Matthew Kandrach – President, CASE
November 21, 2019

The Celtic Tiger is losing its roar. Recent Irish Revenue reversals are suddenly breaking two vital rules — low rates and high certainty — undergirding the business tax policies that have helped push its growth. The Irish government’s missteps are offering a key lesson — and a wide-open opportunity — for the United States as it seeks to bring home corporate investment dollars from abroad.

Like everyone else, businesses seek favorable tax rates, especially on investment. But there’s an aspect of policy they crave even more: certainty.

Corporate management structures — and their boards and investors — hate surprises. Because even more than offering products and services or even making a profit, the core tenet of business is identifying, assessing, understanding and managing risk. Various companies offer investors a choice of places to put their money that reflect different levels of risk tolerance.

Sudden and unanticipated changes in operating environments can create new financial and operational risks that management must communicate to their customers, communities, employees and especially, shareholders and regulators. And that can affect their ability to deliver against their promises and representations to all parties.

Distaste for risk is especially relevant when it comes to a company’s tax profile. Depending on the industry, tax exposure can be one of the largest expenses, and therefore risks, a company faces. Minimizing that exposure is accordingly (and unfortunately) a critical objective.

For governments in setting tax policy, a crucial rule is to help companies manage the attendant financial risk by providing certainty that favorable provisions they depend on in their planning processes will stay predictably in place.

Which is where the current state of affairs in Ireland comes in. The Emerald Isle has been known for nearly 30 years not just as growth tiger, but as a business tax haven because of its favorable treatment of investment. The American Chamber of Commerce Ireland has estimated U.S. foreign investment in Ireland at $387 billion, generating 20 percent of private-sector employment. Irish Revenue reports that foreign multinationals contributed some 80 percent of corporate taxes in 2017.

But the nation’s Revenue Commissioners — collectively known as Revenue — have taken a sudden and surprise policy turn over the last few years that the head of a leading free-market think tank has warned undermines the country’s reputation for tax certainty.

Gary L. Kavanagh, Director of the Edmund Burke Institute (EBI), challenged Minister for Finance Paschal Donohoe on how amended assessments by Revenue nearly tripled in just three years, from 337 in 2015 to 915 in 2018. The trend also led to some high-profile cases of surprise, massive new tax bills faced by international companies.

Both chipmaker Analog Devices and pharmaceuticals multinational Perrigo were informed in the waning weeks of 2018 — with little warning and practically no discussion — of reinterpretations of past years’ returns that resulted in demands for an additional $46 million from ADI and a whopping $1.9 billion from Perrigo.

The Perrigo assessment in particular resulted from a retroactive reassessment of a 2012 transaction that the company had reported, in good faith reliance on longtime Irish precedent, as taxable as ordinary income. But what Revenue determined — without explanation or opportunity to discuss — represented capital gains taxable at a higher 33 percent rate.

While rushing to avail itself fully of both regulatory and legal courses of appeal, the drugmaker also had to move swiftly to calm nervous markets and investors and inform regulators, expressing confidence in the correctness of its position under longstanding law and practice while acknowledging the risks of the uncertainty produced by the ruling.

Meanwhile, both the company and Kavanagh have hit a wall trying to get an explanation from the government from the abrupt change in positions, only heightening the sense of disquiet among companies with or considering major investments in Eire.

Compounding the concern for EBI and others about Ireland’s economic future is the newfound aggressiveness of the United States in bringing home companies who had fled its previously punitive corporate tax regime. Kavanagh points out that in 2018 alone, under the tax reform passed under the Trump Administration that not only lowered the overall corporate rate but also encouraged repatriation of foreign profits, U.S. companies brought back $776.5 billion in offshore gains, a dramatic four-fold increase from the $155.1 billion that was repatriated in 2017.

Yet alongside the opportunity for the United States lies an important lesson. Both Democratic congressional leaders and candidates for the 2020 presidential election have warned not only of rolling back the Trump tax bill and its favorable changes for multinational companies, but of socking businesses with hundreds of billions in new levies to cover ambitious social programs.

As jittery companies eye Irish Revenue’s apparent new posture toward companies who located there in good faith reliance on favorable tax provisions — and hundreds of billions of dollars returning from abroad already filling U.S. coffers — America’s political leaders should be thinking twice. As a potentially toothless Celtic Tiger may be learning, the last thing an economy finally experiencing real recovery needs is another precipitous change in the nation’s tax regime that will heighten the uncertainty and risk of investing here, and threaten our own economic future.