U.S. Tax System Blows A Windfall to Ireland

"The country pumps cash into not one but two sovereign-wealth funds. It is so flush that the budget watchdog doesn't warn about not having enough money but rather that the government is spending so much that it could overheat the economy. 

In Dublin, authorities are building what might become the world's most expensive children's hospital. 

There are plans for a motorway to link Cork and Limerick, new flood defenses in Shannon and floating wind farms off the south coast. Outside the parliament sits a new bike shed that cost half a million dollars, houses 36 bikes and doesn't keep out the rain. The state is spending $10 million to get children off their phones at school.

"The good times are back," says Pat Woods, as he stretches his arms out over the red leather banquette of the Dame Tavern, his pub in central Dublin. "Everything is flying." Standing in a nearby street sucking on a vape, a local hairdresser marvels at what is unfolding. "The spending is wild," he says.

Helping fund this largess is the U.S. tax system and a global clampdown on corporate tax dodging. The U.S. government and the European Union spent the past decade changing laws and pressuring big multinationals not to book profits in offshore jurisdictions, such as the Cayman Islands, where they have no operations and pay no corporate tax. So now many U.S. companies are parking their international profits in low-tax Ireland, where they employ some people and pay some tax. Among those known to use Ireland are Apple, Alphabet's Google, Microsoft and Pfizer.

Ireland, which offers a headline 15% corporate tax rate to big companies, compared with 21% in the U.S., expects corporate tax revenue in 2024 of 37.5 billion euros, equivalent to $39.6 billion, up from 4.6 billion euros a decade earlier. That works out at around $7,300 per person. By contrast, the U.K. corporate tax generated around $1,300 a head.

A country once famed for mass emigration -- and that nearly went bankrupt 15 years ago following a banking crisis -- is now importing workers. "Historically Ireland had loads of people and no money," says Seamus Coffey, chair of the Irish Fiscal Advisory Council. "Now we've loads of money and not enough people."

President-elect Donald Trump's election victory brings uncertainty. Trump has said he would cut the tax rate for companies that make products in the U.S. to 15%. Tax experts say if the Trump administration did entice U.S. firms to repatriate profits or intellectual property, the effect on Ireland could be dire.

The Irish Fiscal Advisory Council estimates that 43% of corporation-tax receipts in 2022 came from just three big foreign companies. Around 15% of the Irish workforce is employed by just under 1,000 U.S. companies, according to Ireland's foreign direct investment agency. Those businesses and their employees may contribute as much as 60% of the government's entire tax take, Cormac Lucey, a lecturer at Chartered Accountants Ireland, recently estimated.

For now, Ireland's leaders choose to look the other way.

Ahead of an election next Friday, the ruling coalition announced a budget that included 7.1 billion euros of income-tax cuts and handouts to every household to help cover electricity bills. Longer-term, grand plans include a ring road around Galway, a metro in Dublin and some 30,000 new homes in the Cork docklands.

The big question is whether all this will be built. The projected cost of the children's hospital, now 2.2 billion euros, is a running joke in Dublin, as is the parliament's pricey bike shed. Coffey, the chair of the advisory council, recently warned that this surge of spending risked fueling inflation.

The man credited with helping design the corporate-tax system says he is hopeful it will keep writing the checks. After the U.S. and EU agreed on a global minimum tax rate, "there were a lot of people here saying, 'God, this could be the end.' And I said, 'This is going to be great,'" says Feargal O'Rourke, a former PwC partner who chairs Ireland's foreign direct investment agency. "But I actually didn't envisage how good it would be."

For decades the U.S. hit U.S.-based multinationals with a 35% tax on their global profits, but they paid that full amount only if they repatriated them to the U.S. So firms had an incentive to book profits abroad and keep them in separate accounts.

Ireland proved an attractive destination. Big pharmaceutical and tech companies built European headquarters here, benefiting from seamless EU access and a 12.5% tax rate.

Then in 2017, the Trump administration cut the U.S. domestic corporate tax rate to 21% and imposed a minimum 10.5% rate on worldwide profits regardless of whether they were repatriated. Four years later, Ireland bumped up its corporate rate to 15%, a worldwide minimum brokered by the Organization for Economic Cooperation and Development.

Counterintuitively, this turned out great for Ireland.

U.S. businesses shifted hundreds of billions of dollars in intellectual property, such as patents and research, out of tax havens and into their Irish operations. Irish tax law allowed them to defer the cost of buying in their own IP from tax havens against their future profits, allowing them to reduce their tax bills.

Apple was ahead of the curve. In 2015, it moved its IP into Irish tax-based companies, contributing to a 26% leap in Ireland's economic growth -- dubbed "leprechaun economics" because the surge had no link to Ireland's actual economic performance.

The Irish government predicts the scale of this tax windfall will moderate in coming years. This year's record haul was plumped up after the EU's top court demanded that Apple pay Ireland $14.5 billion of accumulated unpaid taxes -- a ruling the Irish actually opposed.

In Washington, as the deficit continues to swell, there may be an appetite to revisit tax arrangements to try to rake in more revenue, says Brad Setser, a senior fellow at the Council on Foreign Relations.

O'Rourke, the chair of Ireland's foreign direct investment agency, says he recalls two major U.S. corporate-tax changes: one in 1986 and one in 2017, and little in between.

"It took them 31 years to change the taxes for the U.S. Is it going to happen again soon? I don't know," he says." [1]

1. U.S. Tax System Blows A Windfall to Ireland. Colchester, Max.  Wall Street Journal, Eastern edition; New York, N.Y.. 23 Nov 2024: A.1.