Are changes to Ireland’s tax regime harming the Irish economy?

October 31, 2016

By: Bobby Casey, Managing Director GWP

double irishI can’t help but wonder what is going on with Ireland. It received a bailout a while ago from the EU, but one of the great things it had going for it was its tax code, and that is slowly being dismantled.

Remember the Double Irish? We covered it here a while back. Basically it was a brilliant loophole that essentially made corporations location independent.

It’s worth exploring the benefits Ireland reaped from this with one corporation in particular: Apple.

Ireland has had several things going for it for a long time: English speaking, highly educated, and hard-working. But Ireland itself could not capitalize on that base, and so lost them to places like London and Paris. In fact, their unemployment through the 1980’s hovered around 16%. Then came Apple…

Apple coming to Irish shores revolutionized that country. Not only did their arrival slow the emigration of a talented work force, it paved the way for other corporations to join them. Once the pharmaceutical companies joined in, they became the largest export for that country and for the first time in their history, they were seeing net immigration numbers. Indeed not just corporations turning to Ireland for opportunities, but people!

The labor was comparatively cheaper than other parts of Western Europe, and these corporations weren’t paying much in taxes, if at all.

In a country of 5 million people, look at all the employment these corporations have provided (Source: New Yorker):

  • “Apple employs nearly 6,000 people in fairly high-paying jobs. For a country with fewer than five million people, this is extraordinary. The equivalent in the U.S. would be a company with four hundred and twenty thousand high-paying jobs. Only Walmart and, arguably, McDonald’s have more.”
  • Google provides another 6,000 jobs
  • Intel provides another 5,200 jobs
  • Microsoft provides another 2,000 jobs
  • Dell provides another 2,500 jobs

That’s about 21,700 jobs. The numbers only go up when you look at the whole kit and caboodle (Source: Sunday Times):

“There are about 700 American companies based in Ireland, employing a combined 130,000 people. Dublin hosts the European headquarters of internet giants such as Facebook, Google and Twitter, while Ireland is also a base for several international pharmaceutical and medical device companies.”

Now the EU is seeking arrears on taxes not paid between 2003 and 2013. Regardless of what Ireland wants to do, Ireland must seek those back payments. (Ireland is currently appealing this demand by the EU.) The EU didn’t just bring the Double-Irish to an end; it wants its pound of flesh lost from not taxing these corporations. As discussed before, the argument is that Ireland’s own tax code – which helped and benefited the Irish – was “illegal” in that it violated “unfair competition” laws within the EU.

Nothing is necessarily stopping other members of the EU from adopting a similar tax code… other than perhaps greedy politicians and the EU itself who refuse to cut into their revenues for the good of the people they are meant to serve.

For this short-term gain of arrears, the long term effects against Ireland could be treacherous. If Apple and the others decide to leave, what then? Is Kerrygold meant to see them through? And what does this mean for Irish foreign direct investment in general?

Ireland is caught in some serious political cross-hairs, because it’s not just the EU. Irish politicians such as Michael Noonan are also coming after offshore account holders and non-domiciled corporations.

“The amendment, under section 19 of the Finance Act, allows the tax authorities to raise an income tax liability against income earned through a company, trust or ‘other structure’ in a foreign jurisdiction, regardless of whether the affected money is remitted to Ireland.” (Source: Sunday Times)

Law firms that deal in foreign direct investment are strongly discouraging any changes to the tax code for this very reason: it will have a negative impact on existing as well as potential foreign investors.

Michael Noonan didn’t stop there. As of May 2017, no one will be able to have more than 100,000 Euro offshore. It will be a criminal offense! They are offering a small amnesty program in the interim:

“[C]urrently those found doing so can benefit from a 10% discount on money they owe, keep their identity secret and avoid prosecution…” (Source: Newstalk)

But come May of next year, Ireland will be spending 5 million more Euro and hiring 50 more people to help in the effort of corralling this “lost revenue”.

What I don’t understand is why they would the Irish government not leave well enough alone? The short term gains of getting their taxes can’t possibly be worth the long term losses of jobs and opportunities. What is particularly odd is that Michael Noonan of all people was at one point heard saying, “It’s my absolute judgment after examining all the factors that this is the best course of action. To do anything else would be like eating the seed potatoes and destroying the future for people for short-term advantage now.” This was in response to the EU’s demand to seek back-payment of taxes and his decision to appeal it.

Criminalizing people for putting their money offshore, reneging on tax agreements with corporations that have demonstrated a net boon for your economy, and acquiescing to the demands of the EU hegemony all in the wake of Brexit? That makes no sense. Ireland’s exports relied on having the UK as the go-between:

“Ireland’s economic health is based on its exports, and nearly all of its exports go through England. A post-Brexit England will likely involve trade frictions and complexities that will hurt Ireland. The long-term devaluation of British sterling may hurt Ireland even more, as its export-oriented manufacturers find it hard to compete with cheaper British exports.”

Ireland should be focusing on its own economy. The political fire-storm surrounding the Panama Papers will fizzle out, but the future economy and recovery of Ireland needs to ride in the front seat here. It sounds like the EU is a huge weight on the ankles of the Emerald Isle. It has a tremendous advantage even over the UK herself if she were free to pursue it. The issues of export are EU imposed not UK imposed. The UK is only too glad to do business with anyone. And what’s more, Ireland is experiencing the brunt end of the British Leave Campaign’s economic argument. They have no say in their economic and tax policies? They are cut out of their own governance.

Ireland is all over the place right now. It better take a long look at what’s best for its people: money in their pockets, or money in the pockets of their government and the EU? This is the question I put to everyone every day in fact. For now, let’s just hope this sort of thing doesn’t come to American shores.

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