Ireland’s reliance on multinationals runs way deeper than corporate tax

The anvil of Covid has fallen heavily on lower-paid workers in consumer-facing sectors. That's the same the world over. What's not the same the world over is the hit to public finances. There's been great variation between countries. Ireland will be one of the few to generate more tax this year than in 2019, remarkable given we've had one of the strictest lockdowns in Europe.

Most of the consumer-facing economy was heavily curtailed from operating in the first four months of 2021. Yet the latest exchequer returns show the Government’s tax take was up by €7.4 billion (13 per cent) in the January-November period relative to the same period in 2019.

The progressive nature of income tax has been a key factor. The fact that the bulk of tax receipts are paid by middle and high earners; the fact that middle-income earners hit the higher tax band at relatively low levels of income; and the fact that a relatively large cohort of lower-paid workers remain outside the income tax net altogether has effectively shielded the exchequer from the fallout.

What’s not obvious from the raw data is just how much of our tax base, outside of corporation tax, is derived directly and indirectly from multinationals.

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Workers

Revenue statistics show that foreign-owned multinationals in the traditional foreign direct investment (FDI) sector employed about 32 per cent of the private workforce in 2019 – approximately 439,000 workers. If non-export multinationals, which include retail chains such as Tesco, are included, their employment footprint rises to 766,680.

These same firms and their employees paid 49 per cent of all income tax, USC and PRSI paid by companies in 2019, amounting to €10.4 billion.

They also accounted for 42 per cent of VAT receipts paid by companies that year, amounting to €4 billion.

So Ireland’s reliance on multinationals goes much deeper than corporation tax receipts.

"The FDI sector has protected us from the worst impact of Covid in terms of tax returns and employment," Ger Brady, chief economist with employers' group Ibec, says. "The converse of that is also true, that if there was any hit, for whatever reason, to the multinational sector in the future that would have an outsized impact in the other direction," he says.

Multinational investment in Ireland is like low interest rates. We can’t remember life without them and many of us seem to presume they’ll be here forever.

But in the 2000s, during the boom period of the Celtic Tiger, we went through a period of losing FDI-backed jobs and projects as lower-cost destinations rivalled Ireland for investment.

Some 1,900 jobs were lost when Dell computers announced the closure of its Shannon manufacturing operation in 2009. The US company had decided to shift its European manufacturing base to Poland.

Higher-value jobs

Similarly, US clothing maker Fruit of the Loom, which once employed nearly 3,000, shut its doors in 2006, signalling the de facto end of the textile industry here, with the company shifting its manufacturing operation to Morocco.

But while we lost lower-value FDI jobs, we replaced them with higher-value ones. A huge wall of high-value internet-led FDI has flowed into Ireland since the financial crisis, from 2010 on.

Global FDI trends and the internet era have morphed the Irish economy from a high-tech manufacturing hub to a high-tech service hub. The nature of this investment has inevitably led to a greater concentration of multinational employment in a smaller number of urban centres.

In the pharma sector, predictions that we would see a mass exodus of firms after a series of patent cliffs in the early 2010s proved ill-founded. Instead the sector has moved more high-end, manufacturing large-molecule drugs or biologics. Twenty-four of the top 25 pharmaceutical companies in the world have operations here.

When Ireland joined the EU in 1973, it had a GDP per capita that was 53 per cent of the EU average, the lowest of the then nine member states. By 2017, Irish GDP per capita had reached 184 per cent of the EU average. It has transformed us economically from one of the poorest European countries into one of the richest – but it doesn’t come without risk.

No guarantee

There is no guarantee we’ll keep winning this investment, not least because we don’t know what the next generation of FDI will look like.

The Government is regularly warned about its creeping reliance on multinational tax receipts: they now account for €1 in every €5 collected and they helped the Government run a balanced budget prior to Covid.

Receipts are also heavily concentrated, with just 10 large firms accounting for 56 per cent of all corporation tax generated last year.

"The concentration of corporation tax receipts, coupled with their ongoing volatility and vulnerability to international tax developments, is a source of serious concern," the Irish Fiscal Advisory Council warned in its latest assessment of the public finances.

The Covid crisis has emphasised the importance of the multinational sector to the economy here and – in a converse way – signalled how vulnerable we are to any hit in the opposite direction.