Market participants are rightfully focused on the contagion of Ireland within Europe. However, the depth of U.S. corporate ties to Ireland may surprise many investors.
The value-added of majority-owned affiliates of U.S. companies accounts for more than a fifth of Ireland's GDP. This is the greatest share that American affiliates account for in any country by a wide margin. In second place is Singapore, for example, and the value-added of the majority -owned U.S. affiliates accounts for a little more than 11% of Singapore's GDP. The U.S. affiliates employ around 93,000 Irish workers (as of 2008), half of whom are in manufacturing.
Ireland exports almost 80% of its GDP, and the vast lion's share comes from multinational companies. There is some concern that if Ireland is forced, on condition of getting assistance, to raise its 12.5% corporate tax rate -- which many countries, including Germany, have often complained about -- that it could have significant adverse reaction on Ireland's attractiveness to multinational companies. An OECD study found that a 1% rise in Ireland's corporate tax-rate cut sparked a 3.7% decline in foreign direct investment.
Contrary to the popular impression, Ireland does not have the lowest corporate tax rate in Europe. That honor is shared by Bulgaria and Cyprus, where the corporate tax rate stands at 10 percent. However, as we know, the tax schedule is one thing and the effective rate can be another. Ireland, for example, has a high real estate tax rate that corporations are required to pay in addition to the corporate tax rate. Moreover, studies suggest that Ireland's revenues from corporations are higher as a percentage of GDP than average in western Europe.
Disclosure: No positions.