client whose ability to exploit the tax advantages of locating in Ireland has attracted major international criticism of late. Google has also been accused of paying far too little in taxes. On revenues of €12.4 billion in 2011, it paid just €22 million in taxes here. It has a complicated corporate structure in Ireland that involves a link with another subsidiary in Bermuda. Google Ireland Limited is owned by Google Ireland Holdings Limited which is in turn owned by a company called Motorola Mobility International which operates from a PO Box in Bermuda. The Bermuda company bills the Irish operation for things like administrative expenses, staff costs, sales and marketing expenses, and royalties for the use of technologies and systems and, by the time all that financial “magic” is finished with, the tax bill has vanished.
Other multinational corporations operating in Ireland are also under the spotlight. For instance, Intel Ireland which has an address in Co Kildare is a branch of another Intel Corporation incorporated in the Cayman Islands for tax purposes. Elsewhere, PepsiCo Global Investment Holdings is incorporated in Ireland but pays its taxes in Curacao off the coast of Venezuela. And there are many many more – and not just in Ireland, but all over the world.
Tax arrangements like these, and the attention that has been focused on them at international level in the US, the UK and at the recent G8 Summit at Lough Erne in Fermanagh, have changed international attitudes to the way multinational corporations operate. In July, the G20 nations agreed in Moscow to embark on what is described as a “once-in-a-century” programme of reforms to close many of the international tax loopholes exploited by multinational corporations. In unveiling the agreement, French Finance Minister, Pierre Moscovici, said it is clear that multinational companies have developed an unprecedented know-how for minimising their worldwide tax that is impossible to justify to ordinary citizens.
The OECD has now produced a 15-point action plan. A fresh OECD task force is to be set up to study the business models used by multinational companies and how profits should be apportioned between different countries. The aim is to draw up firm recommendations within 12 to 30 months to clamp down on international tax avoidance. The upshot is that there is now a global determination to rapidly tackle the international tax practices that have been exploited by many of the companies who have brought jobs and investment and innovation to Ireland in recent decades. The IDA does not and has never referred to the creative taxation practices availed of by corporations like Google or Apple or Intel here when marketing Ireland as a location for foreign direct investment. So, from the IDA point of view, any changes that result from the G20 and OECD efforts will not directly impact on their marketing strategies.
In fact, the IDA is adamant that companies locate in Ireland for a wide variety of reasons apart from taxation. The availability of skilled workers, a competitive cost base, good trade connections, appropriate regulation, and may other factors are high up on the list of attractions that work for Ireland. It is even argued that any changes to international tax rules that reduce the role of the tax loopholes, if fairly applied internationally, could work to enhance the attractiveness of Ireland’s current corporate tax regime and the simplicity with which it is operated.
That said however, there is little doubt that a period of uncertainty lies ahead in the field of foreign direct investment. Corporate taxation has been one of the cornerstones of Ireland’s marketing strategy for inward investment and as a result Ireland is vulnerable to the impact of changes that may be imposed in the years ahead.
Ireland’s vulnerability to the impact of changes in international tax rules as they apply to foreign direct investment highlights how important it is for the country to continue to promote indigenous industry, develop our own resources, and invest in innovation and research at home.