Last week the Irish government announced their annual budget with some tweaks to its corporate tax policy. As expected, the practice known as ‘Double Irish’ of repatriating profits from one low tax regime to another has been ended with time allowed for companies to regularize their arrangements in line with new rules.
According to Dara Kelly, Leader, US Irish Business Group at Grant Thornton “Much of the detail (of the Budget) was flagged in advance, the key objective was to retain the attractiveness of our regime while maintaining our reputation overseas.”
Kelly continued “Longer term, our view is that Ireland is well placed to benefit from the OECD’s drive towards aligning taxable profits with substance. It was important that the Irish regime continues to remain competitive and the changes ensure that the overall package of tax reliefs in Ireland makes us a compelling location for foreign investment.”
All this has taken place against the backdrop of sustained negative criticism of the Irish tax code in recent times. Pressure has been mounting on Ireland as international sentiment turns against tax avoidance by large multinational companies. This international media commentary about Ireland’s low corporate tax rate is a misconception. The reality is Ireland is not, and never has been, a tax haven.
Ireland does have a low corporate tax rate - 12.5%, a cornerstone of Irish tax policy since the 1950s. In other areas of the Irish tax regime, as any Irish taxpayer will tell you, Irish taxes can be punitive - up to 50% of income deducted from paychecks at source. The Irish tax authorities are incredibly effective at collecting tax from their citizens.
Martin Shanahan, the new CEO of IDA Ireland (the government agency responsible for the Irish success in the international arena of winning FDI) explained; “After the Budget, the core tax offering of our 12.5% tax rate remains very much intact, and now there is also clarity and stability in relation to the residency rules too. Overall Ireland’s credentials as a pro-investment location are cemented by the changes and reaction from client companies has been very positive.”
“Ireland's tax regime has been built around having economic substance, in terms of employees, payroll and capital investment. Ireland has strongly denied any suggestion of a tax haven status and I am happy to report that this accusation has been firmly put to bed by budgeting changes. This is not an issue of Ireland’s making but we are committed to playing our part.”
So why does Ireland continue fighting to maintain this low corporate tax rate in the face of such powerful pressure? Why do the Irish not say ‘let’s increase our corporate tax rate in line with other countries and play nice in the sandbox?’
This is a deliberate strategy practised by successive Irish governments for decades with one goal in mind - to attract investment dollars to Ireland from overseas to create employment in Ireland. This policy has been a stunning success with Ireland attracting FDI in record figures in 2013.
One obvious achievement is the high number of people employed by overseas companies in Ireland – over 166,000. However, the real success story of pursuing this longstanding policy is often not articulated clearly enough. In addition to providing employment, these successful companies, from Google and Apple right through to Intel and Pfizer, have trained generations of Irish entrepreneurs and world class executives.
The dedication to sustaining this competitiveness in winning foreign investment has also yielded benefits in the Irish education system. Collaboration between multinationals and education institutions has helped develop a highly skilled, adaptable and resourceful workforce.
Other benefits can be seen in the sheer volume of new companies started in Ireland in the last few years, or the speed at which the Irish economy has emerged from recession. This is not all attributable to foreign investment but this did play an important role.
IDA Ireland CEO Martin Shanahan who started in the role a mere six weeks ago added. “Ireland is not some kind of international outlier on corporate tax; Ireland is a member of the OECD and an active participant in the OECD’s Base Erosion and Profit Shifting (BEPS) project. But thankfully I think the recent Budget changes have brought clarity and I expect Ireland’s position will now be a little better understood internationally, and also Ireland’s offering is also likely to be developing further on the tax front, with a knowledge development box on the way via government. So I think we are moving into a new phase and that will see Ireland better positioned.”
All in all successfully attracting lots of the best companies in the world to invest significantly in Ireland has injected a self belief in the Irish business psyche. In the same way that the Germans build great cars and the French make decent wine, Ireland has built a world-class capability in attracting foreign investment. We could take a lesson from one of our largest investors, the US - that it’s okay to be good at something and let the world know it.