Over the last few days, there has been a lively debate on Ireland’s corporate tax affairs. It all started when Stephen Kinsella declared “Let’s say it out loud: Ireland is a tax haven”. Stephen pointed to this not to make the case that we should change our policy on the 12.5% rate – as he himself notes, “we need all the investment we can get”, but to highlight the threats associated with being dependent on tax motives for investment – in particular threats from the US political system, as it struggles with high unemployment and anger at big business.
Op-Ed Wars: It’s getting fiscal
The following day, and in the same newspaper, Brian Keegan of Chartered Accountants Ireland responded. Taking the OECD’s definition of how a region earns “tax haven” status, Brian went point by point through, outlining that Ireland has far more than nominal rates of tax, is very clear on tax issues, does share information with other jurisdictions and – at least according to the ECJ – does require a significant presence in the economy from taxpayers.
With a further response by Stephen, it’s now all kicked off on irisheconomy.ie. For me, the top comment has come from Kevin Denny: it’s probably not very useful to use a value-loaded term like “tax haven” because that gets people’s backs up and instead we should focus on the core point that Stephen was trying to make: it could well be the case that changes to tax codes, either domestically driven or more worryingly elsewhere (especially the US), could have a significant impact on Ireland’s investment performance.
Formally testing for the “elasticity of foreign direct investment with respect to the corporate tax infrastructure” is not an easy ask. In fact, while you might be able to measure the impact of the headline rate on FDI, there are a multitude of factors above and beyond the headline rate that comprise the corporate tax infrastructure – many of these are very difficult to measure.
So in the absence of that exercise, what can do we do? Well, a tax haven is only useful if companies know about it and are using it. So why don’t we ask just investors what they think of Ireland?
Why don’t we ask them?
Yesterday, a report I authored entitled “Investing in Ireland – A survey of foreign direct investors” was launched. The EIU report involved a survey of over 300 executives that had both responsibility for foreign direct investment decisions in their company and familiarity with Ireland. The survey was complemented by ten face-to-face interviews, with executives of companies that have significant operations here, such as Google, those with small operations here (such as Goldman Sachs) and those that could have chosen Ireland but didn’t (such as Kayak).
The survey asked respondents why they set up overseas, what they look for in potential investment locations, whether Government incentives matter (and it so which ones), and which locations (other than Ireland) are most attractive to them for FDI. It also asks them specifically about Ireland: what Ireland’s strengths and weaknesses are as a location for investment, if they have operations here why they came, if they are expanding why – and if they are not based here, why. The survey did not shirk the tax issue either: respondents were asked about the importance of the headline tax rate, the ability to transfer price and Ireland’s network of double taxation treaties.
There will of course always be quibbles about what exactly this sample represents but policymakers do not have the luxury of ignoring all surveys until the One True Survey comes along to answer all their questions. They need to act based on available information, knowing the strengths and weaknesses of that information. Like any good survey, a significant number of cohort questions were also asked of respondents so we do know a good deal about responding companies, including sector, size, number of countries and HQ country.
Ireland’s four pillars
So what do investors say about Ireland? Is it all about the tax? Well… no. There are four reasons Ireland is so successful attracting investment – tax is but one. The foundation of Ireland’s competitiveness is market access: the principal reason companies go international is not to cut costs, it is to access new markets. Ireland offers companies outside the EU access to the world’s largest market. When asked what Ireland’s top three competitive advantages were, by far and away the most popular one was access to EU (and EMEA) markets.
But Ireland has no more access to the EU markets than Birmingham, Barcelona or Bavaria. What else does Ireland have? Access to skill is a second pillar of investment in to Ireland. This can sound like patting ourselves on the back – as Paul Duffy, CEO of Pfizer Ireland, says, “The reason that Pfizer has expanded in Ireland so extensively is the country’s proven ability, from as early as the 1960s, to deliver. The people are reliable and can handle complexity.” But the facts remain: Ireland has a larger proportion of young people with higher education than most other EU countries. And crucially, Ireland is open to skill from elsewhere in the EU: access to skills from across the EU was chosen by almost as many respondents as one of Ireland’s competitive advantages (23%) as local skills (26%).
A third key pillar is the regulatory environment – as you can see from the graph above (taken from the report), both the ease of doing business and Ireland’s legal and fiscal stability were highlighted by between one quarter and one third of investors.
The fourth pillar is tax. But even here, we should be careful not be caught like a rabbit staring at the headlines, so to speak. The headline corporate tax rate is just one component of Ireland’s corporate tax infrastructure. Perhaps more of interest to firms is the effective rate of corporate tax (i.e. once all allowances and loopholes have been applied). And while Ireland has one of the lowest headline rates of corporate tax in the Eurozone, its effective rate (as per the World Bank Doing Business report) is in line with the Eurozone average (both median and mean).
Other components of the tax infrastructure also matter – the network of double taxation treaties matters, particularly to financial services firms (22% of FS firms mentioned it as one of Ireland’s top three competitive advantages). And the ability to transfer price matters too – it was the third most important fiscal incentive for respondents, after the headline rate and double taxation treaties.
Tax Haven? Yes with an if, no with a but
While Stephen is right to highlight the risks of changes in the international taxation environment, Ireland is not a tax haven in the true sense of the word. Tax is not the only reason companies are here – if they were after low taxes on profits, there are plenty of jurisdictions that will charge them zero.
Firms have significant operations in Ireland because of the bundle of factors Ireland offers. I’m sorry I can’t give a more dramatic answer but this is the truth. But in a way, the answer is already dramatic enough. If Ireland were to lose its attractiveness completely on any one of the four factors highlighted – market access, skills, regulatory regime or tax – its phenomenal competitiveness at attracting FDI would be under threat.
So if by “tax haven” you mean that Ireland could no longer continue to attract investment if it had an uncompetitive tax infrastructure, then that it is true. Ireland is also a skill haven, an ease of doing business haven and a market access haven.
PS. There’s lots more to the EIU report than just tax – Ireland’s cost competitiveness, for example, the threat posed by high marginal rates of income tax or recent financial regulation, and indeed the plans they have to create new jobs here. I’ll probably post again on this report but if you get the chance, give the report a read – it’s not long.