Analysis - Ireland has too much to lose to deter U.S. companies re-homing

By Padraic Halpin

DUBLIN (Reuters) – Ireland is in the firing line from Washington again for luring U.S. companies to its shores for tax benefits, but despite contrite noises coming from Dublin, it has too much to lose to discourage U.S. firms bent on shifting their tax domiciles.

Ireland’s low corporate tax rate of 12.5 percent is a natural lure for U.S. companies looking to set up an overseas hub, and for Dublin the pay-off is new jobs, but in so-called inversion deals the company then switches its overall tax domicile from the United States, where the rate is 35 percent, to its new home.

The surge in such deals, which are typically effected by purchasing an overseas company – which does not then necessarily create any new jobs – drew the ire of President Barack Obama last week, who singled out Ireland for criticism.

Ireland’s government has responded by saying it is looking at ways of stopping the transactions, but lawyers and tax advisors who work for multinationals such as Intel, Pfizer and Google say little can be done without putting at risk a model specifically designed to lure foreign companies.

Moreover, the regime has worked, accounting for one in 10 Irish jobs, and Dublin has defended it fiercely for years.

It would be difficult to block inversions without jeopardising the broader benefits.

“It’s a dangerous road to go down,” said Kevin McLoughlin, who as head of tax at accounting firm Ernst & Young advises some of Ireland’s largest multinational companies.

“I really struggle to see how they can legislate against companies choosing Ireland as a destination in a way that’s confined only to these types of situations. I think it’s extremely unlikely because I just don’t know what they can do.”

DISCOURAGING WITHOUT DAMAGING

Ireland’s finance ministry says that as part of its discussions for October’s budget, it is examining whether there are ways to discourage the deals.

Last year it did, after all shut down another much-criticised tax arrangement used by Apple Inc to shelter over $40 billion (26.6 billion pounds) from taxation – but it left open an even bigger loophole that means the computer giant is unlikely to pay any more tax.

And apart from the discomfort of being on the other end of Washington’s finger-wagging, bare inversions can impose real costs on Dublin, too.

These corporate migrations, which have ramped up since 2009, have swelled Ireland’s gross national income – which determines a country’s EU budget contributions – by some 7 billion euros, according to the finance ministry.

That meant Ireland’s 2012 EU contribution rose by 60 million euros, but the mere re-domiciling of a holding company typically adds little of economic benefit. By contrast, the more than 1,000 foreign companies who have set up an Irish base have created 160,000 jobs.

“This is why even though this activity is driven by tax factors in other countries, we are looking at ways of stopping these transactions,” a finance ministry spokesman said.

“But it is important to ensure that, in doing that, we do not damage real investment or jobs coming to Ireland.”

The jobs minister, who has led over 20 investment missions abroad since taking office three years ago, many of them to the United States, said last week that the issue could only be fixed by changes to the U.S. tax code.

WHY IRELAND?

Ireland is not the only home for inversions – Britain, the Netherlands and Switzerland are also popular. Pfizer made a $118 billion bid to buy AstraZeneca Plc this year, so it could move its tax domicile to Britain, but the pharmaceutical giant was rebuffed by its target.

But for tiny Ireland, the deals can be vast, such as Medtronic’s $42.9 billion takeover of Irish-domiciled Covidien, which led to a near sixfold rise in the value of Irish-based M&A in the first half of the year – and almost 20 percent of all of Europe’s, research by information services company Experian found this month.

It is not just tax that encourages inversions from the United States to Ireland.

Ireland’s Arthur Cox, legal advisers on deals worth 56 billion euros this year, according to Experian, lists the attractions of a legal system similar to the United States’, no shareholder rights to interfere with executives’ pay and limited rules on the “transfer pricing” of intercompany transactions, which can also be used to shift profits to avoid tax.

However, the system was not designed for invertors.

In a note published this month after meeting Ireland’s prime minister and finance minister, U.S. law firm Cadwalader said they found a resounding concern that Ireland feels it will “bear the brunt of the reputational and economic impact of inversions but little of the job creation”.

“What would need to happen is that now they’re in Ireland, some of these invertors see it as a good place to establish a real presence,” said Lorcan Tiernan, a partner at Irish law firm Dillon Eustance, who advised on Perrigo’s $8.6 billion inversion deal with Ireland’s Elan last year.

“If you look at what Jazz Pharmaceuticals have done (after buying Ireland’s Azur Pharma in 2011), they’re actually building a centre. That’s the type of thing that will strengthen the case for inversions – real employees, bricks and mortar.”

“SLIPPERY SLOPE”

One Dublin-based M&A banker, who declined to be named, said Ireland’s Office of the Revenue Commissioners, which assesses and collects taxes, has been on red alert since late last year around any sort of structure or deal that might be seen as trying to evade tax.

“It would be a lot harder for an overseas company to set up in Ireland now versus even two years ago unless they were bringing a large number of jobs with them,” he said. “They are not as forthcoming or facilitative as they used to be.”

A spokeswoman for the Commissioners said they are always on the lookout for such structures and apply the relevant legislation fairly to all entities tax resident in Ireland.

While U.S. politicians view inversions as unpatriotic, they are perfectly legal, and multinationals will continue to look to inversions to enhance shareholder value until substantial reform of the U.S tax code is introduced, partners from Arthur Cox wrote in an article for the Practical Law journal recently.

With no quick fix likely as long as Republicans contend that inversion rules need to be part of a broader overhaul of the tax code, Ireland is likely just to keep taking the flak and the rewards of a system it has spent so long cultivating.

“What companies want is certainty. When we visit firms in the States and elsewhere, they mightn’t always be able to find Ireland on a map, but the 12.5 percent rate is nearly a mantra,” Dillon Eustace’s Tiernan said.

    “If you start changing the message or backtrack on something that’s actually not fundamentally wrong, that wouldn’t be good. If Ireland is seen buckling to external pressures, that would raise concerns of whether this is the top of a slippery slope.”

(Additional reporting by Carmel Crimmins; Editing by Will Waterman)

Analysis - Ireland has too much to lose to deter U.S. companies re-homing