Biden, Ireland

The suburbs of Cork, Ireland’s second-largest city, are an unlikely location for the European base of the world’s largest company.

Apple’s sprawling campus has been in the city of 210,000 people for more than four decades.

The iPhone maker and a host of multinational giants including Google, Pfizer and Salesforce have been attracted to the Emerald isle not by its economic prowess but a headline corporate tax rate of just 12.5pc.

But President Biden has cast doubt over Ireland’s glory days as the EU’s foremost tax haven. In his first 100 days as the leader of the world’s largest economy, he took on Dublin in a push for a global minimum corporate tax rate.

A deal brokered by the Organisation for Economic Co-operation and Development (OECD) involving 140 countries for a 15pc global minimum rate for corporate tax is expected to be sealed on Friday after Dublin caved in its fight at the last minute despite fears over ending its sacred low 12.5pc rate.

Economists argue, however, that Ireland will still have competitive tax rates after being given breathing space by Britain to join the deal.

The UK is raising its corporate tax from 19pc to 25pc from 2023, denting its ability to woo foreign multinationals and maintaining Ireland’s advantage. While the new rules threaten its lucrative low business tax model, Ireland will remain competitive compared to its nearest neighbour while also offering a gateway to the European Union.

“People are very worried about upsetting the corporate tax offering just in case it might hurt growth,” says Conall Mac Coille, chief economist at Davy, Ireland’s largest wealth manager.

“Ireland can reasonably expect to attract foreign direct investment to Europe because this is a competitive place to be and even more so now given what the UK has done.”

The country’s initial refusal in July to back the proposed 15pc minimum tax rate for companies with turnover of more than €750m angered the White House and fellow EU member states, viewed as a snub to the President himself who repeatedly flaunts his Irish heritage.

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Now, it joins 140 countries in agreeing to the fresh system. Estonia also dropped resistance on Thursday, leaving Hungary as the last remaining challenger.

The aim is to crack down on US corporations fleeing home shores to lower tax rate destinations. The OECD estimates an extra $150bn in global tax revenue will be generated by the 15pc rate.

Likely to be implemented in 2023, new rules will also allow countries the right to slap taxes on large companies based on where they make their sales, shifting to where more than $100bn of profits are booked. For example, Apple books more revenue in Ireland than any other company, according to the Irish Times’ top 1000 companies list.

Apple Inc.’s campus in Cork, Ireland – Aidan Crawley/Bloomberg

Ireland’s 12.5pc rate is considered sacred. Very few major economies have a lower rate with corporate tax, with Hungary and Switzerland falling just slightly below.

“There is no escaping that the Irish economic and fiscal performance in recent decades has been partly driven by an ability to attract foreign investment,” says Ricardo Amaro, economist at Oxford Economics.

“The fact that Ireland has been so successful at attracting foreign investment in recent years and decades means that Ireland has perhaps more to lose than most other countries… It’s a very important revenue stream now.”

Ireland’s finance minister Paschal Donohoe put on a brave face as they climbed down on Thursday, insisting that the deal is a “balance between our tax competitiveness and our broader place in the world”. The new rate will, at least, be far lower than the initial 21pc proposed by the White House.

A source with knowledge of the talks says it had little choice but to accept a deal. “Almost all of the incoming foreign direct investment in Ireland is American,” they say.

“In terms of the Americans deciding … to raise the Global Intangible Low-Taxed Income and to just tax a whole lot more on any American company that has activities in Ireland, they don't need to ask anyone's opinion, especially not Ireland’s,” they argued. “So what does Ireland do? What does Ireland gain by fighting and trying to stop this?”

Bank of America estimates 60pc of US multinationals’ profits are booked in just seven small countries deemed tax havens: Bermuda, the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland.

That share has doubled from around 30pc in 2000, a trend its economists attribute to the rising importance of intangible assets, such as intellectual property, which gives firms more wriggle room to book resources in tax havens.

American corporate titans helped the “Celtic Tiger” come roaring back post-2008, lifting Ireland out of the ruins of the financial crisis after its property bubble burst. Foreign multinationals’ grip on the Irish economy is far greater than in other countries, leaving it vulnerable to an exodus.

Staggering growth rates after 2008 have been powered by multinationals relocating to Ireland, boosting GDP by as much as 25pc in 2015.

“The contribution from foreign direct investments is incredibly strong and there is no doubt about it: the corporation tax rate has played a significant role in that regard,” says Jim Power, independent economist and former chief economist at Bank of Ireland, while adding that he would be surprised if multinationals leave as a result of the changes.

Oxford Economics estimates 43pc of Ireland’s gross value added was from foreign-owned multinationals in 2018, its last available data, far more than any other EU country and the UK’s 20pc.

The government’s tax take has become increasingly reliant on a small group of US giants: corporate taxes made up a fifth of government revenue last year, compared to just 6pc in the UK in 2019-20.

Just 10 foreign multinationals now pay more than half of the country’s corporate tax take, generating €6bn in 2020, up from 40pc in 2019. Overseas giants also provide a third of all jobs in Ireland – almost 800,000 workers – and contribute to half of all employment taxes at a value of €13bn.

Experts say it is a victory compared to the 21pc rate first proposed by the White House, but risks from a further clampdown loom.

“We will still maintain the tax advantage, it’s a modest deterioration,” says Power. “At least it is being removed [from the 15pc wording]. As a consequence of that, Ireland deemed that a little bit of a victory and will now sign up. But the reality is down the road there's nothing to suggest there won't be another move to push this up to 20pc. This is where the world is going.”

According to Oxford Economics, the deal risks leaving Ireland as one of Europe’s most indebted countries. In June it estimated the changes would increase its debt as a share of gross national income by nine percentage points to more than 120pc by 2028, piling Ireland with the third-largest debt mountain in Europe.

Part of the OECD deal, which ensures corporate giants pay tax proportionately to where their revenues are made, also means Ireland’s tax base will fall. In 2018 a third of US multinational profits in Europe were booked in Ireland, the Netherlands and Luxembourg but together they accounted for just 5pc of e-commerce revenue in the region.

“I'd be more concerned about that element of the global tax reform, rather than the rate itself,” says Power.

“The aim is to ensure that corporations pay more tax in jurisdictions where the economic activity occurs rather than where the balance sheet resides. We know, for example, since 2015 there has been a very significant inflow of intellectual property assets into Ireland for tax reasons.”

Experts say they still expect Ireland – the only native English-speaking country left in the EU – to remain a competitive choice for corporate titans, with its business-friendly environment and educated workforce. It remains competitive against neighbour Britain, which is hiking headline corporate tax rates from 19pc to 25pc.

But some believe higher tax bills for companies could mark a stepping stone for Ireland away from its lucrative economic model. Economists warn of a need to focus on home-grown sectors that have suffered as multinationals were lured in.

“There is a debate in Ireland that productivity and investments in the domestic parts of the economy has been lacking,” says Mac Coille.

Small and medium-sized companies "have continued to pay down their debts and mortgage lending is only just about stable, so in some respects our domestic economy has lagged behind the UK in terms of the recovery”.

After a strong performance in the 2020 election, the lefist Sinn Féin is expected to be the largest party at the next national vote. With the corporate tax rate set to rise, some expect a changing of the guard in Dublin could shift the debate on Ireland’s economic model.

While the Irish economy will largely weather Biden’s global tax upheaval, its competitive edge is being blunted and that could usher in a new era for Dublin.

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