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The Corporate Tax Regime and Industrial Policy in Ireland

Jim Stewart, Associate Professor in Finance School of Business, Trinity College, Dublin, 2.

IIIS Discussion Paper No. 469

Industrial policy is a major tool of economic development. Ireland for example, has used tax incentives, with considerable success, to attract foreign direct investment. As a result Ireland's share of global ICT exports amounted to 12.7% in 2012, compared with 8% for the U.S. Apple and Google have become synonymous with these exports. At the same time considerable public concern has emerged because of tax avoidance strategies used by multinational enterprises. A U.S. Senate report on Apple found that one subsidiary located in Ireland had no employees, income of $22 billion in 2011 (64% of Apple global income), and paid $10 million in tax. Ireland is equally important in the operation of other U.S. companies. This paper presents evidence of the extent to which U.S. firms in Ireland use tax minimisation strategies. For example firms using a 'double Irish' tax strategy , (including Apple Sales International), had pre-tax profits of at least in €32.8 billion in 2011, amounting to 19% of GDP. Individual government and other initiatives, for example the OECD Base Erosion Profit Switching project, will result in tax regime change for foreign direct investment in Ireland and elsewhere. As a result firms and their advisors, may pursue alternative tax strategies. Hence proposals for country by country reporting may be the most significant long run reform, but to be really effective country by country reporting should be publicly available. The paper concludes that a tax based industrial policy will not result in an innovative, research led economy. Rather it leads to an emphasis on tax reduction.

JEL classification: F23, H25, H26, H32, K34.
Key words: Foreign direct investment, Ireland, tax avoidance, tax reform.

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Last updated 2 March 2015 by IIIS (Email).