FDI investigation: Is this the end of Ireland’s multinational expansion boom?
WITH Molex in Shannon and Novartis in Cork announcing plans to let more than 800 workers go, is the multinational gravy train, which contributes at least a quarter of our total tax revenues, about to come shuddering to a halt?
In what was the worst week for jobs for many years, Molex announced that it was closing its Shannon plant, with the loss of about 500 jobs, while Novartis unveiled plans to shut its Cork plant, with the loss of another 320 roles.
While the two announcements were entirely unconnected, they served as an unwelcome reminder that, what the multinationals bring, they can also take away.
The Irish economy has ridden the multinational wave in recent years. Employment in IDA-supported companies, which stood at just 146,000 at the end of 2011, had risen to 229,000 by the end of 2018, an increase of 57pc in just eight years. The IDA estimates that the multinationals support more than 400,000 Irish jobs, almost a fifth of the total, either directly or indirectly.
This huge increase in multinational employment has been matched by an enormous surge in the corporation tax paid by these companies on their Irish profits, and the income tax and USC paid by their Irish employees. Net corporation tax revenues increased by 26pc to €104bn in 2019, and by 126pc since 2014. This looks like being another bumper year for corporation tax, with revenue for the first nine months of 2019 jumping by another 13pc, to €5.8bn.
Of course, not all of this increase in corporation tax revenue has come from the multinationals, but most has. Figures compiled by the Revenue Commissioners show foreign-owned multinationals were responsible for 77pc of total corporation tax revenue, about €8bn, in 2018.
In addition, the Revenue Commissioners estimate that foreign-owned multinationals generated a further €7.9bn in income tax, PRSI and USC in 2018. This means that the multinationals were responsible for almost €16bn of tax revenue, more than a quarter of the total, last year.
Not only is most corporation tax coming from the multinationals, but this revenue is coming from a relative handful of companies. In 2018, the 10 largest corporation taxpayers paid almost €4.7bn between them, 45pc of the total. The proportion of corporation tax coming from the top 10 has been steadily increasing over the past decade, having stood at 35pc in 2009.
While the Revenue Commissioners do not break out profitability between foreign and domestically owned companies, they estimate that total trading profits of all Irish-based companies were €159bn, of which almost €106bn came from the largely foreign-owned manufacturing, financial and information technology sectors.
In many ways, the dependence of the Exchequer on the corporation tax paid by the multinationals, and the PAYE, USC and PRSI paid by their employees, resembles what happened with property-related taxes in the run-up to the 2008 crash. While the Revenue Commissioners’ data on the multinationals’ tax payments is extremely useful, it needs to come with a slight health warning. The figures include all foreign-owned firms, including retailers, in the multinational category and not just IDA-supported companies.
However, if one sticks to just foreign-owned manufacturing, financial and information technology companies, the apparent anomaly largely disappears, with these firms paying €4.9bn in corporation tax, almost 61pc of the total, and their employees a further €7.5bn in PAYE, PRSI and USC in 2017. Between them, these companies and their workers were responsible for just under a quarter of that year’s total tax take.
Ireland’s success in raking in tax from the multinationals has inevitably attracted envious glances. The Irish Government is currently appealing the EU Commission’s ruling that we are owed €14.3bn in tax by tech giant Apple.
The EU has also proposed the creation of a common consolidated corporate tax base (CCCTB), under which companies would file a single tax return, regardless of where they are based in the EU, and that the tax they paid would be shared out among the countries in which they were active. While the Irish Government has successfully resisted the CCCTB up to now, with the UK seemingly headed out the door, it might be a different story post-Brexit.
Further afield, the rich countries’ club, the OECD, is working on new tax rules that have the potential to seriously erode Ireland’s multinational tax take. Earlier this month, the OECD published its latest set of proposals on the taxation of digital business profits.
The OECD proposal “would re-allocate some profits and corresponding taxing rights to countries and jurisdictions where MNEs [multinational enterprises] have their markets. It would ensure that MNEs conducting significant business in places where they do not have a physical presence be taxed in such jurisdictions”.
Translated into plain English, this means that in future, foreign-owned companies operating out of Ireland, but with customers in other countries, will have to pay at least some tax to the countries where these customers are located, as well as to the Irish Revenue Commissioners.
It is not difficult to suspect that the OECD’s latest proposals are aimed squarely at Ireland’s success in attracting multinationals, eroding other countries’ company tax revenues in the process. With several countries, including the UK and Australia, having already unilaterally introduced so-called ‘Google taxes’, designed to hit profits routed through tax havens by ‘contrived’ means, and the EU unsuccessfully trying to introduce a 3pc digital levy last year, Ireland finds itself firmly in the cross-hairs.
So are Molex and Novartis part of the inevitable ebb and flow of overseas companies in Ireland — Molex had been operating from Shannon since 1971 while Novartis first came to Ringaskiddy in 1989 — or is it the start of something more serious?
“I don’t think that we should read too much into individual company restructuring announcements. Levels of new investment are at an all-time high. Between capital investment, equipment and intellectual property, we are currently looking at between €1bn and €2bn every week,” says IBEC director of policy Feargal O’Brien.
While it may be of little consolation to the more than 800 people who lost their jobs this week, the IDA reported another strong firsthalf performance, with 13,500 new jobs being approved in the first six months of 2019, a 19pc increase on the same period last year. In addition, the rate of job losses at IDA-supported companies is at an extremely low level, just 4pc in 2018.
In fact, the last major job loss announcement at an IDA-supported company was as far back as February 2017, more than two and a half years ago, when Hewlett Packard closed its printer plant at Leixlip with the loss of 500 jobs.
“Despite last week’s disappointing [ job] losses and the significant impact on those involved, the evidence does not support that FDI [foreign direct investment] is as transient as portrayed by some. One third of multinational operations in Ireland have been here for more than two decades, with almost 60pc of them having been here for over a decade. This shows that Ireland is considered a long-term, important location in the strategic plans of these large global companies who have made their home here and are fully committed to their Irish operations,” says IDA chief executive Martin Shanahan.
Nevertheless, Ireland is facing ever more intense competition from other European countries, particularly Switzerland and the Netherlands, and from several US states, for FDI projects. Last week’s announcements were a reminder to the IDA that it needs to constantly rejuvenate Ireland’s stock of FDI.
IBEC’s O’Brien also questions the apparent transience of FDI in Ireland.
“The companies that are here have made very significant investments. A lot of that is sunk costs. It may be harder to get new projects. We will have to work more innovatively”.
When considering possible threats to Ireland’s attractiveness as a location for FDI, most of the attention has focused on changes in the corporate tax regime at either OECD or EU level.
While acknowledging that recent developments have meant that Ireland has “lost a bit of its edge” on the tax front, O’Brien is more concerned about the possibility of a global trade war.
Even if we manage to avoid a full-scale global trade war with the main economies imposing punitive tariffs on imports, something that would hit Irish-based multinationals hard, a significant cyclical downturn in the world economy is probably inevitable at some stage over the next few years. If, or more likely when, this happens, the rate of job losses at Irish-based multinationals could rise sharply. To get some idea of what this might entail, one need only compare last year’s rate of job losses at IDA-supported companies, just 4pc, with the 9pc experienced in 2008 and the 15pc we suffered in 2009.
A return to even the 2008 rate would translate into annual job losses of more than 20,000. Even if this were quickly reversed by a global economic recovery, it would be very painful while it lasted.
Even at this early stage, we can be pretty sure that we will not have to wait another two and a half years for the next major announcement of job losses at an IDA-supported company.
’It may be harder to get new projects. We have to work innovatively’