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Investment opportunities in Ireland

AUTHOR(S): John Ryan, Joe Duffy
PRACTICE AREA GROUP: Tax, International Business, Inward Investment
DATE: 04.04.2012

At a time of unprecedented economic turmoil, Ireland continues to attract record levels of foreign direct investment.  The 2011 IBM Global Location Trends Report ranks Ireland 1st in the world for inward investment by quality and value.  Why does Ireland continue to be one of the most favoured FDI locations for US companies?

There are many reasons for this.  A recent report by the Economist Intelligence Unit, Investing in Ireland: A survey of foreign direct investors, suggests there are four cornerstones to Ireland’s unique selling proposition; access to the EU markets, a competitive corporate tax infrastructure, a uniquely talented workforce and a stable regulatory framework that supports business.

The 12.5% corporate tax rate is now alongside the shamrock as a symbol of Ireland’s national identity, regularly making international headlines and on occasion, the subject of comment from some of Ireland’s EU partners.  But it is just one aspect of the Irish corporate tax infrastructure and of itself does not explain the Irish FDI success story.  Indeed there are other European countries that have relatively low corporation tax rates and others which are moving in this direction, notably the UK, where the standard rate is set to fall to 23% in line with a European trend.  So the question remains, what are the key elements of the Irish corporate tax infrastructure that makes it so enticing for foreign investors?

We cannot ignore the obvious; 12.5% is not the lowest tax rate on the block but it is still very good.  Particularly in a western, English-speaking, euro area country.  The Irish regime also works because its simple and transparent.  Once a company is trading in Ireland it pays tax at 12.5%.  There is no restriction on the type of business, no requirement to own or develop patented IP, no complex deemed deductions, no rulings required.  It is transparent and this is a strong calling card.  Its generally understood that a company will be trading in Ireland where there are people with the requisite skill in Ireland engaged in the profit making activity of the business.

Over time Ireland has put together a competitive IP regime that aims to attract IP exploitation businesses.  The 12.5% rate underpins the regime but there are also generous deductions for IP acquisition costs and related interest expenses, meaning that an 2.5% effective tax rate is possible.  Unlike many other IP regimes, the Irish regime is not limited to patented property with exploitation of a wide range of intangibles including brands and trademarks potentially qualifying.  In addition companies engaged in R&D can avail of a 25% tax credit for qualifying R&D expenditure

Ireland has a comprehensive range of double tax treaties with 65 countries covering all our major trading partners.  Coverage in Asia is particularly good. Ireland has treaties with Japan, Korea, Hong Kong and Malaysia and has a particularly good treaty with China.   Notable absentees right now include Brazil (Ireland isn’t alone in this regard) and Argentina though both are short term targets.  The wide treaty network minimises withholding taxes on income and eliminates withholding tax on payments to treaty partners.

Ireland ticks most of the other key boxes on tax for non resident investors.  No tax on the disposal of subsidiaries.  Full credit available for withholding and underlying taxes on dividends received results usually in no additional tax payable in Ireland. No controlled foreign company rules and transfer pricing rules that are OECD compatible and relatively benign.  Recent proposals look to incentivise key executives to relocate to Ireland by exempting from tax part of their salary.  Where the need arises, the Irish revenue authority will provide advance opinions on technical matters, providing certainty to businesses in advance of key decisions being taken. 

Ireland finds itself very well positioned in the global beauty parade for foreign investment.  One of the keys to maintaining and enhancing its position is to ensure its corporate tax infrastructure remains innovative and relevant.  Given the continuing importance of the FDI sector, Ireland won’t rest on its laurels. 

This article first appeared in "The Deal magazine" on 30 March 2012.

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