WHAT NEXT FOR FDI IN IRELAND?

Ireland may have won a big victory on Apple, but the arguments over our reliance on multinationals will not end there, writes Fearghal O’Connor

IN a quiet, nondescript business park on the outskirts of Dublin a senior team manager at the Irish office of a big multinational tech company was recently looking at buying more desks. A regional office elsewhere in the world was to be shut down and the expectation was that new positions would be created back at the EMEA head office in Dublin to take up the slack. But then came the surprising news. The furniture order was put on ice. The positions would not be relocated to Dublin after all, but to a much lower-cost operation in southern Europe.

“They basically found somewhere cheaper,” said the manager. “It used to be that everything had to go into Ireland because that is how you saved your tax, but companies like ours are now looking for low-cost locations again.”

This apparent diminution of the Irish operation was a direct consequence of the big global clampdown on tax strategies that companies such as his routinely used when selling their wares.

“When the Double Irish [one such tax strategy] went away, suddenly you didn’t need to be in Ireland to do certain orders. Our office in Ireland isn’t really important from a tax perspective any more. So we can transact orders here in Ireland for the US, but our teams in Asia and in Eastern Europe can now also do this. It doesn’t matter where you are sitting any more. It’s all just gone completely flexible.”

It’s a story that is playing out in many different ways. Apple and Ireland hit the global headlines with their victory last week over the European Commission, which had failed to prove any fault in another Irish tax strategy from the past.

There were celebrations in Dublin, but nervousness too. Ireland’s taxation policies were once again global news. It remains to be seen whether the Commission will appeal the result but, either way, few believe the win at the General Court of the European Union is the end of the affair.

Thousands of well-paid multinational staff will have felt the ground rumbling beneath their feet in recent times. There is nervousness that Ireland’s industrial policy has too many golden eggs in one weakening basket.

Multinationals are an incredibly important part of our economy. A new study from the OECD revealed Ireland is a very long way in the lead globally when it comes to the amount of our corporate tax take that comes from foreign multinational corporations, with 65pc of the almost €4bn in corporation tax take coming from that source. No other country comes close to being so dependent on big foreign companies.

But, of course, no other country comes close when it comes to the relative amount of jobs foreign companies have brought either, with almost 245,000 employed by the sector.

And trade figures from the CSO also underlined just how important multinational exports are to the Irish economy at a difficult time. The figures indicated that indigenous industries are taking a big Covid hit. Food and beverage exports, along with others, are down. By contrast, the medical and pharmaceutical sector, largely the preserve of huge Irish-based arms of American, British and other multinational firms, was up 11.3pc. Indeed, that sector accounted for 66pc of exports in the first five months of the year.

“Our export sector is still primarily driven by multinationals and if we didn’t have them we really would be in a serious bind,” said economist Jim Power. But he believes the Apple case victory will not end the focus on our tax system. “Corporate tax is a massive issue at a global level now. The problem for Ireland is that despite the positive ruling, the perception, rightly or wrongly, is still widespread, in certain key countries, that Ireland is basically using its corporate tax policy to steal tax revenues from other countries. And that feeling would not have disappeared as a result of the Apple decision. Over the last few years we have been put up as the poster boy for this and this decision will not remove that tag.”

Most commentators believe that growing international pressure for a digital tax to make sure multinationals pay tax in the jurisdiction that the economic activity really occurs, not where the balance sheet resides, is inevitable. The Common Consolidated Corporate Tax Base (CCCTB), long resisted by Irish governments, is also being driven by the European Commission. At OECD level the Base Erosion and Profit Shifting Project (or BEPS Project), set up to combat tax avoidance by multinational enterprises, is bringing change.

And if Irish Government ministers and the IDA were wondering if the now infamous Apple case might draw a line under Europe’s assault on Ireland’s tax policies, they need only have read the Financial Times just days before that decision to help dampen the celebratory mood.

That report indicated Europe is already considering using a new line of attack by using an old treaty to circumvent the need for unanimity in certain tax matters. The report will have been read by some as signs of desperation on the part of zealots on a crusade to take on low-tax countries. To others it will have come as a statement of intent from Europe: the beatings will continue until morale improves. “Any ripple about tax that hits the headlines in the Financial Times or on the other side of the Atlantic will always generate a lot of concern in c-suite in the US,” said Lucinda Creighton, former Minister of State for European Affairs whose Vulcan Consulting advises multinational clients in Dublin, Brussels and the US.

“The Apple result will have been a huge relief for the Government and the IDA and will be noted in every single boardroom that’s relevant to Ireland in the context of existing FDI and potential prospective FDI. So it is massively important, really positive,” she said.

She agrees issues such as the proposed digital tax will have big implications for Irish-based tech companies and the growing number of financial service firms that have moved here since the Brexit referendum. “But the idea of using an instrument in the European treaties to obviate the unanimity requirements on tax issues around corporate tax I think is very tenuous. I mean, if it was possible, it would have been done before now.”

But not everyone believes that the Irish Government and industrial authorities can continue to hold off the force of international opinion. Tom McDonnell, co-director of the Nevin Economic Research Institute, believes Ireland is not going to be able to continue winning huge amounts of foreign direct investment. “We’ve dramatically punched above our weight. We have to realise that while it will continue to be enormously successful, it’s not going to be the driver of economic growth that we’ve seen in particular over the last 10 years. We dramatically benefited from this after 2008 because essentially, it was cocooned from the rest of the economy because it sold to people in other countries. That protected us during the austerity years in a way that Greece wasn’t protected, for example,” he said.

Nevertheless, McDonnell believes Ireland’s multinational boom — much like the huge oil fields that countries such as Norway have enjoyed — is finite. “We should be treating these excess corporation tax receipts effectively as oil receipts,” he said. “We should have been putting this into a wealth fund, but we didn’t. Now we’re going to have to use that money to deal with the coronavirus crisis. It’s great we have it there, albeit temporarily, but we have to assume that it’s not going to be there forever.”

Political and economic realities in countries such as France and Germany mean that it is no longer sustainable that multinationals pay tiny amounts of tax there while citizens of those countries pay potentially increasing amounts of tax, he said. “We’ve seen a rise in populism and anti-globalisation sentiment around the world and part of that is because multinationals pay such small amounts of tax. That means low-tax countries like Ireland and the Netherlands are very much at the forefront of the firing squad.”

Grant Thornton tax partner Peter Vale agrees that the advent of a digital tax would present challenges to the sector in Ireland.

“It is inevitable that an element of it will get sucked away and the next few years will be a challenge,” he said. But, he argued, some of the global changes that have taken place in recent times around intellectual property (IP) and other issues have “actually played into Irish hands”.

Companies have moved vast amounts of IP out of tax havens and into low-tax jurisdictions such as Ireland, meaning that the profits connected to this IP are taxable here even though they generally benefit from tax allowances.

“In due course the allowances will run out. So all things being equal, in seven years time or so you’re going to see an almighty hike in corporate tax receipts in Ireland. Now seven years is a long time in the tax world and so many things could happen between now and then. But there may well be a surge in future years as tax allowances on that IP come to an end. Do I think that suddenly we will have five times the tax revenues or whatever? No, I don’t. But there will be an increase in tax revenues once those allowances run out,” said Vale. “So all is good right now. Ireland, I think, will still remain the most compelling place to do business from the tax perspective, and hopefully other perspectives too.”

But Vale does believe it is crucial the economy lessens its reliance on the sector. “I think we certainly should be looking to hedge our bets. And in fairness, that is what we’ve tried to do by incentivising our own SMEs, with FDI often helping to spawn SMEs here.”

Power feels efforts to create a strong domestic counterpoint to Ireland’s hugely successful multinational sector have fallen short. “We really need to build up the indigenous SME sector here. The SME sector has been the poor relation,” he said. Power recently authored a report for the Local Jobs Alliance in which he suggested that an IDA or Enterprise Ireland-type agency was needed for the SME sector.

“I think with the lack of imagination in our political system, particularly at the permanent government level, the idea is unlikely to get anywhere. But just because something is unlikely doesn’t mean that it is not correct or that we shouldn’t push it. I hope we can maintain a very strong multinational model. It’s good. It’s important. But we definitely should not have all of our eggs in the one basket and I think we pretty much do at the moment.”

Tom McDonnell agreed and said he believes that the indigenous sector has done “pretty poorly” in Ireland relative to other countries.

“But part of the reason for that is that we suck in so much talent into the multinationals,” he said.

“They’re very secure jobs, they’re very attractive jobs. And that means that a lot of the cohort of people that would otherwise become entrepreneurs end up working for multinationals, which is a much safer option.”

The manager at the Dublin office of the big tech firm has seen change come to a job that most would see as rock solid. But he agrees that insecurity is a relative thing. Take the pandemic for example, which has not spread its pain equally.

“Our share price dropped a bit when the lockdown happened but over the last few weeks it has doubled and gone to its highest point ever,” he said. “Tech is a safe haven. People will just keep using more and more of it even if they are never let leave their house again.”

Before the pandemic the company had “a few million dollars of a hole” in its operational budget. Within a month of the pandemic that hole had been filled because there was no more spending on travel or associated costs.

“The company is obviously not delighted with the pandemic but it is delighted with the drop in costs. I enjoyed the odd business trip, maybe four or five a year, but we’ll never go back to the way we were. We’ve been told worldwide by the company that, for example, no matter what your government says, you’re staying at home to work until the end of the fiscal year and they will review it then. I think when we do go back to being allowed into the office it will only be for prearranged meetings. It’s hard to know what this all means for the offices that ourselves and other multinationals have here in Ireland.”

If thousands of remote working multinational tech employees were never to return to their office desks it could be bleak indeed for property owners, not to mention shops and cafés that rely on these workers for their custom. It would, in its own way, underscore the problems of being overly dependent on one sector to keep an economy purring.

“Before the pandemic our landlord was looking to double our rent,” said the manager. “The landlord won’t be as cocky now.”