Ireland's love affair with multinational investment has deepened in recent years. As major investment from long-standing players like Intel and the pharma giants continues, the new breed of tech firms have created a powerful second wave. Walk around Dublin's digital docks and count the numbers – Facebook is building up to 5,000 employees this year , Google – here since 2002 – has 8,000-plus and companies like LinkedIn, Indeed and Salesforce are expanding fast. Ireland's problem is no longer attracting the jobs, but finding a place for all the employees to live.
Yet change is on the way. Major adjustments in global tax rules now look odds-on to take place. The days of Ireland using its corporate tax regime as a key attraction for foreign direct investment may be numbered. Corporate tax revenues will come under threat. For an economy where one in seven work directly for multinationals and where the top ten firms pay some €4 billion in tax each year – equivalent to one quarter of the health budget – this is no small issue.
While the exact impact of the tax rule changes remains debatable, there is a real sense that the old model of relying on foreign direct investment is no longer fit for purpose. Multinationals will remain key players, of course, but we need to develop other strong areas of growth, too. Sources believe that this is now recognised at the highest level of Government – but if the old model is broken, where do we go next?
********
You could argue about when the big change now under way in the way multinationals pay tax started. But there is no doubt that the appearance of senior Apple executives before a powerful US Senate subcommittee in 2013 was a key turning point. Back then the tactics used by Apple and other major players to – legally – reduce their tax bill on profits earned outside the US were laid bare.
The Apple hearing was problematic for Ireland, because Apple’s Irish operations were central to its tax avoidance strategy. Our problems deepened when the European Commission ruled in August 2016 that Ireland had breached competition rules by favouring Apple in the tax arrangements it offered, meaning – it said – that the company owed Ireland €13 billon in back tax. The company and the State are both appealing this to the European courts. But reputationally, the damage to Ireland had been done, adding to claims – hotly disputed here – that Ireland was operating as a tax haven.
The tax haven argument is largely one of semantics – and Ireland does not meet the traditional tests. But there is no doubt that the country was used for many years as part of a global chain which allowed the big players to cut their tax bills. Now, finally, the rules of this game are changing.
*****
In Paris, a quietly spoken Frenchman, Pascal Saint-Amans, has been leading the international drive to crack down on tax avoidance and eliminate the complex loopholes used by the big multinationals. Saint-Amans is tax policy director at the Organisation for Economic Co-Operation and Development (OECD), which has run with the ball on tax reform in recent years, with the first phase agreement reached in 2016. Ireland has, ironically, benefited from this.
But the next phase of this international plan threatens more challenging change for Ireland. Saint-Amans says that the goal is to reach political agreement on this programme by the end of this year and finalise it in 2020 – and points to support from big players including the US.
The latest negotiations look set to have two significant implications for us. First, it will mean the major multinational companies will pay more tax on their digital activities in big markets where they sell their services and less in countries like Ireland where they have their international HQs. And second, there is strong support for a global minimum tax on multinationals – which could, depending on where it is set, render our 12.5 per cent rate either less attractive or largely irrelevant.
How much tax is at risk here? Ibec, the business lobby group, has estimated that as much as 20 per cent of Ireland’s corporate tax revenue could be at risk in the medium term, though it has said that revenues may yet rise further before starting to fall. This would be around €2 billion in annual revenue lost as the new rules are phased in after 2020.
The Irish Fiscal Advisory Council, the budget watchdog, has warned that between €3 billion and €6 billion in annual revenues are not explained by normal economic activity in Ireland – and thus should be judged as vulnerable.
The impact on attracting multinational investment here is more difficult to quantify, but “will be key for Ireland,” according to Saint-Amans.
Combined with US tax changes, the OECD rule changes threaten to tear up the tax rule book which has existed for the best part of a century. The playing field will be levelled and, according to Feargal O’Rourke, managing partner at PWC, “tax will no longer be the leading card it once was for Ireland.”
*************
The importance of multinational investment in Ireland is difficult to pinpoint exactly – but it is very significant. Recent CSO figures show overseas companies here employ 318,000 people, or one in seven of the workforce. Foreign firms are responsible for around 40 per cent of what is called the value added by all industry in Ireland – basically a calculation of what they produce. However as a large portion of the resulting profits flow out of the country, this overstates their contribution to the overall economy.
Yet Ireland remains highly reliant on multinationals and influential bodies such as the Competitiveness Council and the National Treasury Management Agency have warned about our exposure to a small number of very big companies. What happens, for example, if the new US anti-trust investigation into the big tech firms like Apple, Facebook and Google leads to policy changes affecting these firms?
UCC economist Séamus Coffey says that “the presence of multinationals in Ireland is a risk, but it is only a risk because it has been successful.” US companies contribute around €20 billion to the economy each year, he calculates, about 10 per cent of our national income. This compares to an EU average of 3 per cent. And for our public finances the exposure is notable, with US firms paying €6 billion of total corporate revenues of €10 billion – the latter representing €1 in every €5 collected, way above the international average.
Economists say that this exposure should be a wake-up call to Ireland. They want the cash these companies are now paying in tax – providing a once-off opportunity according to Ibec boss Danny McCoy – used to make the economy work better. But also for policy to be ready if the revenues drop.
Economist Frances Ruane, former director of the ESRI says that it is now vital that the tax revenues we are reaping from multinationals be used to invest and build our economic capacity and that we ensure we have the right policies to support growth in the domestic sector.
So what are the key areas to focus on for the future?
1. Invest, invest, invest.
During the economic collapse, government investment spending was slashed, falling from €9 billion in 2008 to €3.6 billion in 2015. It has taken a toll, with a crisis in housing and shortfalls in investment in other infrastructure. We are trying to catch up and the Government’s new investment plan promises a continued ramping up of investment. But we have a lot of catching up to do.
Infrastructure shortages in areas like housing are now a major economic, as well as social, issue and a crunch issue for overseas investors. Businesses also highlight the need for investment in public transport, innovation and parts of the roads network. Ruane pinpoints sustainable cost-effective water, broadband and healthcare systems as vital areas for investment.
Many of these areas are targeted by the Government’s new investment plan. But prioritising and actually delivering is a huge challenge. Major overruns in large investments like the children’s hospital and the broadband plan and the ongoing housing crisis show how difficult this can be – and using public policy to increase housing delivery is proving a slow process .
Ensuring the cash is there if economic growth slows or corporate tax revenues dwindle is vital. IFAC, the independent fiscal watchdog, has suggested the more cash be set aside than currently planned to maintain investment when growth slows. But the risk is that politics may again dictate that if growth slows, investment is again in the firing line.
2. The Green agenda
The recent Climate Change Action plan laid out the Government’s Green agenda, including a massive programme of investment. But we are only at the foothills here in terms of planning and delivery. And as well as “green” investment, taking proper account of the price of carbon fundamentals changes the framework for all public and business investments. It is no longer all about money – it is about emissions too.
Where should we be looking? Economist John FitzGerald, who chairs the Climate Change Council, told an Oireachtas Committee hearing recently that, for example, major investment could go into retrofitting local authority houses, benefiting the generally lower-income occupants and developing skills in the construction sector.
The green agenda goes much wider. Economist Declan Jordan, director of the Spatial and Regional Economics Research Centre at UCC , points, for example, to the opportunities from offshore wind energy, but also the huge organisation and planning needed. At the moment the planning and infrastructure is simply not there. The green agenda need not be at the expense of economic growth – rather it brings opportunities. It has big challenges for Government too, with tricky choices on how to structure a carbon tax – seen by FitzGerald as vital.
Cracking the issue is now a fundamental challenge, not only because of the greenhouse gas targets but also because investors want to locate where they can, for example, get green energy and operating in an environmentally friendly now demanded by customers and investors. The green agenda requires turning the calculus and priorities behind many investment decisions – public and private – on their head. It requires a giant leap of joined-up long-term policy thinking – and implementation.
3. Education
Ireland ranks well in key areas such as the proportion of students completing second-level and the numbers who participate at third level. And the existing group of big companies has developed and attracted a skilled workforce – a vital factor for others looking to follow.
But Ireland needs to up its game in other areas. Heavy cuts during the crisis have taken their toll on the third-level sector, for example, where the ratio of students to lecturers is one of the highest in the EU and spending per student is relatively low.
While international university rankings are generally seen as a flawed indicator, falling down these lists, as Irish institutors have, is bad PR and may also reflect some weaknesses. Trayc Keevans, FDI director at recruiter Morgan McKinley, says that rankings can be a barrier when international firms are first considering Ireland, even if once they arrive and talk to other players here they are often reassured. Meanwhile as the economy now reaches full employment, she says the ability to attract and retain the right staff is increasingly an issue – and here education and the ability to upskill existing employees are vital.
Declan Jordan of UCC points out that third level institutions now rely more on income of industry and students , including international students, than on public funding. An expert report by a group chaired by Peter Cassells concluded that more funding was needed and outlined three ways to achieve this – student loans, ongoing State funding, or a mix of student payments and state funding. But the Government hasn't been prepared to bite the bullet on this. A decision, some decision, is needed.
4. Develop Irish-owned businesses
Businesses in Ireland have traditionally been seen in two groups – highly productive and efficient multinationals and a less dynamic Irish-owned sector. This is an exaggeration: multinational output and productivity is distorted by the way they operate, while there is a cadre of large, strong Irish firms, notably in the agribusiness sector and a growing number of smaller dynamic and innovative firms.
However all the evidence is that there are also many Irish SMEs which rate poorly on productivity and innovation and a lack of companies developing large diversified export operations. Unfortunately, many of these are precisely the firms most exposed to Brexit – as the UK is often their only export market.
The Irish business start-up rate remains at the lower end of the EU table. While the export performance of the indigenous sector has improved significantly, we still need to develop more firms moving from small to medium and medium to large. Dr Jordan of UCC says that a key issue is to find ways to get SMEs plugged into State supports , university networks and so on. As well as addressing newer markets in China and elsewhere in Asia, he says, one new opportunity, he says, is for import substitution post-Brexit, when UK companies may find it more expensive to export here.
Meanwhile separate policies are also needed for the smaller group of innovation driven firms which have the potential to grow quickly. Brian Caufield, entrepreneur and venture capitalist, points out that the key issue for these firms is how to attract capital and skilled talent in their early phase when they are typically spending a lot more cash than they take in. He identifies changes to share option rules and the rules of a scheme to encourage outside investment in these firms as two vital factors to get companies over the first hurdle of moving to viability and growth.The Government has held consultations on these issues, but whether change will come is not yet clear.
******
There is one other key factor here. All these issues require planning for the long-term. And this is an issue where our political system, facing a short-term election cycle, often struggles. The current Government has promised to break the “boom-bust” cycle and plan for the long term. But as we face into a general election, this is a challenging agenda.
