Ireland needs to develop plan before multinational tax high comes down

Foreign multinationals pay much higher salaries on average than domestic firms — over 50 per cent more in 2017, according to the CSO. It is also due to the highly progressive nature of our tax system, under which high-earners pay a far higher share of their earnings than low-earners. According to Revenue, the multinational sector also pays more than half of all VAT payments, at 53.8 per cent.

When you examine all of Ireland’s varying tax heads and apply these percentages to the expected actual 2023 tax take, as set out in the 2024 budget documentation, it emerges that the multinational sector contributed 55 per cent of Ireland’s total tax revenues that year, even if we assume that it made no contribution at all to customs, excise duty, capital gains tax, capital acquisitions tax, stamp duty or motor tax. If you assume the multinational sector paid the same share of other taxes as its 53.8 per cent VAT share, then last year the sector contributed 62.3 per cent of the state’s total tax take. This is extraordinary.

A few years ago, someone warned that Ireland risked being as economically dependent on multinationals as it was on the potato in the early 1840s, just before the calamitous blight struck. The danger of a calamity suddenly reducing the multinational contribution to the Irish economy to zero — as happened with the potato in 1845 — is remote.

The nature of any external threat is too diffuse and too slow-moving for such a sudden convulsion. The Organisation for Economic Co-operation and Development’s base erosion and profit shifting process was formally started at the G8 summit in Enniskillen in 2013. It will take 11 years for that process to raise the corporation tax bills of multinational subsidiaries this year, and then only by one fifth. Furthermore, the foreign operations in Ireland today are too deeply integrated into the global fabric of their owners for their scope to be easily reduced.

But there are two slow-motion dangers facing our multinational sector. The first is that a native incapacity drives away mobile international investment. We are already bursting at the seams in terms of the supply of housing, skilled personnel and electricity.

The second is that America takes action to seize the eggs that our multinational golden goose has been laying for us. Congress could legislate for a global minimum rate of corporation tax on the worldwide earnings of all US multinationals at its current corporate tax rate of 21 per cent. Companies might save tax by paying at 15 per cent in Ireland only to face a 6 per cent surcharge in the US.

This measure would undermine any tax rationale for locating here and reduce Ireland’s attractiveness as an investment destination. With two protectionists vying for the US presidency in November, this scenario is more than just an outside chance.

With US budget deficit projections skyrocketing into the future, hungry American fiscal authorities may look to Ireland as a politically low-cost option to help prop up Washington’s finances.

Michael McGrath, the finance minister, has warned that corporation tax receipts cannot be relied upon in the future. The implication is that there may be a significant degree of tax planning that is boosting current receipts which may not continue in the future. If we are at risk of having maxed out our extraction of eggs from the multinational golden goose, how stands our indigenous sector of Irish-owned operations?

According to the CSO, Irish workers are among the most productive in the world, adding on average €103.90 to the value of the economy for every hour they worked in the third quarter of 2023. That figure is, of course, inflated by multinationals. Labour productivity for the foreign sector was €405.90 an hour compared with just €54.40 an hour for the domestic sector.

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A recent report, jointly carried out by the Nevin Economic Research Institute (Neri) and the trade union Siptu, revisited the CSO analysis and concluded that the average value-added per hour of indigenous sector workers was just €28.

A chart in the Neri report shows sectoral productivity in the Republic compared with that in Northern Ireland — no economic champion. Apart from sectors dominated by multinational activity, southern productivity levels lag those in the north, sometimes quite markedly. In the southern construction sector, for example, productivity is less than half that north of the border. The economic rise of the Republic seems entirely down to foreign multinationals, and appears to owe little to native endeavour.

Two factors may help explain the indigenous sector’s poor performance. If multinationals are paying much higher wages, one would expect more talented Irish workers to gravitate there, so domestic firms must make do with the less talented and productive.

The indigenous sector may also be suffering from the effects of “Dutch disease”. The term was coined in 1977 by The Economist to describe the decline of the Dutch manufacturing sector after the discovery of massive gas reserves. As revenues and profits increase in the growth sector, costs rise across the economy, thereby making activity in other sectors more expensive while imports become relatively cheaper, in turn making non-growth sectors less competitive.

The Dutch disease framework exactly describes the modern Irish economy: a sector experiencing extraordinary growth; sharply rising costs across the entire economy; and poor competitiveness in low-growth sectors.

The government is correct to bank excess multinational tax receipts rather than use them to fund ongoing spending. It should also examine how real is the threat that our multinational sector’s economic contribution might shrink. Finally, we need to focus on how to boost the indigenous sector’s dismal productivity levels.

PS:

Philip Lane, chief economist at the European Central Bank and a former Trinity College Dublin professor, attracted criticism for warning of a dwindling Irish presence among the central bank’s staff. Lane noted that few Irish people were applying to join the ECB and many already there would be retiring over the next few years.

This prompted union representatives on the staff committee to complain to the ECB board. The letter stated: “It is very disturbing to see that a member of the executive board is not aiming at achieving an overall balanced representation of nationalities within the ECB, but only at having the representativeness of his own country/government addressed.”

The letter added: “The role played by nationality in hiring and promotions should be monitored and made transparent via adequate statistics.” Well, it is, actually.

That’s how we know Germans comprise almost a quarter of total ECB staff and nearly a third of managers. That’s far larger than Germany’s 21 per cent share of ECB capital, based on the size of its economy and population in the eurozone. The ECB is headquartered in Germany, however. Ireland’s share is under 2 per cent.

The staff committee then called for a “system identifying a threshold under which specific efforts must be made to hire and promote certain nationalities”. This would “ensure a suitable balance of nationalities”, before adding that a similar system was already in place at the European Commission.

I was unaware the European Commission sometimes engineers “a suitable balance of nationalities”. One woman’s suitable balance of nationalities might be another woman’s racial quota. I can understand a desire that the staff membership of European bodies should broadly reflect the national composition of the European Union. But I’d hate to think that second-class candidates are being appointed to key European posts.