GRANTS AND TAXES: THE RECENT IRISH FOCUS ON U.S.

C O N F I D E N T I A L SECTION 01 OF 03 DUBLIN 001505

SIPDIS

SIPDIS

E.O. 12958: DECL: 01/31/2015
TAGS: EINV ETRD ECON EI
SUBJECT: GRANTS AND TAXES: THE RECENT IRISH FOCUS ON U.S.
FIRMS


Classified By: Ambassador James C. Kenny; Reasons 1.4 (B) and (D).


1. (C) Summary: The Irish Government is determined to
maintain its approach to grants and taxes for foreign firms,
despite recent press coverage of U.S. companies that
highlighted problems with these investment incentives. The
coverage focused on three areas: EU obstruction of Irish
grant aid to U.S. firms; U.S. reports on questionable tax
practices by Irish-based U.S. companies; and, renewed
pressure for EU tax harmonization. Irish Government
officials told Post that they hoped to reverse EU reluctance
to approve large grants to U.S. firms, a posture reflecting
the Commission's failure to recognize intense global
competition for investment. The officials also said that
they would resist EU pressure on Irish tax structures, which
had underpinned Irish economic success and helped U.S. firms
to compete more effectively against international rivals.
Notwithstanding the focus on grants and taxes, Post believes
that Ireland's chief concern in its bid to remain an
attractive destination for U.S. investment is the erosion of
the country's cost competitiveness. End summary.

Background: Irish Press Attention to U.S. Firms
-------------- ---


2. (U) November saw substantial Irish media coverage of
issues relating to U.S.-invested firms, a sector that
typically receives less press attention than its significance
for the Irish economy would merit. There are currently over
620 U.S. firms operating in Ireland, employing over 90,000
people and supporting an estimated 250,000 jobs in Irish
industry (one-eighth of the total labor force). In 2004,
these firms exported roughly USD 55 billion in goods and
services and spent over euro 17.2 billion on payroll and
services. According to the U.S. Department of Commerce and
local American Chamber of Commerce, the stock of U.S.
investment in Ireland in 2004 stood at USD 73 billion, and
U.S. firms have accounted for 88 percent of new FDI projects
in 2005. The recent Irish reporting that bore upon the
U.S.-invested sector focused on two subjects:

A) Irish grant aid. In mid-November, the Irish Times
reported that Ireland's Industrial Development Authority
(IDA, the Government's FDI-promotion agency) had asked the EU
Commission to extend indefinitely its initial review of a
proposed euro 50 million IDA grant to Johnson and Johnson
subsidiary, Centocor, which is building a pharmaceutical
plant in Cork. The request aimed to avoid a likely formal
Commission investigation into the possible
competition-distorting effects of the IDA grant within the
EU. The IDA's action was reminiscent of its decision last
March to withdraw a proposed euro 170 million grant to Intel
only days before the Commission was expected to rule against
the grant. Irish reporting on this link cast doubt on the
IDA's ability to offer large grants to foreign firms, a
long-standing plank of the Government's investment incentive
strategy.

B) Corporate taxes. On this issue, Irish coverage followed
reports concerning, on one hand, renewed pressure for EU tax
harmonization and, on the other, the use of Irish corporate
tax benefits by U.S. firms. Regarding the latter, the Wall
Street Journal reported in November that Microsoft had placed
intellectual property with Irish units to save USD 500
million in U.S. taxes, and a subsequent New York Times
editorial described Ireland as a tax haven that facilitated
the outflow of U.S. jobs and investment. The Irish media
later reported that the IRS was pursuing USD 500 million in
back taxes from the U.S. software group Synopsis over its
Irish subsidiaries' transactions. Irish reporting
highlighted domestic concerns that U.S. firms were exploiting
Ireland's 12.5 percent corporate tax rate with questionable
transfer-pricing methods. (As a theoretical example, U.S.
firms could sell assets to Irish subsidiaries at low prices
in order to minimize their profitability, and thus tax
liability, in the United States; the Irish subsidiary could
then resell the assets and be taxed at the lower Irish rate,
while its profits would form part of the earnings that would
grade the U.S. firm's overall performance.)

U.S. Business Responds
--------------


3. (U) The American Chamber of Commerce used the occasion of
its annual Thanksgiving lunch to respond strongly to the
press coverage. AmCham President Eoin O'Driscoll, an Irish
citizen, said that U.S. reporting had misrepresented
Ireland's transparent tax structures and could damage
Ireland's reputation as a foreign direct investment (FDI)
destination. He noted that, in an environment of intense
global competition for FDI, Ireland would rely not only on
permissible state aid and an effective tax regime, but also
on a strong education system, a vibrant business culture, and
new research and development capabilities. He called on the
Government to urge Member States to recognize that Europe was
losing competitiveness when measured against other regions.
In separate remarks, AmCham CEO Joanne Richardson pointed out
that U.S. firms exemplified corporate responsibility, having
paid euro 2.7 billion in Irish taxes in 2004. Finance
Minister Brian Cowen, who also attended and spoke, emphasized
that the GOI would resist any pressure within the EU for
Ireland to change its 12.5 percent corporate tax rate.

The IDA's Views
--------------


4. (U) On December 2, Post discussed recent attention to tax
and grants with Ray Bowe and Enda Connolly, Chief Economist
and Spokesperson/R&D Division Manager, respectively, for the
Industrial Development Authority (IDA),the Government agency
that oversees Ireland's investment promotion strategy. In
2004, the IDA paid out euro 66 million in grants to foreign
firms and negotiated 70 new business projects involving a
total investment of euro 5 billion over the coming years. At
the start of 2005, moreover, the number of IDA-supported
foreign companies was 1,022, including 478 U.S. firms. Bowe
was directly involved in negotiations with the EU Commission
in the Intel and Centocor cases, and the Wall Street Journal
quoted Connolly in its article on Irish tax benefits.


Irish Frustration with the EU on Grants
--------------


5. (C) Bowe noted that Irish frustration with the EU in the
Intel and Centocor cases centered on the application of the
Multisectoral Framework on Regional Aid for Large Investment
Projects, adopted in 2002. He observed that, since the
Multisectoral Framework was relatively new and untested, EU
Competition Directorate officials tended to be conservative,
slow, and not business-friendly in interpreting the
Framework's grant review guidelines. They also had wide
discretion with the review criteria, including their
estimates for the market share that grant-recipient firms
would garner. Most importantly, according to Bowe, these EU
officials did not see their work in the context of the
overarching Lisbon Agenda, nor did they fully consider that
the EU was fighting for investment in a highly competitive
global environment. For example, Intel had made clear that
it would look not to other Member States, but outside the EU,
as an alternative to further investment in Ireland. Connolly
conveyed his sense that the Commission was beginning to "wake
up" to this reality, and he added that the IDA intended to
pursue possible grant aid for Intel and Centocor as both
firms moved to the second phases of their respective Irish
investments.


6. (C) Connolly cautioned, however, against overstating the
importance of grants in a foreign firm's decision to invest
in Ireland. He described such aid as a "contribution to
start-up costs," ranking well below other determinants of
Ireland's attractiveness as an investment destination, such
as an educated work force, a pro-business climate, a
transparent legal framework, and favorable tax structures.
The fact that the value of grant aid per number of jobs
created by foreign firms had continuously fallen in Ireland
since 2000 showed the decreasing significance of grants in
investment decisions, remarked Connolly. With the 2004
accession of ten Member States, moreover, general EU
guidelines for regional aid were scheduled to tighten in
2006, restricting IDA grants primarily to the Border and
Mid-West regions. Ireland, said Connolly, had accepted this
eventuality; in fact, grants were rarely now provided for
projects in Dublin and Ireland's east coast. Bowe pointed
out that Ireland would continue to provide aid for research
and development and small/medium businesses under the EU
"horizontal aids" program, which the Irish Government did not
expect to change significantly in the next five-ten years.

The Advantages of Low Taxes
--------------


7. (C) Regarding the Wall Street Journal and New York Times
pieces, Connolly emphasized that, since the 1950s, Ireland
had structured its taxes to induce investments from foreign
firms -- "but on the back of their substantive operations on
the ground" (a point he made in the Wall Street Journal). He
argued that these operations were not, as U.S. reporting had
implied, an "excuse" to shift around company funds; rather,
they had driven and sustained Ireland's rapid economic growth
in more recent decades. He pointed out that Irish tax
arrangements performed a less publicized, but critical,
function for U.S. firms in allowing them to retain and invest
a greater share of their overseas earnings. This option made
U.S. firms more competitive against foreign companies whose
home governments did not exercise the same scope of
jurisdiction over overseas earnings that the U.S. Government
did. Connolly added that U.S firms, decision to move a
portion of the ownership of their intellectual property to
Ireland also enabled them to take advantage of vibrant
research and development programs in Ireland. The most
innovative ideas, he said, were no longer found only in the
United States; firms realized that they had to tap into other
countries, expertise in order to remain leaders in their
fields.


8. (C) Ireland would continue to resist any move within the
EU to harmonize tax rates that might push Ireland's corporate
tax higher, said Connolly. He explained that Ireland's
opposition to harmonization had a powerful spokesperson in EU
Commissioner for the Internal Market (and former Irish
Finance Minister) Charlie McCreevy, as well as a like-minded
ally in the UK. The new Member States were also opting for
lower corporate taxes, and Belgium, too, had recently cut its
rates. Connolly noted that, in contrast to Ireland, the
higher taxes needed to fund the social model espoused by such
Member States as Germany and France had been an obvious drag
on economic growth. He added that German/French complaints
about Ireland's low tax rates were hypocritical, since German
and French firms in Ireland, particularly those that were
family-owned, were notorious for tax avoidance. These firms,
said Connolly, were expert in sheltering revenues through tax
haven arrangements in former colonies and Switzerland in
order to minimize their profitability, and thus their tax
burden, in Ireland.

Comment: Cost Competitiveness -- The Real Investment Concern
-------------- --------------


9. (C) Comment: Ireland recognizes that a corporate tax rate
hike would likely send investors to the exits, so the GOI has
made clear that it would fight to the last man to block moves
toward EU tax harmonization. Oddly, however, the 2006 Irish
Government budget unveiled on December 7 (covered septel)
included a proposal to eliminate the remittance basis of
personal income taxation for resident foreign businessmen.
Currently, the tax system allows foreign executives in
Ireland to receive their salary outside Ireland's
jurisdiction and pay tax only on money they "remit," or bring
into, the country to support themselves. U.S. firms have
been quick to point out that the budget proposal to eliminate
this allowance would discourage executives from establishing
operations in Ireland. In other words, the personal income
tax structure would work against the investment incentives
offered through low corporate taxes.


10. (C) Actually, Ireland's chief concern in its bid to
remain an attractive destination for U.S. investment is not
so much its tax and grant strategy, but rather the erosion of
the country's cost competitiveness. Irish-based foreign
firms face some of the highest costs in the EU for labor,
utilities, and land. In 2004, for example, the annual
average cost per employee in Ireland (encompassing wages and
taxes) was euro 38,100, compared to euro 33,200 in Germany,
euro 28,400 in Spain, and euro 7,700 in Poland. In recent
years, GOI economic strategists had acknowledged these high
costs and appeared willing to concede simple manufacturing
investments to lower cost regions like India and China in the
belief that Ireland could promote itself as a producer of
higher-value, knowledge-intensive goods and services. These
strategists worry now, however, that U.S. firms seem
increasingly willing to target such regions for investments
in this sort of higher-end production. For example, Intel
and Microsoft in recent weeks both announced billion-dollar
investments in India that have the kind of research and
development components that Ireland would relish. Post does
not anticipate any near-term exodus of U.S. firms from
Ireland, and, in fact, large U.S. pharmaceutical and banking
investments were announced the week of December 5.
Nevertheless, the likely acceleration of investment in
higher-value production in places like India and China does
pose longer-term challenges for Ireland to build upon its
current FDI base.
KENNY