After Outcry, Ireland Adjusts Its Corporate Tax Draw

CORK, Ireland — As lord mayor of this quiet seaside city in southern Ireland, Chris O’Leary seems to have a situation most other local politicians can only dream about.

Blue-chip international companies like Apple, Dell and IBM have all set up shop in and around this city, filling newly built office blocks near the city’s port and sprawling office parks in the suburbs. The companies set up shop here for the cheap workers, business-friendly lawmakers and — above all — Ireland’s low corporate tax rate. Since the height of the financial crisis in 2011, the region’s unemployment rate has fallen by more than four percentage points, to 9.9 percent, or roughly the national average, according to government statistics.

“What has made us different is how we’ve gone about our business,” said Mr. O’Leary, 55, in his City Hall office, decorated with a black-and-white photo of President John F. Kennedy’s visit here in 1963 and a copy of the city’s centuries-old charter.

That way of business is now under attack, though — and the potential benefit of Ireland’s most recent tax strategy for attracting companies is in doubt.

In recent years, other European countries have accused the country of acting like an unfair low-tax haven. The European Commission, for example, is investigating whether Ireland gave Apple a preferential tax deal that broke the region’s tough state-aid rules. While lawmakers and the company have repeatedly denied wrongdoing, the country is already phasing out the most controversial loopholes.

Ireland has since turned to a new inducement: a low tax rate on revenue generated from patents and other intellectual property held in Ireland. Such an incentive — announced last month to be 6.25 percent, or half of the country’s corporate tax rate — could be most attractive to patent-heavy industries like technology and pharmaceuticals.

But many tax experts say the benefits will be significantly smaller than many had expected, particularly for global tech giants.

Because of recent changes to global agreements, Ireland must limit what type of intellectual property can be included in these low-tax structures, known locally as a “knowledge development box.” Such restrictions have been demanded by several European countries, particularly Germany, which raised concerns that Ireland and other countries would turn to such structures to unfairly bring down corporate tax rates.

Under international law, Ireland and other countries like Britain and potentially the United States can offer the tax breaks only on intellectual property derived from research carried out in their national borders. Much of the research and development for technology companies is done outside Ireland. So revenue from global patents like those linked to Google’s search algorithm, many of which were developed in the United States, will not be eligible for the reduced tax.

“It won’t be much help to many international companies,” said Anna Scally, head of the technology, media and telecom practice in Ireland at KPMG, an accounting company that has helped global companies with their Irish tax arrangements.

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Some local policy makers are concerned that Ireland’s ability to entice international companies may be hampered by the restrictions on the country’s latest tax proposals. But others cite Ireland’s flexible (and increasingly multicultural) work force and its close ties to the United States as the reasons global companies, particularly those from the tech industry, will continue to knock on Ireland’s door.

“We’re closer to Boston than we are to Berlin,” said Mr. O’Leary, Cork’s mayor. “Companies aren’t just coming for the corporate tax rate.”

While lawmakers often play down its importance, Ireland’s 12.5 percent tax rate (versus 35 percent, before deductions, in the United States) has been a mainstay in the country’s decades-long strategy to attract the world’s largest companies. With few natural and manufacturing resources, Ireland and its politicians instead have turned to one of the world’s lowest corporate tax rates as the country’s primary competitive advantage in the global economy.

The bet has paid off. The country collected $4.2 billion in corporation tax in the first nine months of the year, or almost 50 percent more than the period last year, according to government records.

“We see tax as just part of the overall package that we can offer companies,” Richard Bruton, Ireland’s minister for jobs, enterprise and innovation, said in an interview.

Companies do not appear to be shying away from the country. Representatives from Google, Apple, Microsoft and Facebook declined to comment on Ireland’s new tax mechanism. But just last week, for instance, Apple said it would increase its work force in Cork by 20 percent, to 6,000 employees, by 2017. IBM and Pfizer, the drug maker, also recently announced plans to expand their Irish operations.

Mark Redmond, head of the American Chamber of Commerce Ireland, a lobbying group that represents many of the companies, said there were other incentives, including tax breaks of up to 25 percent on research and development conducted in Ireland, that still were available to international companies.

“The knowledge development box is not the only show in town,” Mr. Redmond said.

And experts say global pharmaceutical companies, many of which operate research and development facilities in Ireland, could benefit from the country’s 6.25 percent tax rate on revenue derived from locally held intellectual property more than their counterparts in the tech industry.

“The low rate eventually could encourage companies to carry out R.&D. here in Ireland,” said Joe Tynan, head of tax at PricewaterhouseCoopers in the accountancy firm’s Dublin office.

Still, for regulators who have tried to limit Ireland’s tax advantage, the restrictions placed on the country’s knowledge development box represent a victory in the global push to close unfair tax loopholes. Some companies in Ireland had lobbied for a wider definition of what type of intellectual property, especially linked to online advertising and search patents moved from other countries to Ireland, could be included in the tax mechanism. Those efforts, though, failed.

Pascal Saint-Amans, tax director at the Organization for Economic Cooperation and Development, which has been charged with drafting new standards to avoid multinational tax avoidance, said these low-tax mechanisms had to be linked solely to intellectual property from research and development conducted within a country’s borders.

Otherwise, Mr. Saint-Amans added, international companies could unfairly move patents between countries in a bid to pay the lowest amount of tax.

“The greater amount of global intellectual property you include in these mechanisms, the more likely it is that they will be harmful,” he said. “The goal should be to attract real R.&D. to a country, not to compete just on tax rates.”