Every year on St. Patrick’s Day, Ireland’s top politicians make their annual pilgrimage to the United States. Rather than celebrate the national day at home they don the shamrock in Boston, Washington and New York, in a bid to maintain the vital economic links between the two countries.
It’s indicative of just how much the Irish economy has come to rely on the presence of countless U.S. multinationals on its soil.
Yet news this week that the European Union is deepening its probe into the tech giant Apple’s tax affairs in Ireland is bringing the wrong kind of attention to the way U.S. firms operate in the country.
The E.U. investigation comes amid a broader effort by international institutions to crack down on tax avoidance by multinational companies across the globe. Ireland is bearing the brunt of this new crusade, which could dissuade new multinationals from settling on the Emerald Isle in future.
“This can impact trade, impact investment and certainly can impact our reputational capital as a location for doing business,” said Constantin Gurdgiev, an economist and finance lecturer at Trinity College, Dublin.
The European Commission is targeting an agreement made between the Irish government and Apple back in 1991. The tax deal, which set how much profit Apple would pay tax on, was “selective” and constituted state aid, according to the Commission’s latest finding, which would make it illegal.
Both the Irish government and Apple deny the allegations and the case is likely to take years to resolve. However, the impact on Ireland’s reputation – already battered by a U.S. Senate Committee hearing last year into Apple’s tax practices – has been immediate.
“Companies may be concerned with being associated with Ireland.”
The country is increasingly being seen as a haven to facilitate companies looking to push profits around the world to reduce tax liabilities. The Dublin government has become ever more concerned about its reputation and has started to make moves to close some tax loopholes. There is no talk, however, of raising the 12.5 percent corporate tax rate, the second lowest in the bloc, which has long drawn the ire of some of its European neighbors.
While the negative publicity is unlikely to see the big multinationals leave, it could make new ones more cautious about locating there, analysts said.
“Companies may be concerned with being associated with Ireland,” said Seamus Coffey, an economics lecturer at University College Cork, located in the southern Irish city where Apple has based its European headquarters since 1980. “This might create difficulty in trying to attract new investment because of the reputational damage.”
The Irish economy has become heavily reliant on investment from abroad. In particular, major technology and pharmaceutical companies have based their operations in the country.
Apple now employs 4,000 people in Cork, one quarter of its entire European workforce. Google, Twitter, LinkedIn and Facebook all head their E.U. operations from Ireland, while Microsoft, Avid and Pfizer also have major presences in the country.
In fact an Irish government report in 2014 said that foreign direct investment, or FDI, has created 18,000 new jobs since 2011, a time when the country was hard hit by the financial crisis and had to deal with the severe austerity measures that were a condition of the E.U.-IMF bailout in 2010.
“The sector effectively offset the collapse of growth,” said Mr. Gurdgiev.
And while most of those companies insist that Ireland’s E.U. membership and young English-speaking educated workforce has been a big draw, the country’s low corporate tax rate of 12.5 percent has undoubtedly been a major attraction.
“There are other advantages, it’s not just tax,” says Mr. Gurdgiev. “That being said, we can’t really discount the role tax plays, it is probably what drives the ultimate decision on where to locate.”
“The Double Irish isn’t an Irish tax loophole, it is a mismatch between the Irish tax system and the U.S. one.”
Yet the reliance on foreign multinationals has its critics in Ireland too. Not only do indigenous tech companies have to compete with the big firms for talent, but the economy relies too heavily on the sector, leaving it vulnerable to these big corporations. In addition the country’s economic output, or GDP, is being artificially inflated by profits that are not actually staying in the country, giving a false picture of economic activity.
Furthermore, the focus on Apple has raised other issues relating to how companies based there are pursuing even more aggressive tax optimization. It has become clear that many companies, such as Google, have used legal loopholes, such as the “Double Irish,” that take advantage of discrepancies between different countries’ taxation codes, to ensure even lower rates of tax.
“The investigation initiates questions about whether you have fair competition, between companies such as Apple and its rivals, and also between countries, particularly between E.U. member states” said Alex Cobham, a research fellow at the Center for Global Development, based in London.
But now these practices are becoming the focus of a global effort to crack down on tax avoidance.
“The general climate on tax avoidance has changed over the last few years,” said Sheila Killian, an expert on finance and accounting, based at the University of Limerick in western Ireland.
The G-20 bloc of industrial and emerging nations, the OECD, and now the European Union are looking to both tighten up loopholes and punish those who break the rules. Last week the U.S. government announced restrictions on “inversions,” whereby companies use overseas addresses to avoid U.S. taxes.
This new climate is likely to have an impact on how multinationals operate, as is the fact that tax evasion is becoming less socially acceptable.
“There is going to be some recognition that there are risks associated with being so aggressive,” said Nicholas Shaxson of the Tax Justice Network. He predicts that companies will approach tax strategy with a slightly more conservative view in the coming years.
According to Mr. Shaxson, the negative attention on Ireland’s tax regime is “well deserved,” adding that Ireland is a “predatory economy.”
The Dublin government has started to make moves to address its increasingly poor image. Last year it sought to tighten up its tax rules, getting rid of a loophole that had allowed companies registered in Ireland to declare themselves “stateless,” thereby avoiding paying taxes anywhere.
The Irish finance minister, Michael Noonan, is expected to make some move in the upcoming budget on October 15 to tackle the “Double Irish” loophole. However, that may be little more than a gesture – analysts said many of these issues have to be tackled on both sides of the Atlantic.
“These global tax avoidance schemes focus on mismatches or misalignments between one tax system or another. So the Double Irish isn’t an Irish tax loophole, it is a mismatch between the Irish tax system and the U.S. one,” said Ms. Killian of the University of Limerick.
Meanwhile, the Irish government is still adamant about protecting the low corporate tax rate, which it insists is required to protect jobs in a still fragile economic recovery. But there is some criticism within the country by those who say the big multinationals are not paying their fair share. Dublin’s E.U. partners could step up pressure in light of the tax avoidance scandal.
“We are likely to see pressure to move beyond tightening loopholes to doing something about harmonization or increase the actual rate,” said Mr. Gurdgiev of Trinity College. “The Irish government still has some room to play there in terms of regaining the momentum and shifting the debate away from the headline rate.”
Siobhán Dowling is an editor with Handelsblatt Global Edition in Berlin and reports on politics and economic affairs. She is originally from Dublin, Ireland. Lára Hilmarsdóttir contributed to this article. To contact the author: email@example.com.