Letter from Ireland: Accounting & Business

Letter from Ireland

by Paul Gosling

A trickle threatens to become a flood. Shire Pharmaceuticals made news in April as the first FTSE 100 company to move its tax residency to Dublin – jumping out of Britain’s 28% corporation tax net, into Ireland’s more hospitable 12.5% tax rate. Shire was persuaded not just by the headline CT rate, but also by fears that new UK tax avoidance rules could capture more of companies’ overseas earnings.

Since Shire’s announcement, United Business Media decided that it will do the same. So too will Aberdeen Asset Management. The Experian credit referency agency has already moved. Diageo, AstraZeneca, WPP and International Power may all change tax residency to Ireland. The CBI warns that the UK tax system has reached a “tipping point”, at which many more companies will flee the country – many for Ireland. A decade ago the UK’s CT rate was the third lowest in the EU – now 17 EU countries have lower rates.

Ireland has been pivotal in driving corporation tax rates down in the EU – and done very well from it. Shire’s move will net about €2.4m (£1.9m) annually for Ireland and lose the UK’s exchequer about £4m. The impact on jobs and the wider economy will be limited, as Shire will have only a small head office in Dublin – though the board of directors will meet in the Irish capital. A company can move tax residency if business decisions are taken in the new location, without moving their operational headquarters or it affecting their stock exchange listing.

Ireland began a phased reduction of its CT rate from 32% to 12.5% in 1999 – and increased its CT revenues every year, until last year. In 1998, the CT revenues were €2.6bn: by 2006 this had become €6.7bn. In the process, Ireland also earned billions of euros from foreign direct investment – particularly from the United States.

But these successes are strongly resented by the major EU member states – the UK, Germany and France – which believe Ireland’s low tax rate undermines their economies. Recently appointed French finance minister Christine Lagarde promises to use her country’s EU presidency in the second half of this year to push for a single corporation tax rate for the EU.

Fear of what a single rate would do to Ireland’s economy is stoking growing hostility towards the Lisbon Treaty on European constitutional reform. Despite assurances that the new treaty would not affect Ireland’s right to veto EU changes on tax policy, it makes this month’s referendum on the Lisbon Treaty more difficult to win – and Ireland is the only EU member state required by its constitution to vote on the treaty.

But the low tax rate causes problems even within Ireland and has provoked inflationary and recruitment pressures that can be difficult for companies to cope with. Now a bilateral protocol agreed between the Irish Republic and Northern Ireland – and approved by the EU – addresses this and means that some of Ireland’s growth can spill over into the UK.

Dublin’s International Financial Services Centre is so successful that 1,170 companies operate from there, paying €700m annually to the Irish exchequer. The businesses were attracted by the low CT rate, reduced initially to 10%. Faced with recruitment problems, these companies – backed by the Irish government – have begun looking over the border into the North. Companies based in the IFSC will be encouraged to operate secondary facilities in Northern Ireland when they have difficulty recruiting in Dublin. This, says PwC, could generate about 5,000 jobs in Belfast and Derry, while alleviating skill shortages in Dublin. Assuming this becomes a reality, it could help kick-start the Northern Irish economy as it continues to emerge from 35 years of conflict.

Whether these companies pay tax in the UK or Ireland depends on how they structure their operations. But even if the Dublin government continues to receive the corporation tax, the benefits to the UK economy from job creation and the payment of indirect taxes could be significant. We will, it seems, witness Dublin-based companies ‘offshoring’ to a part of the UK, as they cope with the fall-out from Ireland’s low tax regime. It’s a funny old world.