Staying ahead in the race for FDI

Foreign direct investment (FDI) by overseas firms can never satisfy all of Ireland’s employment needs. But it can make – and for many decades has made – a significant contribution to developing and modernising the domestic economy; by creating jobs, raising productivity and improving the skill levels of both management and workforce.

At present, 3,300 foreign owned firms based in Ireland employ a quarter of a million people directly. Minister for Jobs Richard Bruton yesterday outlined how the Government's plans to compete in future for FDI. He set a target of securing 7,000 net new jobs from FDI each year between 2015 and 2020.

International competition to attract foreign investment has greatly intensified with the recession and its aftermath. Governments have struggled to meet the challenge of high unemployment at a time of low growth and weakened public finances. And tax has become a major weapon in the fight for jobs. The UK has lowered its corporate tax rate to attract more inward investment and other countries are set to do so. Where Ireland led the world in favouring a low rate of corporate taxation – starting in 1956 with zero tax on export profits, and refined in stages to a 12.5 per cent tax rate – others have followed. A feature of the Government’s new policy statement on FDI is its commitment both to retaining and defending the 12.5 per cent tax rate, and to supporting multilateral reform of the international tax system.

President Obama’s recent intervention in the tax debate, where he criticised US companies for using low tax countries like Ireland to avoid paying higher taxes in America, risks confusing different issues and exposing Ireland’s low corporate tax regime to unjustified attack. An increasing number of US companies have relocated to Ireland for tax purposes by acquiring an Irish based company and reincorporating here in what is called a tax inversion.

They have done so to benefit from a lower (12.5 per cent) corporate tax rate rather than pay a higher (35 per cent) US rate. American corporate tax – the highest in the developed world – has given companies a strong financial incentive to relocate, while American laws have made this easy to achieve. Nevertheless Ireland, which gains little from the recent spate of company inversions, has become embroiled in a controversy which is not of its making and one to which the US should provide its own solution by legislating for change.

Ireland’s low corporate tax rate remains its unique selling point in attracting inward investment. What is now clear, as the Government document states, is that future FDI policy will involve developing, in addition to a low tax regime, other areas of competitive advantage. The challenge for Ireland, as the Government states, “is to recognise and nurture the factors that can truly differentiate our offering”.