TAOISEACH BRIAN Cowen came away somewhat reassured after meeting the US president in the White House on Tuesday. Mr Obama told him that he did not regard Ireland as a tax haven. And Mr Cowen was hopeful there would be a “satisfactory outcome” to the US administration’s review of its corporate tax regime.
But ultimately, relations between states are governed less by personal sentiment and more by national self-interest. Nevertheless, the initial signs are encouraging. Mr Cowen has secured early access to the newly elected president, the third foreign leader to do so, and they have established an obvious rapport.
Both the Taoiseach and Minister for Finance Brian Lenihan were correct to take the opportunity offered by the St Patrick’s Day festivities to state Ireland’s economic case before an influential international audience. Mr Cowen did so impressively in New York and Washington. Mr Lenihan engaged the attentions of the international media in London before meeting his British counterpart, Alistair Darling. Without question, Ireland’s global image and reputation have been badly damaged in recent months. The Government’s poor management of an economy – which in Mr Lenihan’s words “had fallen off a cliff” – when allied to lax regulation of the banks have taken a heavy toll on international investor confidence. Ireland was a low-risk borrower less than a year ago but is seen today by foreign lenders as high risk. As a result, the State must pay a substantial risk premium on its borrowings and is now subject to the highest interest rates in the euro zone to finance a growing and unsustainable budget deficit.
Ireland’s economic difficulties can only be exacerbated by policy changes – whether in the US or the EU – that negatively affect corporate taxes here. The 12.5 per cent rate of corporation tax remains the key incentive in attracting foreign direct investment, particularly from the US. Without it, Ireland is limited in its capacity to encourage major multi-nationals to locate here and overseas companies already based in Ireland would have less reason to stay and expand. In that regard both Mr Cowen and Mr Lenihan in their meetings were right to dismiss any suggestion that Ireland is a tax haven. In the past year some British companies have moved their corporate tax headquarters to benefit from a lower tax rate, prompting a member of Britain’s upper house of parliament, Lord Oakeshott, to describe Dublin, unfairly, as “Liechtenstein on the Liffey”.
Ireland does not fit the tax haven category by any measure. The OECD does not think so and, as Mr Lenihan has pointed out, neither do the US nor the EU. But he readily accepts that major reforms in bank regulation are needed to repair Ireland’s damaged reputation. Earlier this week, credit ratings agency Standard Poor’s (SP) downgraded the Irish banking system for the second time in four months. SP cited as particular reasons for the downgrade the “reputational fallout from the events at Anglo Irish Bank” and “weakened investor confidence in the framework of bank regulation”. Time is not on the Government’s side.