Published in my column of 3rd June 2013 in the Irish Times – what happens when tax avoidance is no longer a viable Irish industrial policy ?…
There is something exquisitely wry about a Republican dominated US Congress now questioning the global taxation policies of US controlled multinationals. On taking office, Republican President Bush quashed an earlier initiative taken by his predecessor, Democratic President Clinton, over this same issue.
Meanwhile in Europe, France and Germany in particular have been applying pressure for a harmonization of corporate tax policies, in fact since the 1970s. The issue forcefully arose again with the Cowen administration during the EU & IMF bailout of Ireland in 2010.
Global corporate taxation avoidance is long running. As the Cantillon column in this newspaper observed on May 28th last, the accounts for the main Apple subsidiary in Ireland were routinely published up until the mid-nineties, showing for example in 1993 that Apple paid just 2% on profits at a time when the corporate tax rate for manufacturing sector was 10%. Any investigative journalist or inquisitive politician might have raised some interesting questions. The recent revelations that certain Irish-registered Apple subsidiaries are now not paying any tax to any jurisdiction, apparently without breaking any current laws in any jurisdiction, must cause at least some chief executives of other Irish-registered multinational subsidiaries to ask why they too cannot avail of similar structures.
One wonders whether in 1981 the instigators of the 10% manufacturing tax in Ireland ever thought that their tax avoidance strategy to attract foreign direct investment would still be in place over 30 years later. A national economic foundation which is built on an assumption that multinationals will forever succeed in avoiding their home countries tax policies, at best seems fragile.
The multinationals have indeed become an economic foundation for Ireland. The 2011 Annual Report of the IDA (the most recent available) notes that the multinational sector accounted for 250,000 jobs (at the time, 1 in 7 jobs); and the then equivalent to 80% of the national take of corporation tax and to 50% of all payroll taxes, amounting to €10B in all. If the multinational sector were to materially shrink its presence in Ireland, the economic consequences would therefore be quite profound.
Fiona Reddan, in her article in this paper on 27th May, investigated the nature of the jobs in the multinational technology sector. It would appear that typically about 70% of the jobs are sales and customer support, and only about 10%-15% in engineering and new product development. This is of concern, because in general sales and customer support activities are easier to relocate to other jurisdictions than the more capital intensive, and more deeply trained, R&D professionals. In comparison, a multinational technology company would usually have about 25% of its total global headcount in engineering and product development, and approximately 45% in sales and customer support – with the remaining employment being in marketing, professional services and administration. Clearly, Irish multinational employment appears weighted towards customer facing activities, particularly for the wider European market, and so requiring good linguistic skills. In turn, the multinational sector in Ireland also depends on attracting suitably qualified immigrants, to compensate for the weak supply of technology-savvy fluent foreign language speakers emerging from the Irish educational system. Multinational employment helps our national payroll tax take, and probably increases the traffic for our airlines, but often has a disappointing impact on our high unemployment rate.
It could be so different. One small country in Europe, with a population about twice ours, has a corporation tax rate of 25%, yet employs 260,000 in its high technology sector, or 1 in 12 jobs (2011 figures). Inward investment by the global multinational sector is largely focussed on engineering and R&D sectors, rather than sales and customer support, and deeply embedded into the national economy. The pool of risk and venture capital available to seed new ventures, and to expand successful ones, is comparable with the entire rest of Europe combined. Skilled entrepreneurs and engineers routinely move between indigenous start ups and multinationals, as companies are started, later acquired, and the founders then move on to a further venture. The academic sector feeds start-up activity. Israel, and not Ireland and nor anywhere else in the rest of Europe, is arguably the true centre of multinational high technology activity, and with the closest links of all to the USA.
It is clear that the Irish political classes and economic policy strategists can no longer be complacent. After 30 years of denying that the global tide may turn for corporation tax avoidance, the Irish have to realize that the game may be almost up. What strategies are we going to now introduce to retain or even grow the multinational sector in Ireland when a myopic policy of facilitating tax avoidance becomes unacceptable and no longer possible? Why are there no Oireachtas debates on an urgently sought and new industrial strategy, and no visionary articulation from any of our political parties nor leaders ? Where are our national industrial strategists and planners ? A pragmatic strategy to spin out and grow indigenous companies, to link these to the R&D interests of the multinational sector, and a healthy pool of risk capital could substantially reduce our current vulnerabilities.