Biden’s tax plans risk bursting Ireland’s bubble

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Biden Ireland tax illo

Biden Ireland tax illo

If there’s one number that matters above any other to the Irish economy, it’s 12.5pc.

“The 12.5pc tax rate never has been and never will be up for discussion. The 12.5pc tax rate is settled policy. It will not change.” So said Michael Noonon, then the Irish finance minister, in his 2014 budget speech to the Dáil in Dublin.

Ireland's corporate tax rate has become a beacon for multinationals – particularly from the United States – that have learned how to shop around the global marketplace for the best tax loopholes and rates, and treated Ireland as a gateway to European markets.

Ireland doesn’t have the lowest rates in the EU, but when the clearest alternative is Hungary it’s not hard to see why businesses find themselves drawn to the Emerald Isle.

However, plans by the rich OECD group of nations have put 12.5pc under threat. The Biden administration’s support for a global minimum rate of 15pc made the shift inevitable, with the President’s Irish ancestry apparently doing little to add a green tint to American foreign policy.

Many details are yet to be thrashed out, but with most countries having already acceded or capitulated, Ireland – and a handful of holdouts – are all that is left against a major shift.

The proposals create a predicament for Irish finance minister Paschal Donohoe, who met with US Treasury Secretary Janet Yellen in Brussels on Monday.

Donohoe, who also leads the Eurogroup of eurozone finance ministers, faces a difficult balancing act, needing to be seen as gunning for what has been a game-changing policy for Ireland, while avoiding Dublin being regarded as undercutting global efforts to level the tax playing field.

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Janet Yellen, US Treasury secretary, right, and Paschal Donohoe, Ireland's finance minister at going to a Eurogroup meeting of EU finance ministers - Valeria Mongelli/BloombergJanet Yellen, US Treasury secretary, right, and Paschal Donohoe, Ireland's finance minister at going to a Eurogroup meeting of EU finance ministers - Valeria Mongelli/Bloomberg

Janet Yellen, US Treasury secretary, right, and Paschal Donohoe, Ireland's finance minister at going to a Eurogroup meeting of EU finance ministers – Valeria Mongelli/Bloomberg

It looks inevitable that Dublin will buckle, most likely in the autumn.

Michael McNamara, an independent member of the Irish parliament, said his country is finally having to get to grips with the impact its tax haven status has on the rest of the world.

“We have an image of ourselves in Ireland that might not be necessarily totally sustainable at the moment: of being a very outward-looking country, open to the world, and not a country that is effectively eating other people's lunch, which we have been doing on corporation tax for some time,” he says.

“It served us well for a while, but I think it has come to a shuddering halt.”

The 12.5pc rate is a badge of pride, proudly emblazoned across websites and literature enticing foreign companies to use Ireland – which now describes itself as “the only English-speaking country in the eurozone” post-Brexit – as a base for their activities in the continent.

Throughout most of the 20th century, companies’ European entities were a fairly simple affair. Generally speaking, the globetrotters were manufacturers that sought to place international operations near the workforce, resources or markets they needed. That made taxation a relatively logical affair, and global tax rules that have stood for a century were based around this principle.

However, the new breed of tech-led services companies that emerged toward the millennium flipped this dynamic. With little interest in raw materials, and the ability to pull in a skilled workforce from across the bloc, it was possible for a company to base itself almost anywhere – giving countries a new way to lure in foreign investment.

Ireland was a key beneficiary from this shift. With a small, well-educated population, and its capital Dublin overshadowed by nearby London, creating a low-tax environment to act as a magnet for American businesses in particular suddenly became a political lever. Corporation taxes were cut around the turn of the century, leveraging its position as a member of the continental bloc to lure companies with the promise of substantial savings.

The Irish economy reaped the benefits of this Faustian bargain, shaking off the doldrums of the early 1990s to notch up a spell of rapid growth that earned it the “Celtic Tiger” moniker – at least until the 2008 crash brought the party to an abrupt halt.

Stories of companies with Irish bases paying stunningly low rates of tax have become commonplace. Infamously, these included the “double Irish with a Dutch sandwich” arrangement – in which, under a now-abolished Irish law, companies could pay the corporation tax of their owner’s country while being based in Ireland.

This led to companies being established in zero-tax havens (typically Bermuda, although several Caribbean islands also fitted the bill), basing their operations in Ireland, and as a result not incurring any tax. Licensing intellectual property rights to a subsidiary in the Netherlands – where revenues on IP do not incur taxes – offered the “sandwich” on the side.

At its most extreme, this meant tech giant Apple accounted for a quarter of Ireland’s GDP in 2017 despite paying a pitiable amount of tax. That same year, Google was able to avoid corporate taxes on $23bn of profit. According to one study, a sixth of US corporate profits moved to low-tax countries in 2015 went through Ireland.

Ireland’s EU peers, unhappy with these arrangements, have taken steps in recent years to force Dublin to close several of these loopholes. Relations haven’t always been easy, with Dublin and the European Commission at each other’s throats after Brussels ordered Apple to pay €13bn in unpaid taxes from 2004–2013 to Ireland.

Despite the temptations of the huge windfall it stood to gain, Dublin resisted the fine, worrying it could scare off other multinationals. The charge was overturned last year.

The tax situation has created a “dual economy” in Ireland, with heavy investment disguising the weaknesses of the underlying domestic situation.

The pandemic laid this schism bare. Ireland was the only EU economy to expand during 2020, with GDP growing by 3.4pc despite the ravages of the pandemic. But that figure was a mirage, mainly reflecting this sharp concentration of international activity. The underlying reality was of a heavy hit to the domestic economy.

This imbalance has long been apparent: the draw of favourable tax arrangements has made the Irish economy top-heavy, and gains in wages and employment since the financial crisis have been highly concentrated within the sectors receiving the most foreign investment.

Estimates by the Irish finance ministry suggest the new tax rules could cost the country €2bn to €3bn a year, equivalent to up to a quarter of the corporation tax it drew in last year – most of which came from global giants such as Pfizer and Google.

It’s a blow – and one that risks sweeping the legs out from the Irish economic powerhouse.

Analysts reckon it’s a hit Ireland can weather, albeit with difficulties. Many say Dublin should simply take the rise to 15pc on the chin, and hope companies that now have roots in the country will do the same.

Their logic is that a hike is likely to cost Ireland some lost business in the future, but will not prompt a sudden exodus. However, the fall in investment that could entail would take a heavy toll in a country that has relied on an influx of foreign capital.

Anna Guildea at the European Centre for International Political Economy at University College Dublin warned the Irish economy could be heading for “uncharted territory”, adding: “If Biden’s tax plans go ahead, Ireland won’t be able to depend on [foreign investment] to inflate GDP and cling to a rhetoric of ‘recovery’, as it did post-2008.”

For years, the favour of global corporate titans has papered over Ireland’s economic cracks. The OECD’s tax plans risk revealing what lies beneath.

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