Sunday, October 10, 2010

Irish corporate tax rate and FDI (foreign direct investment)

US chip giant Intel is Ireland's largest industrial employer. Since 1989, Intel has invested over $7 billion transforming the 360 acre former stud farm campus in Leixlip, Co. Kildare into a state of the art manufacturing centre of excellence.
Intel had peak employment in Lexlip of over 5,000; In 1930, Henry Ford, son of a native of Ballinascarthy, near Clonakilty, West Cork, had 7,000 employed at his Cork plant.

The following are contributions to a thread on the issue of the Irish corporate tax rate of 12.5%, on the Irish Economy blog.

A tax exemption on export profits was introduced in 1956; a 10% tax on manufacturing - broadly defined: it included growing mushrooms under galss - was introduced in 1981 as some companies were due to see their 1956 exemption expire.

Intel for example began on a 10% rate in the early 1990s.

The EC agreed in 1997 to one rate of 12.5% replacing the general corporate tax rate and the two schemes as outlined above.

The challenges for Ireland

A significant downscaling of costs and reform to have a governance system comparable with the Nordic model is necessary to meet the current challenges.

Declare open season on sacred cows; despite the crash, it’s private sector workers and business collapses where the real pain has been experienced.

The rest have experienced baby-step adjustments.

We have got most of the big US companies that are likely to locate in Ireland; the key challenge now is keeping them. This is why the recession period fall in costs is just not enough. Rivals in Eastern Europe have also had big drops.

Why has Intel got its original plant idle in Leixlip?; it has to have a strong reason to invest $3bn in another plant in coming years when the centre of economic gravity is moving eastward.

Research should focus on the food area; amazing isn’t it that Ireland’s cheese output could be as low as Sweden’s?; lower than in Spain and Greece while production in the Netherlands is six times the Irish level.

Amazing too that a New Zealand company could capture almost 40% of international trade in dairy products.

The the main focus of increasing exports should be in the single currency area.

Taoiseach Brian Cowen said last week there should be more trade missions to regions like Asia; we can’t be all over the place like a company with too many products or a restaurant with too many choices on the menu.

We have little recognition in Asia; Roy Keane and Boyzone gave us some; logistically it is also a big challenge.

I have some idea of what I’m talking about as I live in Kuala Lumpur!

EU Commissioner Olli Rehn recently said, Ireland has to prepare to be a higher tax economy and suggested that an increase in the corporate tax rate should be considered.

The European Commission is also critical of tax competition from Switzerland.

At present, companies in Lucerne for example, pay an average 23% combined local, cantonal and federal taxes on their profits depending. In two years time the burden will be reduced to 15%.

Adjacent canton Zug is well established as a location for the European headquarters of international firms, while Schwyz, Nidwalden and Obwalden also offer better incentives.

A KPMG study shows that global corporate tax rates were reduced by 7% between 1999 and 2009 with EU countries slashing their tax by 12% on average and Switzerland by 6%. Guernsey and the Isle of Man top the table with zero taxes on company profits. The British islands are followed by Montenegro (9%), and a group of countries – Bulgaria, Cyprus, Serbia, Albania and Bosnia & Herzegovina – on 10%.

In the canton Zug, about 30 minutes drive from Zurich, the corporate tax is about 16% but can fall as low as 9.5% for companies that do most of their business outside Switzerland.

Such a location may not suit big manufacturers.

There are 3 key tax factors in the attraction of Ireland for multinationals.

1) There is no tax on patent income

2) the corporate tax rate of 12.5%

3) R&D tax credits — it’s a while since I worked in MNCs but my hunch is that ‘R&D’ would be broadly defined and with capital allowances, the effective tax rate would be in single digits for big firms.

Microsoft operates 2 tax haven companies in Ireland.

Income from patents parked in Ireland is routed through Flat Island; licensing fees from 20 or more EMEA countries are routed through Round Island One.

As Round Island One paid over $300 million in Irish taxes in 2004, it is possible that half the corporate taxes paid by US MNCs are from the tax haven activities.

The tax haven income may well be worth up to $2m in taxes paid in Ireland - - 40% of total MNC tax paid.

As regards the zero tax on patent income, given that there is now an R&D tax credit, I don’t know what is the justification for it.

Irish residents are also tax exempt on patent income - - it is hardly the key motivator for innovation.

Intel CEO Paul Ottilini said in July in Aspen, Colorado that a new semiconductor factory at world scale built from scratch would cost about $4.5bn - - in the United States.

He said: “it costs $1bn more to build, equip and operate a semiconductor manufacturing facility in the US. Ninety percent of the cost difference is the result of tax and incentive policies.”

He said in Aspen: “At Intel, we generate 75% of our revenue and much of our profit abroad. The US tax treatment of that income makes it extremely expensive to repatriate that profit and invest here.”

Obama said this week that he is open to cutting the headline tax rate of 35% if it would be revenue neutral — eliminating various breaks.

FDI investment in Ireland has plateaued and while the country has been run in an appalling manner for decades, the positive aspect is the parallel MNC world.

As I have said before, without FDI, think of Albania or a big Sceilig Mhichíl theme park for American tourists.

We have had some new small scale projects in the past year and employment in the sector is back to 1998 levels.

We are not likely to be very attractive to emerging economy MNCc - - so we should keep the Yanks tuned up.

Ex-Intel boss Craig Barratt said Ireland is over-reliant on FDI. However, behind all the spin about developing the indigenous sector and advice from chairborne experts to put Mandarin on the curriculum, in the medium term Ireland has nothing else to rely on but the MNCs.

I reported earlier on Finfacts that Irish goods exports to China in H1 2010 were 1.9% of the total and only 6% of that 1.9% were from indigenous firms.

In the bubble years as the Irish became the second biggest investors in commercial property across Europe, policymakers didn’t give a damn about how new markets would be developed.

The reality now is that it takes years of perseverance, as long as key variables are positive, to develop new export markets.

Irish Economy blog: thread on FDI

Finfacts article: 1) Ireland can choose a path to greatness or perdition

2) EU-China Summit: EU27 exports to China in H1 2010 rose 43%; Germany accounted
for almost 50% of total; Ireland had trade surplus