For years now, the model Ireland has used to attract multinationals has faced threats from a variety of directions – pressure from Europe, talks at the OECD and threatened policy changes in Washington. This is in large part a reflection of our success over the years in attracting US companies here. Low tax and access to the EU has been the magic formula.
To date none of the threats have really hurt Ireland. Remarkably,the last round of international reform actually played to Ireland’s advantage. But there has been a building sense over the past couple of years that the next round of international reform, being brokered by the OECD, might not be so kind to Ireland. But it now turns out the clearest danger may be driven from the White House.
And we cannot ignore this warning shot from Washington. To help pay for a massive programme of public investment, Joe Biden has proposed a 21 per cent minimum tax on the international earnings of US companies, in a way which would render our 12.5 per cent rate redundant. It is the clearest evidence yet that things are going to change.
The details have yet to be worked out – and important aspects of the plan may change in Congress – but the direction of travel is obvious. Depending on how this falls, Ireland may be faced with a decision on whether to increase the totemic 12.5 per cent rate. What the balance would be in terms of tax revenue remains very hard to predict, but it has big implications for attracting investment here.
Reading Joe Biden’s election literature gave the first hint of what was to come. We may have dismissed Donald Trump’s rhetoric of bringing investment “back home” as a passing phase. It wasn’t. It was a reflection of a wider mood in the US, particularly among the middle-class earners in US manufacturing. And Biden, in his campaign, doubled down on this, producing papers on how big companies would be encouraged to invest at home – particularly in pharma.
Work by Brad Setser, formerly an economist in the Council on Foreign Relations, has found that the Trump 2017 Tax Cut and Jobs Act increased the incentive for US companies to produce high-value medicines abroad and reimport them back to the US. The main beneficiaries were Ireland and Switzerland. Perhaps , he joked, the legislation should have been renamed the "Tax Cuts and (Irish) Jobs Act".
Global deal
Ireland may not meet the standard definition of a tax haven. We don’t have the palm trees and the hot sun. But when Biden took aim at tax havens in his speech this week, Ireland was one of the countries in his sights.
It is hard to know what his plan will look like after it passes through Congress. Already the US business lobby is in action, hoping to swing enough moderate Democrats to ensure significant change. The US will also engage in the OECD talks, where a global minimum rate is also on the table, though nobody saw it as being as high as 21 per cent. There may be some compromise to get a global deal.
But whatever way this ends, Ireland needs to read the room. Depending on how the US reforms fall, the idea of using low tax to attract companies here is coming to an end. Ireland needs to ensure it keeps a predictable and attractive tax regime in relation to other countries, but we need to build advantages in other areas.
Irish governments have long argued the attraction of Ireland for foreign direct investment (FDI) goes well beyond tax. We may be about to find out. The reforms to come will not lead US firms to leave overnight. But some may drift away or do less here. And it will be harder to win some future projects.
There are encouraging signs too. Intel's recent confirmation of a major new investment is encouraging. So is the decision of Stripe, the multinational founded by the Collison brothers, to locate more business here. Their co-operation with the University of Limerick, which has established a new immersive software engineering programme in co-operation with Stripe and more than a dozen other companies, is the kind of template we need to be looking at.
Affordable housing
Nor is this all about multinational investment. The key goal is to create the right conditions and infrastructure for both domestic and foreign players. And creating a good environment for people to live – including affordable housing – is a central link in the chain.
This requires a change of mindset. We need cheaper houses where the younger workforce can settle, not more expensive properties to keep the settled classes happy. When we talk about State investment in infrastructure, we should be focused more on research and education – on people and skills – and less on politically popular stuff like roads.
And we need to tackle the crisis of funding at third level, not only for undergraduates but also research. I used to think fees were an essential part of this – but the pandemic has dealt another blow to the younger population to add to sky-high rents and house prices and they don’t need student debt on top of this. So it will needed to be funded by tax – or PRSI. And this is on top of the help needed for the tens of thousands who lost their jobs during the pandemic.
The changes need to be significant, not just shuffling a few million around on budget day. We need a few big targets, not the kind of endless recitation of measures seen in the rural development plan published this week with its 150 “priorities”.
The warning shot from Washington is serious. Combined with the fallout from the pandemic, Ireland faces the challenge of renewing its economic model. We need to start talking about this.