Irish corporate tax a mixed blessing

There are obvious locations that come to mind as tax havens: Bermuda, the Isle of Man, Malta, the Canary Islands. But Ireland? Recently, Google Inc. and Microsoft Corp. made headlines for how much they save on taxes by conducting operations in Ireland. This was big news even in Ireland, where the low corporate tax rate is certainly no secret, having been implemented in one form or another for over a half a century.

While many of the local news stories in Ireland seemed aimed at shocking readers with the staggering amount of money these companies save by basing operations in Ireland, the reaction on the street is instead generally pleased with the upside of the low tax.

There's scant fuss in Ireland about the amount of money the state could reap if it raised the tax. "Twelve percent of a big number is better than 30 percent of a tiny number," reasons John Gilsenan, an independent analyst who sometimes consults for IDC Ireland. He and others recognize that the low corporate tax of 12.5 percent draws multinationals to Ireland and that without it there might be far fewer multinationals paying any taxes at all.

But while the rate itself isn't terribly controversial, there is the subtle issue of bragging rights. While many in Ireland are pleased that the low tax attracts multinationals, which account for a large number of jobs, they're also wary of the result. For example, the low tax was a key factor in Microsoft's decision to base its European headquarters in Ireland. Because of Microsoft's operation here, Ireland can boast of being the largest software exporter in the world, according to the Organisation for Economic Co-operation and Development.

While government agencies and trade groups like to cite Ireland's lead in the software industry whenever they get the chance, many people are cautious of being proud of it. "The Microsoft situation has led to Ireland being termed the biggest exporter of software in the world, which is factually true, but nonsense when you consider the origin of the intellectual property," Gilsenan said. Many Microsoft software CDs are copied and packaged in Ireland, but most of the software development happens in Redmond, Washington. That makes some Irish people dubious of the right to brag of being one of the world's largest shippers of software, which implies that the software is developed here.

Still, the Irish government has spent many years carefully instituting the low corporate tax rate and few would argue that it hasn't paid off for the Irish economy, bragging rights aside. The low tax originated in the 1950s when the Irish government did away with taxes on exports in hopes of spurring the dragging economy. But with the creation of the European Economic Community and Ireland's membership, Ireland had to create a tax on exports and so set it at the low rate of 10 percent. Ireland also extended that low rate to manufacturing. Famously, an importer of bananas qualified for the tax exemption after he successfully argued that since he imported green bananas, the process of ripening while in Ireland should qualify as manufacturing in Ireland.

But in the 1990s, pressure mounted for Ireland to begin taxing exporters and manufacturers when the European Community suggested that those exceptions could be construed as state aid, and such preference shouldn't be allowed. "They assumed we'd kill the 10 percent rate," said Christine Kelly, chief tax advisor, strategic business group at the Investment and Development Agency in Ireland. Instead, Ireland instituted a plan to slowly drop all taxes on corporations until they all reached 12.5 percent.

It was that rate and the promise to keep the rate low for years to come that first attracted multinationals to choose Ireland for European operations. Language skills, the availability of an educated work force, overall low costs and high productivity completed the package that has made Ireland an attractive place to set up shop.

The low tax promises to continue to take center stage in Ireland's quest to attract foreign businesses, especially as some of the other original attractions of doing business in Ireland have changed. "The five to 10 years ago time frame when a lot of companies located here in Ireland, they came in primarily as a manufacturing base in Europe and they were attracted by the corporate tax," said Joanne Richardson, chief executive officer of the American Chamber of Commerce for Ireland. "At the time, we were a relatively low-cost environment. That has changed in the last five years dramatically."

She said that with the soaring costs of labor, and for services such as electricity and telecommunications, companies are starting to shift from doing manufacturing to financial services or research. That way they're still able to take advantage of the low tax but are conducting activities that aren't so reliant on low costs of operation.

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