Tax Policy And The Impact On Foreign Investment In Ireland

Author:Mr Mark O'Sullivan and Shane Hogan

Despite being an island nation on the periphery of Europe, Ireland has succeeded in becoming the leading destination for foreign direct investment (FDI) in Europe. Ireland consistently ranks first globally for high-value FDI flows (see for example, IBM's annual Global Locations Trends report). There are a number of reasons why Ireland has gained such a foothold with respect to FDI in recent years. Membership of the EU and providing US multinationals, in particular, with a platform to access the 900 million strong EU market has been central to that success story. Cultivating an open economy with very few restrictions on trade and embracing globalisation has also been critical. One other influencing factor has been Ireland's tax policy which has created an environment which encourages, rather than punishes, investment from overseas.

An evolving economy

Ireland's tax policy was not always designed to attract FDI. In fact, one only has to look at the rules in play in the 1950s to see that restrictions were imposed on foreign ownership of firms and heavy tariffs were applied to protect Ireland's manufacturers. At the back end of the 1950s, 90% of all Irish exports were destined for the UK. Those protectionist policies led to limited economic growth and during the 1960s successive Irish Governments began to cut unilateral tariffs, a Free Trade Area was agreed with the UK and subsequently both countries joined, what was then, the EEC in 1973.

In the 1980s, Ireland's tax regime sought to attract certain manufacturing operations (throughout the country) and internationally traded financial services to certain designated zones (ie, the IFSC in Dublin and the Shannon Free Zone in the mid-West). These policies were designed to attract foreign investment in Ireland at a time when the country endured extremely high unemployment levels and slow economic growth. These policies were undoubtedly successful but also had certain limitations as they were limited to certain sectors and also only provided growth opportunities to those designated zones. Ironically, it was following pressure from the OECD and the EU that Ireland arrived at its current corporate tax regime which applies a flat 12.5% rate to all active trading income for activities carried out anywhere in Ireland.

The introduction of the 12.5% rate in the early 2000s was a game changer in many ways. It opened up Ireland's doors to other sectors outside of financial services and...

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