By Anthony McDonnell, Queen’s University Belfast
Ireland is to phase out its controversial “double Irish” tax scheme. It follows international criticism and the European Union’s investigation into the legalities of Apple and Ireland’s tax arrangement, and a long-term fascination with whether the country is akin to a tax haven for multinational companies. But endless focus on Ireland’s corporate tax rates makes it seem that this is the sole reason for the high levels of foreign investment.
Ireland possesses one of the highest ratios of inward foreign direct investment stock to GDP. It also has one of the highest ratios of employment in foreign subsidiaries across services and manufacturing industries. The focus on Ireland’s tax rates as the reason for this belies the fact that many other countries also offer very attractive tax incentives to foreign companies and that Ireland has a great deal more to offer than just tax policies.
What multinationals want
The singular focus on corporation tax suggests that all multinational companies “shop” for their bases in the same way; that global companies take up locations for the same reason and with the same package or incentives. This is not the case.
Research identifies a plethora of reasons that go into how companies decide where to invest and locate. As well as tax concerns, these include how amenable the host country’s legislation and regulation is, labour and operating costs, industrial relations, and the availability of resources including labour and so forth.
Common route and language
Ireland’s low corporate tax rate has undoubtedly been a significant contribution to the country’s attractiveness and is hence a major explanatory fact, but it is not the only one. Often overlooked is the fact that Ireland is the only English-speaking country in the eurozone. For organisations trading in the eurozone, a base in Ireland brings with it the ease of working in English as well as not being exposed to currency fluctuations.
Ireland has also been an EU member state for almost 40 years and is well connected in terms of international air routes. And the regulatory environment is supportive in terms of having largely manageable, pro-business employment relations. Support by way of tax credits and grants for research and development activities are also attractive to investors.
So, even though the “double Irish” tax loophole is to be abolished, political support for industrial policy that is investment-centred remains, as does a low 12.5% headline tax rate. And the mimetic effect of successful multinationals already in Ireland should not be downplayed. This has arguably been fundamental to the cluster effect of industries developing there.
Wealth of human capital
Another factor that is critical for attracting investors is the quality and availability of human capital, which Ireland has in abundance. A 2010 European Commission report stated Ireland produced the “most highly employable graduates in the world”. Some key competitors, including those offering low tax rates, for foreign investment did not poll so well in this study which built support for the contention that low corporation tax is just one, albeit critical, factor.
Plus, there is a range of independent academic research that highlights the importance which multinationals place on Ireland having developed a significant cadre of managers who are well versed in international business. Not only are the technical skills of management highlighted, but also the ability of “local” management to influence corporate decision-makers over which operations should receive new investments or mandates. It is this kind of influence that is most likely to further attract and embed multinational companies in Ireland.
There is little doubt that Ireland’s position as one of the world’s most globalised economies is in no small part due to a longstanding policy that prioritises attracting and retaining foreign investment through incentives such as a low corporation tax and liberalised trade policies. But it’s clearly not all about corporation tax. It’s arguably not even the single biggest incentive.
As former US president, Bill Clinton, put it at the Invest in Ireland Forum in 2012:
You’d have to be nuts not to take advantage of the unique investment opportunity presented by one of the most business friendly countries in the world, with the youngest, best-educated workforce in Europe.
So while it might worry some, the decision to close the “double Irish” structure should not totally scare off further investment.
Anthony McDonnell does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.