Sniff the air around Ireland’s regime for attracting foreign investment and, for the first time in decades, you will pick up the distinct whiff of uncertainty. It isn’t yet noxious or even pungent. It is not strong enough to sting the eyes or invade the throat. But a faint hum of the unknown definitely hangs there.
The Government will deny this. So will the State officials in IDA Ireland and elsewhere whose job it is to tempt multinationals here. All will herald the prospect of Ireland agreeing to hike its corporation tax rate from 12.5 per cent to 15 per cent to join an international tax deal as providing “certainty”. And it is a truism that investors crave certainty above all else before committing capital.
But as the IDA and the Government have argued repeatedly for years, this State’s reasonably low corporation tax rate is just one element of what makes Ireland attractive to foreign investors; it is merely a single ingredient in the investment policy larder, even if it is a particularly sweet and sticky one.
It isn't just that we speak English. Some foreign investors also like the depth (or occasional lack) of regulatory scrutiny they get and also the enduring stability of Irish political thinking
Officially, there are the usual arguments about investors also valuing our talented young workforce and our education system. But unless that young workforce can afford decent housing without living like monks, its continued presence in current numbers should not be taken for granted.
With the current trajectory of public borrowing and the repayments that will inevitably accumulate, there is also no guarantee that the fiscal capacity will always exist to properly fund the education system. It is tight enough as it is.
Leave the official guff aside, though, and look at some of the real alternative reasons why multinationals choose to commit capital to this windy rock on the edge of the Atlantic. It isn’t just that we speak English. Some foreign investors also like the depth (or occasional lack) of regulatory scrutiny they get and also the enduring stability of Irish political thinking. Unknowns abound here, too.
But let us start with the tax system. It isn’t just the tax rate that matters. It is the entire tax regime. The rate becomes almost irrelevant if you can slice and dice the thing that is taxed: the base. There are further battles ahead for Ireland on this front, regardless of whatever is agreed at the Organisation for Economic Co-Operation and Development (OECD) club of rich nations.
Assume the OECD closes a deal settling on a 15 per cent rate, dispensing with the prefix of “at least” that spooked Ireland. Even if there is also agreement around elements of the base, it is still not a given that this will be the end of tax as a bone of contention. Our friends in Europe, who have long wanted to blunt the Irish tax advantage, may have other tricks up their sleeve.
Whatever is agreed at OECD level will still have to be implemented across the European Union through some sort of directive. The agreed OECD framework will be the sponge, the base of the cake. The Government says it has received “assurances”, but who knows what extra jam or icing the European Commission, at the behest of powerful members such as France or Germany, may try to smear on the directive at a later date?
Paolo Gentiloni, Europe's economy commissioner, was in Dublin two weeks ago making soothing noises to encourage Ireland to sign up to a minimum tax rate. The last time he was here, in June, he was asked straight out if the EU might make another effort to harmonise the tax base ahead of implementing an agreed minimum rate. His windy answer left that door clearly ajar.
It is also uncertain how sultry the Irish tax system will continue to look to investors if and when its utility ends as a resting place for multinationals’ profits, on their journeys to other locations with even lower rates. Profit washing is another reason why some investors are here with such enthusiasm.
Let us assume that multinationals, especially the US tech behemoths that are among the State’s biggest private sector employers, can swallow whatever is thrown at them on the tax-deal front. The tech companies in particular are also content in Ireland because it is where their global data regime is regulated. The Data Protection Commission (DPC) fiercely defends its record of supervision, but there is an emerging consensus among other European states that Ireland’s regulatory touch is not as heavy as it might be.
A recent ruling from the EU’s Court of Justice opened the door for other countries to investigate data complaints against tech companies if their lead regulator (such as Ireland’s DPC) is viewed as being too soft. It is seen as having eroded the “one-stop-shop” regulatory principle that makes Ireland attractive.
On the political front, nobody really knows what lies ahead. The only certainty is that Sinn Féin will play a major role in it, one way or the other
If you are a tech giant such as Facebook, worth close to $1 trillion, why wouldn’t you want most of your data regulation outside of the US to be the responsibility of a small island nation of just five million people, with a total economy worth less than half of your market value?
Inevitably, change will come, too, in the regulatory landscape for the biggest multinationals and, with it, uncertainty for Ireland.
On the political front, nobody really knows what lies ahead. The only certainty is that Sinn Féin will play a major role in it, one way or the other. This week, the latest Irish Times/Ipsos MRBI poll shows the party at 32 per cent support with a 10 point lead over Fine Gael. Even if Sinn Féin doesn’t lead the next government, it will help to shape its policy through the force of its opposition.
In its alternative budget last year, one of Sinn Féin’s centrepiece proposals was to cut about €720 million off the tax breaks that multinationals get from putting their intellectual property in Ireland; as well as a further €40 million off the Special Assignee Relief Programme (Sarp) tax breaks that are geared towards attracting multinational decision-makers to locate here.
Politicians can argue the rights and the wrongs of such policy proposals. But what is undeniable is that such thinking makes Ireland look less attractive to foreign capital, especially when its source is knocking on the door of government
Sinn Féin's oft-stated preference is to lead a government that is a broad alliance of left wing groups, which would presumably include People Before Profit. Paul Murphy, a PBP TD, this week called on the Government to nationalise Facebook. Murphy is an intelligent and able parliamentarian but, even if it was a little tongue-in-cheek, it was a stupid thing for him to say.
Such is the trajectory of thinking in certain quarters of the Irish political system. And no longer are they outliers. So much for all that famous stability.
Ireland’s tax regime has always been the sweet spot of the offering to foreign investors. Whip that advantage away, and how attractive do we really look?
