Ireland insists it can still be hi-tech hub despite axing ‘double Irish’ loophole

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As 22,000 tech entrepreneurs, inventors and investors converged on Dublin for the city’s Web Summit last week, one big question threatened to bring the whole digital bonanza down to earth.

After the Ireland moved last month to close a lucrative tax loophole, former Apple chief executive John Sculley told the summit that the country risked losing the “edge” that has helped it become the European headquarters of US technology giants including Apple and Facebook. “There is a lot of talent in Ireland so I don’t think it will be an insurmountable problem but it will take the edge off, if tax advantages do go away,” he said.

The “double Irish” scheme has allowed corporations to save billions by legally moving huge profits at their Irish bases to countries regarded as tax havens. It will be phased out following the 2015 budget – although Taoiseach Enda Kenny confirmed last week that firms already benefiting from the scheme could continue to operate it until 2020.

At the summit – where speakers included Paypal co-founder Peter Thiel, Dropbox founder Drew Houston and actor and angel investor Eva Longoria – bosses of the latest wave of hi-tech companies to come to Ireland were keen to play down the significance of Dublin’s move to end the scheme. Eight software, telecoms and digital media firms announced that they would create 400 new jobs in the republic.

The boss of one of them, New Zealander Dr Jock Percy, whose Perseus Telecom provides fibre optics to connect major banks with stock exchanges, said he was encouraged that the Dublin government had decided to maintain its 12.5% corporate tax rate and planned new tax breaks for inventions and innovations minted in Ireland, like the UK’s “patent box” scheme.

“Low corporation tax in Ireland is attractive but the double Irish was not even considered or planned for. Instead we were more interested in the fact that there are multilingual skilled workers in Ireland and a pro-business government,” said Percy, whose company’s main base is in Galway.

“For us the introduction of a patent-box is much more valuable because our intellectual property, designs and software programmes all belong here in Ireland. So getting tax relief for that is fantastic and we are looking forward to that coming in,” he said.

Another firm, Atlanta-based N3 Results, has just set up in Dublin, creating 100 new jobs. Chief executive Jeffrey Laue stressed it chose to base itself in Ireland for expansion into the EU and beyond because of the people. Speaking in Dublin’s RDS conference centre last week, Laue said: “There are very smart, educated and motivated people here in Ireland. This was our primary motive – the talent base, not the tax base.” On the 12.5% corporation tax, Laue added: “While that’s always nice to have it’s not the main reason why we established a base here. Because Ireland is in the EU, it allows us to have a beachhead into Europe.”

Udemy, one of the world’s largest online learning and teaching sites, is also increasing its workforce by 50 people over the next three years at the Digital Media Hub in Dublin, which is next door to the vast Guinness brewery site.

Eren Bali, Udemy’s co-founder and chairman, said the hi-tech business culture in the Irish capital was “very similar to that of Silicon Valley and both had a strong, young, vibrant talent pool. Taxation policy or tax loopholes never came into our thinking really.”

Kristin Jellison, director of products and services of a Dublin-based communications company that trains many of the top executives in the Irish capital’s so-called “Google Quarter”, said the end of double Irish would not change its plans to increase its workforce in the republic.

Despite scrapping the double Irish loophole, Dublin has robustly defended its 12.5% corporation tax rate, which has also come under fire from EU partners such as France. The French have claimed that the low taxation rate gives the Irish an unfair advantage in attracting foreign investment.

Kenny told an audience at the summit that the country had “nothing to fear” from the end of the double Irish scheme. “The end of it will make our country even more attractive for foreign direct investment in the future and there is that transition period for companies already here up to 2020.”

Richard Bruton, minister for jobs, enterprise and innovation also dismissed the concerns of Sculley, although he acknowledged the flak Ireland has taken over tax schemes in Brussels and Washington. “Clearly we understand that countries compete on a number of fronts and Ireland has always offered a competitive tax environment,” he said. “We know companies expect that and we will continue to compete very strongly but on a fair basis. There has to be a worldwide consensus to make taxation policy fair across the board.”

The 12.5% corporate tax rate, Kenny and Bruton said, would be protected as a cornerstone of Irish fiscal policy.

As Kenny and Bruton were speaking, Northern Ireland Secretary Theresa Villiers signalled that the UK Treasury would decide within weeks if Northern Ireland could set its own corporation tax rate. She promised in a speech to Co-operation Ireland in Belfast that the administration would know soon whether London would hand over control.

Political leaders in Stormont have looked on jealously as their southern neighbours continue to use low corporate taxes to attract foreign direct investment and want their own rate set at a level close to the republic’s.

Villiers said London was taking the calls to devolve tax powers “very seriously”. It could be a move the republic’s Industrial Development Agency will have to take very seriously too.

END OF A LOOPHOLE

The “double Irish” that Dublin banned last month is said to be the main manoeuvre behind Apple’s rock-bottom tax rate, which a US Senate report last year found to be an effective 2%, charged on billions of dollars of profits booked through its Irish affiliates.

The strategy requires a US company to attribute profits to an Irish subsidiary. A second Irish subsidiary is then set up and managed from the British Virgin Islands (BVI) or another jurisdiction with no corporation tax. The Irish-based company makes royalty payments to the second company and claims those payments as tax deductions in Ireland.

From January all new companies domiciled in Ireland will also have to be tax residents there, making the Double Irish impossible – although companies already operating the system will be allowed to continue until 2020.

Apple’s tax arrangements in Ireland were established under a deal that Steve Jobs, Apple’s late co-founder, struck with Dublin in the 1980s.

Last year’s Senate report did not say that Apple used the “double Irish” but it noted that Apple had a BVI-based company that owned a small share of the group’s main Irish subsidiary.

Apple’s Irish offices are based near Knocknaheeny, an impoverished northern suburb of Cork. The company told the Senate inquiry that its business there was substantive and was not based on a “sweetheart deal” that brought employment to Cork.

Apple’s chief executive, Tim Cook, told senators that the company did not rely on “tax gimmicks” and that it paid every dollar it owed. Sean Farrell

Powered by Guardian.co.ukThis article was written by Henry McDonald, for The Observer on Sunday 9th November 2014 00.05 Europe/London

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