Pluck of the irish
20 October 2003
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The context in which the strategic decision was taken by Irish firm Matheson Ormsby Prentice to open an office in New York can be summed up in two words: inward investment. The following facts and statistics are illustrative:
World foreign direct investment (FDI) stood at $50bn (£29.87bn) in 1985. By 2000 that figure was $1.3 trillion (£776.58bn), representing a 26-fold increase. In 1980, FDI was one-fortieth of the world's investment; now it represents a fifth.
Ireland has for many years been the recipient of a considerably higher proportion of FDI into the EU than its 1 per cent population would suggest. In 2000, Ireland received 10 per cent of the total FDI into the EU, with US assets in Ireland standing at $44bn (£26.28bn). This represents 32 per cent of Ireland's gross domestic product (GDP).
There are 1,200 foreign companies established in Ireland, employing more than 138,000 people. More than 500 of these are US corporations, employing more than 90,000 of those people, representing a $34bn (£20.31bn) investment by the corporate US in the jurisdiction.
The importance to Ireland of inward investment in general and the corporate US in particular is readily apparent from the following:
- The US is Ireland's second-largest trading partner, after the UK.
- Nine out of the top 10 global pharmaceutical companies have significant operations in Ireland.
- 10 of the top 15 global medical device companies have established in Ireland.
- 33 per cent of PCs sold in Europe are produced in Ireland.
Principal attractions for US corporations
To understand Mathesons' decision to expand its North American presence (it was the first European firm to establish an office on the US West Coast when it set up its Palo Alto office in 1997), it is also necessary to consider the principal attractions for a US corporation in establishing in Ireland.
There are many reasons why Ireland is attractive to US investors - a common language, membership of the EuroZone and an educated workforce are undoubtedly some of them.
However, a principal reason is the tax advantages of doing business in Ireland. Until recently, the principal fiscal incentive in Ireland comprised a special low rate of corporation tax (10 per cent) applicable to certain trading activities. But doubts raised about the validity (from an EU law perspective) of the preferential nature of the tax rate incentive were the subject of a dialogue between the Irish government and the European Commission, which culminated in an agreement in July 1998. This agreement provided for the abolition of the preferential 10 per cent rate and its replacement by a universal corporation tax rate of 12.5 per cent, applicable to all trading profits.
What kind of activities qualify for the 12.5 per cent rate?
Broadly, the current corporation tax regime involves the characterisation of income into two streams, with all trading income (broadly equivalent to active income) taxable at 12.5 per cent and all non-trading income (broadly equivalent to passive income) taxable at 25 per cent.
For many years Ireland has proved to be an attractive, low tax platform from which to do business in Europe. US companies in particular have maximised the opportunities that exist in this regard. Although the primary motivation behind the introduction of the universal 12.5 per cent corporate tax regime was to preserve the attraction of Ireland as a low tax platform for such companies, it presents significantly more opportunities for the international business community to do business in or through Ireland.
The significant change from the previous corporate tax regime which makes this possible is that almost all trading activities now qualify for the 12.5 per cent tax rate. This contrasts markedly from the tax incentives under the old tax regime, which were only available in respect of qualifying activities (ie the broad range of trading activities that qualified for the former 10 per cent tax rate).
Going forward, therefore, the Irish low tax platform will be open to practically all business sectors, making Ireland attractive to businesses that have not traditionally regarded Ireland as a location from or through which to do business.
The only issue in most cases will be whether the activity conducted in Ireland comprises the carrying on of a trade in Ireland for tax purposes. Noting the increasing focus by multinationals on lines of business, outsourcing and the increasing flexibility in business models presented by the internet and technology developments generally, this is expected to generate significantly more international business in Ireland. In particular, it is anticipated that the next generation of inward investors in Ireland will include investors from industry sectors that have not traditionally considered Ireland as a potential low tax platform.
Therefore, the central importance of inward investment generally, and US inward investment in particular, to the Irish economy, combined with the broadening of the low tax platform available now to practically all business sectors, led Mathesons to conclude that the time and circumstances were right to further augment its presence in North America, consequently enhancing the firm's capability to advise locally on Irish law matters.
What of the uncertain state of Ireland and the world economy?
As a consequence of its success in attracting inward investment, Ireland now has one of the world's most open - and indeed vibrant - economies. Exports account for more than 80 per cent of GDP. Between 1986 and 2001, Ireland's exports increased by an average of 12 per cent per year.
As for the future, the recent Organisation for Economic Cooperation and Development (OECD) report, 'Economic Outlook: Special Focus on Foreign Direct Investment' (June 2003), forecasted real GDP growth in Ireland to slow to 3.25 per cent this year, before rebounding to 4.25 per cent in 2004 with the strengthening of export market growth. The report indicated that the real GDP growth rate in 2002 of around 6 per cent was itself a significant decline from the 'Celtic Tiger' era of the mid-to-late 1990s and was largely accounted for by the strong performance of the biomedical and pharmaceutical sectors.
Inflation, which has been a problem in recent years for the Irish economy, is expected to fall, but will remain above the EU average, reflecting persistent price pressures in the services sector. In short, the Irish economy has had a 'soft landing' from the boom period, which ran from 1994 to 2001.
The importance of US inward investment to the Irish economy drove Mathesons' decision to establish in Palo Alto. The success of that move is evident in the fact that the firm succeeded, in the period since the office opened in 1997, in winning a large share of the software and IT inward investment projects established in Ireland over that period. The firm represents many of the leading US corporations in these sectors, not least among which are Microsoft, EMC, Xerox, McKesson and HP Compaq.
Historically, the firm serviced the Irish law requirements of clients on the US East Coast from its Dublin and London offices. However, the success of the firm's experiences in Palo Alto led it to conclude that, notwithstanding the current US economic downturn, the establishment of an office in New York would enable it to replicate its successes on the West Coast. Again, the primary focus of the New York office is to service the Irish law requirements of existing and new US corporate clients on the East Coast, be they international financial services, pharmaceutical, medical devices or other US corporates.
Mathesons takes the view that, with more than 500 US companies employing over 90,000 people here, Ireland will continue to be the country of choice for US companies accessing the European market.
Elizabeth O'Connor is head of Matheson Ormsby Prentice's New York office