Ten years ago Dublin was nicknamed Silicon Valley’s “home from home” with tech superstars including Mark Zuckerberg and Elon Musk queueing up to snap up office space, avail themselves of local Irish hospitality and low tax.
But while the decision of Google, Facebook, Yahoo, LinkedIn, eBay, Amazon and more recently TikTok to locate their European headquarters in the Irish capital helped cement its reputation as one of the region’s leading tech hubs, questions are now being asked about whether they will stay.
Earlier this month Ireland signed up to landmark reforms for a global minimum corporate tax rate of 15%, up from the current level of 12.5% set by Dublin, in the biggest shifts for the country’s tax system in almost 20 years.
Some analysts argued the nation’s economic model could be badly undermined, while the Irish finance minister, Paschal Donohoe, said earlier this year that up to €2bn (£1.7bn) a year in tax revenue could be lost by 2025. However, there are hopes the changes might not prove as existential as they first seem.
“In the short to medium term, no, there won’t be an exodus, the change from 12.5% to 15% is not that significant,” said Seamus Coffey, an economist at University College Cork and former chair of the Irish Fiscal Advisory Council.
Ireland had played hardball in global tax talks taking place between 140 countries at the OECD in Paris, following almost a decade of failure among world leaders to agree reforms that would equip the taxation regime for the digital age.
Dublin refused to join an accord earlier this year, and only relented earlier this month at the 11th hour of negotiations after securing a key concession – earlier plans calling for a minimum rate of “at least” 15% were dropped, giving the government more certainty that it would not be ratcheted higher in future.
However, the reality is that many big tech firms never paid the 12.5% headline rate set by Ireland in the first place.
A Bloomberg investigation in 2010 showed how Google had cut its overseas tax rate to just 2.4% using an aggressive avoidance schemed dubbed the “Double Irish, Dutch sandwich” to effectively shuffle revenues made across Europe offshore to places like Bermuda, where the tax rate was zero.
Those schemes were outlawed in 2015, giving companies five years’ notice to comply.
However, while such arrangements undoubtedly helped attract Google and Facebook to Ireland in the noughties, they were merely the latest in a wave of more than 1,500 foreign firms – 800 of them American – lured in by the low-tax ethos of the country’s Industrial Development Agency since its foundation in 1949.
Before them IBM, Intel, Pfizer and Apple were shown the red carpet. For at least a decade Allergan has been making the world’s supply of Botox in Westport, County Mayo, on the country’s windswept Atlantic coast.
“The low tax rate started in the 1960s at zero and then went to 10%,” said Coffey. “The point of it was never to generate corporate tax revenue, but to use relatively low corporate tax to attract the companies to set up in Ireland and let them build big factories and facilities. And then we have employment.”
There are other factors tempting in multinationals. Chinese-owned TikTok set up its Dublin HQ in 2018 long after the writing was on the wall for the tax avoidance loophole.
“Young companies focus on things that will either kill them or help them scale in the near future. Corporate tax isn’t one of them,” said Stephen McIntyre, former head of Twitter in Ireland and a partner in Frontline Ventures, a venture capital firm in Dublin and London set up to help US tech firms expand in Europe.
Joe Biden and the OECD want to promote this idea of competing on grounds other than tax, viewing the reforms as ending the “race to the bottom” between countries.
“When startups land in Europe, they care more about hiring experienced people and acquiring customers. They also like places where it’s easy to do business,” McIntyre added.
He said that for Ireland “there are cultural ties to the US, English language proficiency is widespread, and employment law makes it easy to hire and fire. Corporate tax is a top 10 issue but not a top five issue.”
If Google’s historic use of schemes to transfer taxable revenue offshore gave Ireland a reputation as somewhere tax could be avoided, the annual cash booked by the Irish exchequer paints a different picture.
The government’s budget watchdog has warned that just 10 companies accounted for 56% of net corporate tax receipts in 2019, highlighting the risks from the OECD plan.
One former senior Irish tax official estimates about 30% of Ireland’s corporate tax comes from just three companies – Microsoft, then Apple and Pfizer, which has been in the country since 1969. As much as 40% comes from Microsoft and Apple, he said.
He agrees with Coffey that the tax hike will not be a cliff-edge.
“Companies like Microsoft will be years ahead of the curve. They do not pay their tax counsels more than $1m just to sit on their backsides. They are very clever. These companies will have their plans, strategies in place for years,” said the source.
One danger for Ireland is that corporate tax reforms could go further.
In the OECD talks this summer, sources said France and Germany were pushing for a higher global minimum tax rate; with the subtext to forge closer economic integration by limiting tax competition across the 27-member bloc.
Donohoe recently said he had been assured by the elimination of “at least” that this would not be an issue for years to come.
Some EU countries, including Ireland, Hungary and Estonia, have drawn the ire of their neighbours for setting low headline corporate tax rates; reflected in the bitter dispute between Dublin and Brussels over €13bn in taxes allegedly owed by Apple.
Across the 37-member OECD, the average headline corporate tax rate is about 23%.
Coffey believes France’s ire is more to do with the per capita corporation tax rate in Ireland. It is double and heading toward triple that of France and Germany.
“Most of the corporation tax is paid by American companies in Ireland. You can imagine in France it is by French companies,” he said.
A bigger danger is the prospect that the OECD may push to force companies to pay tax in their countries of activity – this autumn’s reform was all about eliminating offshoring.
The Irish Fiscal Advisory Council has estimated that some €5bn in annual corporate tax receipts relates to “excess” activities that may not have occurred in Ireland.
Coffey said that Irish corporate tax income had trebled in the past seven years from €4.5bn to €14bn, helped by a huge injection from US companies. “But if they can rise in such an unexplained fashion, then there is also the potential for them to fall in a similarly unexplained fashion.”