Why Ireland's Corporate Tax Rate Is Unsustainable

|
Includes: EIRL, IRL
by: Benjamin Miller

Summary

Changing EU and U.S. policies pose a risk to Ireland.

With Trump in office, companies may be drawn back to the U.S.

Apple's fine from the EU show Ireland isn't invincible from regulations.

In the past two decades, Ireland has benefitted from over “$277 billion worth of U.S. direct foreign investment." The journalist Henry McDonald also found that the majority of these profits have come as over 700 U.S. companies have relocated to Ireland as their headquarters. Over 130,000 people have been employed because of this. There are many large firms that decided to move their headquarters overseas from the U.S., including big names like Intel (INTC), Boston Scientific (BSX), Dell, Pfizer (PFE), Google (GOOG), Hewlett Packard (HPE), Facebook (FB) and Johnson and Johnson (JNJ). This is due to the fact that Ireland has one of the lowest corporate tax rates in the world, and certainly in Europe. With a 12.5% corporate tax rate, it makes the U.S. corporate tax rate of around 35% pale by comparison. The low tax rate that Ireland offers is one of the main benefits that U.S. companies see when deciding whether to move their operations abroad. The other side of the coin is that Ireland is a country that can allow U.S. companies a foothold in the European market. Big tech companies are already investing much of their time and money on funding new operations in Ireland. Apple (AAPL) announced in 2015 that it would begin building a data centre in Athenry, Galway in 2015 that would cost $979 million and create over 300 new jobs. This decision by Apple makes it the largest data collection hub in Europe. Ireland is now receiving billions of dollars, manufacturing hundreds of thousands of jobs, and increasingly becoming the tech hub of Europe. All these benefits are extraordinary and Ireland’s economy is improving at an astonishing rate because of this. But what are the downsides to having such a low corporate tax rate, and is a 12.5% corporate tax rate sustainable?

“The think tank for action on social change (TASC) has warned that Ireland is vulnerable to EU and U.S. tax and corporate regulations changes as a result of its over-reliance on a low corporate tax regime.” The reason that Ireland is attractive to so many businesses worldwide is that of its particularly low corporate tax rate. Initially lowered from a rate of 40% in 1995, Ireland adopted a rate of 12.5% beginning in 2003. Ever since Ireland chose to lower their tax rate, GDP has increased in the country by 23%. Considering their GDP growth went up by 7.2% from 1960-1995, a growth of 23% is an immense jump. Just as the majority of Russia’s economy depends on oil, much of Ireland’s economy relies heavily on having a lower tax rate than the majority of Europe. While this is an advantage, for now, nothing is stopping other countries from lowering their tax rates to match Ireland. Professor Stewart at Trinity College says “With a likely reduction of the corporate tax rate in both the U.K. and the U.S., huge pressure could be put on Ireland.” Even a few percent change in other countries tax rates could send Ireland spiralling. As much of their economy relies on these low tax rates, if a few companies saw another country lower their tax rate, it could be enough for them to decide to move their operations. “Paul Sweeney, chair of TASC’s (Think Tank for Action on Social Change) economist network said that inappropriate tax policies have contributed to three major crises in the country since independence and that because politicians have a poor understanding of taxation, it’s important that governments follow fiscal rules.” Ireland has been fortunate enough that the years following the economic collapse in 2008 have been bullish, but with debt issues persisting in Greece as well as Italy, it is only a matter of time before the past 9 years of positive growth will be reversed. Ireland should begin to rely less on foreign companies and start to focus on creating sustainable jobs domestically. Relying less on foreign investment is difficult, but the more Ireland is able to reduce foreign investment the stronger they will be in the future.

Technology companies are beginning to take over major cities across Ireland. Dublin, in particular, is experiencing a major shift towards the future of technology, with many tech companies setting up shop there. Intel, IBM, eBay, Google, Huawei, Microsoft, Dell, Twitter, and Linkedin all have spots in the city. The influx of technology companies has had a positive effect on the economy, with GDP growing annually around 5%. Companies want to join in on the growth and have decided to open up operations in the country. Along with a growing economy, Ireland has a stable climate which is fairly cool. Large data centers are expensive to run, mainly in part because they have to be kept cool in order for them not to overheat. The costs for cooling can add up fairly quickly, and data center Interxion said that the Irish climate is one of the main reasons why they chose Ireland as a place to set up their facilities. Tech companies not only need low costs in order to operate, they also need a skilled labor force. Ireland is one of the most educated countries in the world, “With 48% of the Irish population aged between 25 and 34 holding a third-level qualification.” Having such a large population ready to work and the information needed to perform the job properly, it should come as no surprise why Ireland is beginning to be called the tech hub of Europe.

My personal experience working in an IT recruiting agency has opened my eyes to just how big the tech sector has grown, and why they continue to choose Ireland over other European countries. For one, Ireland is an English speaking country. As many of the tech companies opening up shop in Ireland come from America, the ability to speak English is almost a requirement. 51% of the European population said that they are either native in English, or are strong enough to hold a conversation. This already rules out half of the region, making Ireland an ideal spot for companies to pick. The company I’m interning for relocate people from Ireland, as well as outside of Ireland, to various parts of the country. Dublin, Galway, and Cork are the main places where the IT jobs are located as those are the largest cities in the country. The people that call the recruiters looking for jobs are primarily from India, Poland, Italy, Croatia, and Russia. Many of them are comfortable where they are, but are either looking for a change or want to move up to a senior position. In the past few years, business has started to pick up. My boss, Micheal, has seen an increase in a number of people that are looking to relocate to Ireland as well as a number of deals that he’s been able to close. Much of the decision to relocate can be attributed to a positive news cycle: a person hears that large tech companies are setting up their business in Ireland and they decide to move. Those people that relocated then tell their friends and family that business is great and then they decide to move to Ireland as well. Poland, Nigeria, U.K., Lithuania, and Latvia make up the largest percentage of migrants in Ireland. This influx of migrants is expected to continue, largely depending on if Ireland can continue its immense growth.

Jim Clarken, CEO of Oxfam, has been a critic of the low corporate tax rate. Clarken said that Ireland's choice to pursue a lower corporate tax rate has been hurting Ireland by disabling them to receive the proper amount of taxes needed to operate government effectively. According to Clarken, Ireland has been involved in attempts to sweeten deals for large companies in order to keep them in the country and keep the jobs in the country. While most large companies have stayed put, that may be changing soon with the EU’s decision to fine Apple €13 billion after they found that it had broken state aid laws by offering Apple a deal that didn’t apply to the rest of the businesses in Ireland. Apple threatened Europe after the ruling was announced and said that its future investment in Europe may take a hit in response. While the usual corporation tax rate is 12.5%, the EU found that Apple was only paying 0.005%. Apple perhaps threatened Ireland that they would relocate unless given a lower tax rate, and they had little choice but to agree to their terms. While this may work for short-term growth, this method can’t be relied upon as it’s only a matter of time before other companies start arguing for a lower tax rate as well.

The election of Donald Trump into office will significantly affect the way companies in the U.S. think. With Trump pushing for a lower corporate tax rate, this would compete directly with Ireland’s efforts to keep big companies in the country. President Trump wants to “offer multinational businesses a steep tax break on overseas profits brought into the United States.” Trump wants to bring as many businesses back into the U.S. as possible and is enticing companies by offering them tax breaks in order for them to do so. As one of the main drivers that brought companies to Ireland is the low corporate tax rate, this could pose to be a real issue for Ireland if Trump follows through on his agenda. This will impact the Foreign Direct Investment (NYSE:FDI) that Ireland receives from companies overseas and would dramatically impact the economy. Trump also is looking for companies to repatriate their earnings overseas. A repatriation of funds is simply bringing funds from overseas back to the U.S. As Apple and many other companies have billions of dollars abroad, it would be a huge cost to them since the repatriation rate is 35%. Trump has tried to persuade more companies to bring back their revenue by offering them a much lower 10%. As U.S. companies employ more than 140,000 people in Ireland, the effect would stretch far beyond just the tax dollars that Ireland receives. People’s jobs will be at risk if an alternative isn’t given.

The U.S. White House has also proposed a border adjustment tax. This would encourage companies to increase their manufacturing in the U.S. by offering lower taxes, and harder for other countries to import their goods to the U.S. by raising taxes. The White House’s mission is to try and improve the manufacturing industry, and are actively cutting the costs to incentivize them to produce more goods. The good news for Ireland is that progress on the border adjustment tax has been stalled in Congress and doesn’t appear to be moving forward anytime soon.

Ireland has been prospering over the past decade due to the low corporate tax rate that is found there. It has attracted many large companies from around the world: Apple, Dell, Microsoft (MSFT), Linkedin, and Facebook to name a few. They have enjoyed paying little tax while supplying the people of Ireland jobs in the process. It has been a win for both sides thus far, but those jobs aren’t necessarily permanent. Changing political, economic, and societal changes are affecting Ireland along with the rest of the world. The ‘tax haven’ status that Ireland has enjoyed may not last too much longer as countries like the U.S. are beginning to put forward plans that would lower their corporate tax rate down to a competitive level. This would attract more companies back to the U.S. and would potentially leave Ireland in the dust. Ireland has to become more robust and flexible if they want to keep the 140,000 plus jobs that have been created since it lowered its tax rates. Figuring out another method to attract companies from across the world to invest in Ireland is key if they want to become more independent, and not have to rely on the tax rate alone to generate jobs. Keeping a low tax rate isn’t always going to be a sustainable method for growth, but the large percentage of young, educated, and vibrant youth is a good sign that Ireland has life in it yet.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.