05 October 2009
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With investment from overseas and companies returning to Ireland, there are signs of growth that are surprising everyone. By Tom Phillips and Margaret Taylor
Never far from controversy and often on the front foot, the Irish government has atttracted much criticism among the public for its handling of the recession.
First there was Europe-wide condemnation when, immediately after the crash, the Irish finance Minister Brian Lenihan struck out on his own with guarantees to save the country’s banks.
Then there was the creation of the National Asset Management Agency (Nama), which bought between e80m and e90m (£72.80m-£81.93m) worth of development and building loans off the banks’ books using taxpayer’s money. The plan was to buy the loans at a discount, somewhere between what they were worth at the peak of the property boom compared with their long-term economic value - an undetermined figure known as the ’haircut’.
These loans will then be redistributed back into the market allowing the banks to start lending again. That, or the taxpayer will be crippled under the weight of the debt for decades to come, according to who you listen to.
The ins and outs of Nama have dominated the Republic’s newspapers since the scheme was announced, with uncertainty over what the plan might mean for the country’s economy, creating a soap opera to rival Irish television’s Fair City. But in nationalising Anglo Irish Bank, was Ireland not ahead of the curve? Gordon Brown and other European leaders soon followed suit as the seriousness of the situation became more apparent.
And what of a big economic cheese coming out in support of Nama? In an email circulated to banking clients of Goldman Sachs, the investment bank’s chief European economist Erik Nielsen described the creation of the agency as “the latest in a series of impressive steps” by the Irish government to clean up the banking system. He went on to highlight the “huge benefit” to a small economy of being in the euro zone.
Then, in the same month, insurance broker Willis Group Holdings announced plans to move its corporate base from Bermuda to Ireland, citing tax benefits alongside Ireland’s trade treaties with other EU states and the US. In doing so, Willis becomes the fifth large organisation to redomicile to the country, following in the footsteps of consultant business Accenture; manufacturer Ingersoll Rand; electrical products manufacturer Cooper Industries; and healthcare firm Covidien.
Bucking the trend
This is meant to be an economy in crisis, one of the hardest hit by the recession. So what’s going on?
“It’s well known that Ireland has been attracting inward investors for many years and we continue to punch above our weight in terms of the level of foreign direct investment [FDI] we receive across sectors compared with our European counterparts,” says David Widger, corporate partner at A&L Goodbody. “It’s not just about a 12.5 per cent headline tax figure - it’s about an environment that has all the ingredients any large corporation or emerging industry needs to take their business to the next level.”
While dissenting voices can be heard from all quarters back in Dublin, it appears that the corporate and banking market is seeing something else. A ringing endorsement such as that given by Goldman Sachs’ Nielsen, along with high-profile corporate moves to Dublin, appear to reflect a growing mood of optimism in the economy. None more so than from lawyers at the forefront of new FDI deals.
But it appears to be a trickle rather than a tidal wave of companies relocating to the country - and only in a few specific industries. Andrew Doyle, managing partner of Maples and Calder in Dublin, says the firm’s Cayman Islands office has not noticed a shift away from traditional tax jurisdictions in the Caribbean, but notes marked growth in specific areas.
“There’s no tangible evidence of companies redomiciliing to Ireland,” he says. ”Cayman continues to grow as a market for us. But there are two sources of this FDI redomiciling: one is insurance companies relocating from Bermuda and the other is corporations redomiciling from the UK. The fundamental attractions of Ireland remain the same but there is now, of course, an improved cost base.”
John Kettle, senior partner at Mason Hayes & Curran, believes there is plenty to be positive about.
“Ireland is still recognised as having a viable workforce - English-speaking and well educated,” he explains. “Ireland is also in the euro zone, has good healthcare benefits, low tax, is tax-transparent and is on the US ‘white’ list. That message held true throughout the recession. It’s going to take a while to fix things but we’re steadily taking steps to address them. The fact that we’re able to take these very drastic steps quickly is a positive.”
Kettle says he is seeing more business from Continental Europe that was not around five or 10 years ago, particularly in investment funds, IP, IT and pharma. Part of this growth, he believes, is down to small economy syndrome: a more concerted attitude to get noticed by the big corporations.
“We have a willingness and capacity to chase the clients,” he adds.
Tony Burke, a partner at Mason Hayes & Curran, agrees that Ireland has remained attractive to investors despite the recession, with some more progressive practices areas such as IP and technology being the favoured industries to enter the country.
He points to the recent announcement by Microsoft that its first-ever non-US megadata centre is to be located in Ireland. With 300,000 sq ft, costs of $500m (£310.23m) and 50 employees, the move has been regarded as a coup for IDA Ireland, the country’s inward investment promotion agency.
“FDI in Ireland is still happening even in troubled times,” says Burke. “Facebook’s European Centre is about to open and, again, Dublin was the location of choice amid heavy competition from other locations. The number of projects being announced is unsurprisingly down, but the quality is still there. The profile of the recent announcements demonstrates that technology, IP and pharma are the leading destinations for FDI monies. The medical device sector is still healthy, with companies such as Boston Scientific recruiting employees.”
Innovation, technology, pharma, IP, energy, funds, research and development (R&D) … you do not have to search for long to find an Irish lawyer with plenty to say. Nothing new there perhaps, but there is plenty of evidence to back up the enthusiasm.
Arthur Cox partner John Menton highlights the IT sector as one that is particularly enamoured with Ireland, with quality, high-value projects.
“Despite the global downturn, Ireland has continued to attract a significant number of quality FDI in the form of R&D investments,” he says. “So far this year Intel, HP, PayPal, Helsinn, Hovione, Boston Scientific and Pfizer have all announced the establishment of new R&D projects here. These are direct FDI projects, in addition to collaborative research projects that overseas companies can enter into with Irish universities. One of the impacts of these projects is an increase in the volume of IP-related legal work, as well as legal work associated with structuring such projects in the most tax efficient manner.”
A&L Goodbody’s Widger praises the Irish government for its approach to new technologies in the IT, pharma and R&D sectors. The knock-on effect is growth in many progressive industries, making the real estate boom and bust that kept property lawyers busy seem like economic naivety. The dot.com bubble has, after all, already burst. Again, having the right kind of attitude is key.
“The government has been particularly progressive in fostering [FDI] through its focus on encouraging innovation for a new ‘smart economy’, including bolstering tax and business grant schemes as part of this,” says Widger. “The quality of the workforce you’ll find here, in terms of education and creativity, is, in my view, not replicated anywhere on the globe.”
Mason Hayes & Curran’s Burke agrees: “There’s a fresh emphasis on innovation, with the perception being that, worldwide, companies with focused R&D programmes will survive.
nnovating one’s way out of the downturn, rather than simply trading out of it, is the message from the IDA.”
Meanwhile, according to Widger, growing sectors such as new media, social media, web services, pharma and technologies all benefit from the attractive fiscal framework.
“Ireland gives these kinds of companies an ideal R&D environment,” he says. “They’ve [also] been encouraged by the expansion earlier this year in our Irish Finance Act 2009 to tax reliefs on the acquisition of IP. The funds sector is also tipped for expansion, despite recent trauma in the financial services sector.”
Arthur Cox’s Menton says FDI R&D has been allowed to flourish, driven in part by the provision of additional tax incentives as well as grants from the government.
Ireland already has a low standard corporate tax rate and recent changes to Irish tax legislation means that a company that incurs expenditure on R&D may avail itself of a tax credit of 25 per cent on R&D expenditure. This tax credit is in addition to the corporation tax deduction available at 12.5 per cent for qualifying expenditure.
The combined effect of these provisions, Menton explains, is that it is possible to obtain tax relief at an effective rate of 37.5 per cent for incremental expenditure on R&D.
“In addition, the Irish Finance Act 2009 recently introduced capital allowances on capital expenditure incurred by companies on the acquisition of certain ‘specified intangible assets’ [which are mainly IP assets]. The tax write-off will be granted as a capital allowance and the write-off will be available in line with the depreciation or amortisation for accounting purposes,” explains Menton.
Whelan says IP is at the heart of Ireland’s new-found love of progressive industries.
“For any jurisdiction positioning itself on the international stage as an innovation hub, it must have three necessary ingredients to its offering: a skilled workforce, for the creation of IP; a favourable tax regime, for the exploitation of IP; and a robust legal system, for the enforcement of IP,” he believes. “As a result, significant emphasis has been placed on investing in the skills of the workforce, tax reform and developing the IP legal framework in Ireland.”
John Whelan, partner, A&L Goodbody
Legal policy will continue to be vital to Ireland’s smart economy. Ireland has the institutions in place to drive its innovation offering. For example, we have received great praise internationally for the establishment of the Commercial Court, which handles almost all IP enforcement cases, and for the manner in which that court has conducted its business - the judgments emanating from it in international IP litigation have been recognised as among the best in Europe.
The favourable IP tax and legal regimes will be important drivers in the times to come, as Ireland gets its economy back on track to the levels of growth in previous years. As a result, there will be a continued and increased need for lawyers who focus on the hi-tech and pharma sectors, be they IP and IT specialists or general corporate lawyers with an innovation-based practice.
David Dillon, partner, Dillon Eustace
Interestingly, when the initial crisis really took hold following the collapse of Lehman Brothers, financial services and in particular funds practices in the immediate aftermath became even busier. There was significant work involving restructuring and reorganisation of fund portfolios and financing relationships.
There was a lull in the amount of funds work for a few months from March time, but nothing like the collapse in the amount of work experienced in other areas of practice.
Since June there has been a steady increase in the amount of work relating to the establishment of new funds and general work. This, to a significant extent, reflects the increase in asset values and share prices on the major stock exchanges. In addition, hedge funds have been seeking to exploit value from the stress situations.
Gerry Halpenny, partner, LK Shields
Throughout the 1990s and the early part of the present century, Enterprise Ireland achieved spectacular success in attracting foreign direct investment (FDI) to Ireland, helped by a favourable tax system, a well regarded regulatory system, a highly educated English-speaking population and significant government investment in research and development within the Irish third-level education system and beyond.
With the global downturn, a number of jobs have been lost, with foreign companies affected by the slump ceasing or reducing their activities in Ireland. Nevertheless, the factors that attracted foreign investment to Ireland remain and sectors such as IP, technology, energy, pharmaceutical and funds remain relatively buoyant.
From a funds industry perspective, new money is still flowing into Irish-domiciled fund structures. Particular beneficiaries are the more highly regulated Ucits funds, which are taking advantage of the general “flight to quality” for those with cash to invest. Interest in developing existing Irish-based fund products and creating new products remains high, with new fund promoters continuing to pick Ireland as their domicile of choice for internationally marketed investment products.
Ironically, the result of the current downturn in the Irish economy may well be to make Ireland more competitive and thus more attractive a location for business and FDI generally. As a small economy on the outskirts of Europe, Ireland has always been heavily dependent on FDI and this is likely to remain so for the foreseeable future.
Mark White, partner, McCann FitzGerald
One development we have seen in relation to investment funds is an increase in fund managers, particularly hedge fund managers, looking to domicile their investment funds in regulated jurisdictions such as Ireland. In some cases, the fund managers are migrating their existing Cayman Islands or British Virgin Islands funds to Ireland; in other cases, they are setting up new vehicles in Ireland for the purposes of attracting new subscriptions on the basis that an investment in a regulated jurisdiction provides greater comfort for investors.
Ireland continues to be a leading domicile for investment funds, not just because it offers a regulated product but because the fund is tax neutral from an Irish tax perspective. Ireland also has a wide network of double taxation treaties and is seen as a good Organisation for Economic Cooperation and Development jurisdiction from a tax perspective.
Tony Burke, partner, Mason Hayes & Curran
We have just completed work on a three-year project for the European Commission on a large-scale technology transfer review that covered the EU. This gives us a unique insight into the innovation topography of the EU, and into the benefits that locating in Ireland has for foreign direct investment (FDI) projects. On a smaller scale, our indigenous Irish clients are still winning valuable research contracts, so FDI does have a positive trickledown effect, even outside the “headline” companies.
We are experiencing a significant increase in interest in Irish-domiciled Ucits funds. One of the most interesting developments arising from recent market difficulties has been the increased demand by investors for regulated products. This has led hedge fund managers to move into the regulated fund arena, either as a result of their investor base wishing to move away from unregulated hedge funds or as those managers seek to attract new money.
Ucits are now recognised as the most marketable collective investment product in the world. Not only are they freely distributable within the EU but also regulators in Asia, Africa and Latin America permit Ucits products to be sold in their jurisdictions. Those regulators recognise the Ucits brand as representing a well-regulated, liquid, transparent product with a strong emphasis on investor protection and coming from a stable environment.
David Carthy, partner, William Fry
Foreign direct investment (FDI) would appear to be fairly robust and there is still a flow of it through to Ireland, reflecting the ongoing attraction of the tax regime and other fundamentals. Costs in Ireland have also fallen and although there is work to do, property and salary costs have fallen in the past 12 months.
We are still seeing a flow of projects in the pharma, medtech and technology sectors, as well as insurance related projects. The University of Pittsburgh Medical Centre’s recent increased investment in Ireland, into the Beacon Hospital in Dublin in particular, would be an example of this and is a significant project on which we were engaged recently.
Given the fall in domestic activity from a much higher level, FDI and transactions originating overseas are definitely providing a boost to the economy as greater value emerges.