December 1, 2016
Senior Trump economic adviser Stephen Moore, formerly with the conservative think tank Heritage Foundation, somewhat gleefully announced on BBC radio the day after the election that Donald Trump’s new reduced tax rate would mean that many American companies now in Ireland would be leaving and returning to the USA. Moore based his statement on Trump’s claim during the campaign that he will reduce the American corporate tax rate from 35 percent to 15 percent in order to bring back jobs.
The United States accounts for about 5 percent of the world’s population. For successful American companies to prosper they must consider all possibilities for growth. Senior business executives managing profitable organizations would be making a significant mistake if they did not try to market their products in the rest of the world. Their stockholders and workers would demand it.
Ireland, without any major natural resources except its people, has decided to compete for this inward investment business.
Back 40 and 50 years ago, Ireland was a desperately poor country with its young people leaving by the tens of thousands. There were no foreign corporations interested in locating there. In 1950 Ireland was almost a brand new country. It had not participated in World War II and its leader, Eamon de Valera, who was very protective of Irish sovereignty, kept the country mostly closed.
But at the same there were some very smart men in Ireland who wanted to modernize the country and its moribund economy. To encourage new corporations they set a corporate tax rate of 10 percent. A new agency – the Ireland Development Agency (IDA) – was set up to attract foreign investment.
In the half-century since, their plans have been extraordinarily successful. Much to the envy of similar agencies. It was the Irish people’s natural ability and brain power and the ideas of far-reaching thinkers that made the difference. Superior free education for all, a government willing to create the right atmosphere for incoming companies, and a large diaspora in the United States loyal to their home heritage also helped make that difference.
Today 700 American companies have created subsidiaries in Ireland, creating some 140, 000 jobs that are a huge benefit to the Irish people. They are there because Ireland offers an English-speaking environment to which American management can easily adapt, a superior, highly educated, and available work force, and very cooperative governments that have all made inward investment comfortable and profitable as an entry point into Europe and other locations outside the United States.
The Irish corporate tax fate remains famously low, although it was raised to 12.5 percent in 2003. This helps Ireland compete not so much with the United States but with Germany, Britain, and France all of whom have much greater resources. British Prime Minister Theresa May has just announced that Britain is considering a lower corporate tax rate, maybe lower than Ireland’s, to prevent damage from the Brexit movement.
Pfizer arrived in Ireland in 1969 and now has 3,300 employees there;, Intel came in 1989, and now has 5,000 workers; and Boston Scientific arrived in 1994 and now has 4,500 employees in Ireland. All three companies have continued to make new investments in plants and facilities over the years.
Through the efforts of the IDA, more than 20 percent of America’s Foreign Direct Investment (FDI) in Europe comes into Ireland. That means, of course, that 80 percent goes elsewhere on the continent so Ireland has to work hard to maintain its competitive position.
The American tax laws that may be changed are meant to encourage the growth of American companies throughout the world. Pfizer, Intel, and Boston Scientific must pay Ireland its 12.5 percent tax on profits and is liable to the United States for the difference below the American tax rate of 35 percent, but only if they bring the profits back to the United States. Many companies simply use these profits to expand their operations overseas. So if Intel makes $100,000 in profit in Ireland, it must pay Ireland $12,500 and can use the remaining dollars to build another plant or invest in a sales office somewhere until they decide to bring the profits back to the USA.
There may be some discussion warranted concerning repatriating profits to the USA along with the reduction in the USA’s corporate tax. Campaign promises will require some change, but, in any case, it is highly unlikely that after investing hundreds of billion dollars in Ireland any of the big companies will close their operations there. And jobs at Intel, Pfizer, and Boston Scientific may not be duplicated here in the United States.