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Ireland -- U.S. firms' favorite new home

Mar 03, 2016, 11:50 PM EST
Ireland.
Source: Michael 1952/flickr

A report released on Thursday found that the U.S. has invested almost as much in Ireland as Latin America and China combined. According to the American Chamber of Commerce in Ireland, as of 2014 the total stock of American FDI was $310 billion in Ireland (with $58.1 billion in 2014 alone), whereas in Latin America it was $257 billion and in China it was $66 billion. All told, Ireland was the destination for more than 20% of U.S. FDI to Europe.

With 6.9% GDP growth in 2015, Ireland is the fastest-growing economy in the E.U. That breakneck pace is estimated to slow down some but will still reach 4.5% this year and 3.5% in 2017 – well above the euro zone’s forecast of 1.7% growth in 2016. This is quite the change from the country’s three years of bailouts and reforms under the IMF and E.U. beginning in 2010.

In fact, Ireland ranked #1 out of 109 nations in FDI in the 2016 Global Talent Competitiveness Index, boosted by several key strengths. Rapid economic growth itself attracts more investment in a positive feedback cycle, aided by the country’s high quality human capital and its pro-business policies. Ireland’s low corporate income tax rate of 12.5% is perhaps the main attraction for U.S. firms. Indeed, some 700 American firms are based in Ireland, employing about 130,000 people.

An increasingly popular tactic for U.S. corporations is to do an “inversion,” acquiring an Irish firm and then relocating its headquarters to Ireland in order to slash its tax bill. Compared to the standard corporate tax rate of 35% in the U.S. – the highest in the developed world – these tax savings can total several billion dollars over a few years.

Last November, U.S. pharmaceutical firm Pfizer and Irish firm Allergan confirmed their $160 billion merger in the largest corporate inversion ever. The companies said they expect the company to have an effective tax rate of 17-18% in the first full year after closing, compared to the 25% Pfizer had been paying. They said the merger would save about $2 billion over three years. (The real savings may be much higher – last week advocacy group Americans for Tax Fairness wrote that through its proposed merger with Allergan, Pfizer would be able to permanently dodge an estimated $35 billion in U.S. taxes owed on about $148 billion in profits it currently maintains offshore.)

Likewise, in January Wisconsin-based manufacturer Johnson Controls announced that it would merge with Tyco International and transfer its official corporate headquarters to Cork, Ireland, where Tyco is already based. All other strategic motives aside, the move will save the new firm $150 million a year in U.S. taxes.

Still, Ireland would be wise not to neglect its homegrown enterprises by focusing too much on drawing in big multinational firms. A new E.C. report found that the country isn’t doing enough to support its small and medium enterprises. Their R&D spending and productivity are well below that of the larger foreign firms that now call Ireland home. The report also criticized Ireland’s lack of funding for education, as well as the high cost of childcare, housing problems, inadequate state infrastructure, and sub-par public transport in Dublin. But those problems can be fixed, and overall the country is the envy of Europe.

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