Ireland booms as investment magnet

Date: 18/02/1999

By Tim Jones

IRELAND'S latest export to the rest of the EU is its national colour.

The phenomenal development of this country of just 3.6 million people on the western outskirts of the Union - fuelled at least in part by low corporate tax rates - has turned Benelux, British and Danish eyes green with jealousy.

Years of whispered political envy finally burst to the surface before Christmas in the European Parliament after US office-technology giant Rank Xerox shifted production to Dundalk from the UK and the Netherlands at the cost of 950 jobs.

Dutch and British Socialists sponsored a motion, which won MEPs' support, condemning the fact that huge EU aid flows enable “Ireland to attract companies from other parts of the Union with subsidies and very low taxes”.

Dublin was furious and rightly pointed out that the flow of investment was not one way. In the same week that the Parliament passed this motion, US clothes manufacturer Fruit of the Loom closed its 770-strong plant in County Donegal, following hard on the heels of espresso-machine-maker Krups' decision to leave Limerick and lay off 500 workers.

Ireland's special 10&percent; tax rate for manufacturers failed to persuade these companies to stay put. Even high-technology manufacturers such as Semperit, Packard and Digital have left Galway.

Nevertheless, employment trends do suggest that Ireland's attractions as a low-tax, highly-educated, English-speaking country are acting as a magnet for financial services and hi-tech businesses.

A recent report from the Dublin-based Economic and Social Research Institute showed that, while low-paid textiles jobs were in decline, the number in the engineering and machinery sectors would swell from 54,000 in 1981 to 96,000 in 2003. Over the same period, jobs in banking and insurance are set to double from 34,000 to 77,000.

For close to 20 years, manufacturers have benefited from a 10&percent; tax bill, compared with today's standard rate of 34&percent;. At the same time, the government set out to create a new City of London in Dublin docks, known as the International Financial Services Centre (IFSC). Each year during the Nineties, 75 aid-assisted companies were established, with 67 coming into the IFSC.

In July last year, Competition Commissioner Karel van Miert won support for a landmark decision on fiscal subsidies. Following negotiations, the Irish government agreed to bring its corporate tax system into line with the state aid rules laid down in the Treaty of Rome.

The Commission found that the preferential rates offered to manufacturers, companies in the IFSC and those in a low-tax zone surrounding Shannon Airport constituted 'operating aids' designed to cut firms' current bills, which is only permitted under tightly controlled circumstances.

The Irish government agreed to phase out the IFSC and Shannon regimes for existing projects by the end of 2005 and, for a limited number of further schemes, by 2002 - as long as they are approved by the end of this year.

Phasing out the corporate tax system for manufacturers will take longer since the Commission accepted that most firms had come to feel it was a 'general' tax break, and had “legitimate expectations” it would continue. Those companies with such 'acquired rights' could retain eligibility until 2010, but those joining now could only benefit until 2002.