Ireland’s economy has had an interesting few months. In July, the Central Statistics Office (CSO) announced that the country’s GDP had surged by 26 percent in 2015. The statistic, widely lampooned in the international press, led Paul Krugman to criticize Ireland for its “leprechaun economics.”
But stranger things were on their way. On August 30, European Union competition commissioner, Margrethe Vestager, delivered a long-awaited decision regarding Irish state aid to multinational giant Apple. It found that the Irish tax commissioners had damaged competition by providing Apple state aid in a sweetheart tax deal.
Apple had paid Ireland’s generously low corporate tax rate of 12.5 percent on its domestic activities and sales. In return, however, Ireland allowed the company to book profits made in other parts of the world to a second company regarded as “stateless” and not required to pay any tax.
The effective tax rate on the combined operations of these two Apple companies was 1 percent in 2003. By 2014, It had fallen to a microscopic 0.005 percent. In effect, Apple paid just fifty euros for every million it made.
Anyone paying attention to the Irish economy in recent years wasn’t surprised by Apple’s barely there liability. After all, Ireland has become one of the world’s more respectable tax havens.
The European Union’s Poster Child
Some predicted Ireland would face a fine for their state aid to Apple. Instead, the state was awarded a €13 billion plus interest windfall from the world’s most profitable company.
Further, the European Union wouldn’t mandate that Ireland use this money to draw down its substantial national debt, accumulated during the international financial crisis. The nation could spend the money on badly needed housing, health care, and social services.
Rather than rejoicing, however, the Irish government made clear that it didn’t want the money — in fact, it would appeal the decision.
An enraged Irish establishment immediately backed the government. The major opposition party, Fianna Fáil, and the Irish Labour Party both supported the appeal. The media commentariat and business elites lined up behind them. The only serious opposition came from Sinn Féin and a smaller socialist alliance.
Meanwhile, independent members of the government, who had not been informed of Noonan’s plans, demanded a future study of tax justice in return their support.
This delayed the announcement for two days, but, with the cabinet’s full approval, finance minister Michael Noonan came out swinging. In a move that surprised many, he began to undermine his country’s previously fawning relationship with the European Union.
“There was a lot of envy across Europe about how successful we have been in putting the headquarters of so many companies into Ireland and especially into Dublin,” he said.
I want to say to international investors and to the Irish people that there will be no change to the 12.5 percent [Irish corporate tax rate]. We stand by the treaty. It’s within our competence to and no bridgehead by any commissioner is going to change that perspective in Ireland. We will fight it at home and abroad and in the courts.
A sympathetic Irish columnist described Noonan’s promise to fight on the side of multinational capital as Churchillian.
Later that day, Taoiseach Enda Kenny echoed an earlier war: “This is about the right of small nations,” he claimed. “I regard this matter as questioning Ireland’s right as a sovereign nation to actually set out policies that are appropriate for Ireland.”
Noonan and Kenny had previously distinguished themselves as Angela Merkel’s right-hand men in the effort to discipline Greece’s Syriza government. The cordial relationship they established with European policy was a point of pride, and they courted Europe’s regard for Ireland as the “poster child of austerity.”
It often seemed like Irish politicians believed they should represent Europe to the Irish people rather than represent the Irish people in Europe. But it turns out their cozy relationship with Europe was weaker than their romance with a major American multinational corporation.
As this is written, establishment Ireland has settled on a three-point justification for appealing the ruling. First, they argue that the ruling attacks Ireland’s low corporate tax rate. Second, because the decision concerns the tax rate, it demands a defense of Ireland’s sovereignty. Finally, the appeal will grant certainty to foreign companies about their tax obligations.
A parade of government ministers, bureaucrats, the respectable opposition, and conservative commentators are repeating the mantra like a drumbeat. Too bad it’s mostly false.
The commission was careful not to question Ireland’s tax rate, contending only that it should be applied to all of Apple’s profits. The ruling was made precisely to establish certainty and prevent special deals; the appeal itself created uncertainty about tax obligations.
Romance With Multinational Capital
It’s tempting to make fun of Enda Kenny’s defense of Irish sovereignty. After all, Ireland had no problem surrendering its fiscal and monetary policy to the European Union’s institutions when it endorsed the Fiscal Stability Treaty.
However, an examination of Ireland’s historical development strategy, and its more recent relationship to global neoliberalism, reveals the logic behind his argument.
Modern Ireland’s sovereign development has centered on a strategy that can be characterized as industrialization by invitation. That is, the ruling elites have worked to make the country inviting to multinational corporations. As Apple’s Tim Cook told Irish radio audiences,
We’ve been in a romance together now for thirty-seven years, we’re confident the government will do the right thing and appeal this decision.
But the strategy has been in place for a lot longer than that. In the 1930s and 1940s Ireland pursued an import-substitution industrial policy, similar to Latin American nations at the same time. The idea was to create a domestic bourgeoisie through protectionist strategies.
The policy had some success but “economic war” with neighboring Britain, the Great Depression, the outbreak of World War II, and Ireland’s small size limited its effect.
During the 1950s, the Irish government came to feel it was missing out on the postwar expansion. The First Programme for Economic Expansion, prepared under the leadership of prominent civil servant T. K. Whitaker, was published in 1958. This strategy marked the definitive end of Ireland’s autonomous development strategy and the beginning of a consistent program that prioritized foreign direct investment (FDI).
Ireland pursued FDI on a number of fronts. It introduced an extended tax holiday on profits from export. When the European Union found this discriminatory, the state replaced it with its famously low tax regime.
In 1981, Ireland introduced a corporate tax rate of 10 percent on all manufacturing profits, whether for domestic or international sales. Subsequent legislation extended this low rate to a larger range of industries: mostly notably, in 1984, data processing, computer software companies, and software development services were granted the low rate.
In the 1990s, most corporate tax rates were harmonized to 12.5 percent to avoid charges of discrimination against non-manufacturing industries.
The Corporate State
In addition, state agencies intervened to connect the Irish economy with global capital. In the 1960s, the Industrial Development Authority (IDA) began promoting foreign direct investment. As Maynooth academic Sean O Riain put it, “It is usually the IDA that speaks most clearly for the interests of the TNCs [transnational corporations]” within the Irish state.
In 1987, the IDA’s capacity to bring in investment was applied to a new realm. The incoming Fianna Fáil government decided to target international financial services by building the International Financial Services Centre (IFSC) in a previously derelict section of Dublin’s Docklands.
Financial incentives — including 100 percent capital allowances, double rent deductions, and a ten-year remission on local taxes — were provided to any company located inside the designated twenty-seven acre area. In addition, a 10 percent corporate tax rate was approved.
While its promoters deny that IFSC is an offshore tax haven, the low rate has been integral to its international appeal. As of 2006, over 450 international financial services companies had headquarters in Ireland.
Further, the Irish parliament has enacted more than forty pieces of legislation to facilitate the financial services industry and has integrated industry representatives into decision-making through a clearinghouse where they can discuss policy with senior government figures.
The Irish government’s approach to regulation has been widely characterized as a light touch. During the economic boom, its principles-based approach — in which a regulator laid down principles rather than rules, leaving banking institutions to interpret them — exemplified this.
The state’s preference for foreign companies extended throughout its economic policies.
Centralized wage bargaining, conducted through Ireland’s now-suspended social partnership process, linked wage increases in the multinational sector to wage and productivity increases in the backward domestic manufacturing sector.
Despite the explicit broadening of this process to include social welfare, it remained focused on creating employment through FDI. Consequently, successive partnership agreements did little to challenge Ireland’s lean welfare state and, in fact, facilitated the maintenance of the low corporate tax rates.
Partnership also failed to seriously challenge Ireland’s voluntary approach to industrial relations and union recognition, allowing incoming corporations to maintain a nonunion policy.
The industrialization-by-invitation strategy has remained relatively consistent in part due to Ireland’s primarily two-party system. Fianna Fáil and Fine Gael — both pro-business — have used coalitions to alternate power without fundamentally altering the country’s economic direction.
The Irish capitalist model has long placed multinational corporations at its heart. The state facilitates and enables these companies, giving them direct or indirect influence over many policy decisions. Government institutions primarily shape a favorable business environment by offering incentives — particularly the low tax rate — to would-be foreign investors.
All other policy domains — labor, education, governance, the welfare state — have become subordinate to the primary goal of attracting international capital.
The latest chapter has seen corporate headquarters and their associated assets physically relocate to Ireland to avail of the low tax rates. “Inversions” — when large foreign firms merge with smaller Irish firms — have accelerated this process.
Legally, it appears as if the smaller firm has acquired the larger one and transferred its headquarters to Ireland. In practice, it drives up recorded investment and artificially boosts GDP. The “leprechaun economics” Paul Krugman criticized is one consequence of these practices.
A Model Under Threat
The Apple ruling puts the Irish government’s economic model in a bind. Ireland’s low tax and loose regulation model cannot directly oppose the European Union, since the multinational corporations attracted to Ireland still want access to European markets. But breaking with the long-standing policy would be difficult for the ruling class, which has facilitated corporate tax avoidance for so long it is written into their DNA.
More broadly, the Irish state finds itself on the frontline of a historic shift in international capitalism. Capital has attempted to resolve the crisis of global neoliberalism by intensifying its logic — cutting wages, eliminating social services and labor protections, selling public enterprises, shrinking public employment, and relying on export surpluses. These measures have proved ineffective, and some ruling elites are looking toward a more regulated capitalism.
Following the argument of Thomas Piketty’s Capital in the Twenty-First Century, sections of the European business class have concluded that effective international tax cooperation must be secured to restore capitalist political legitimacy. This is why the pro-business European Commission, headed by a Danish centrist, has taken on Ireland and its tax haven.
Lacking an alternative economic model, Ireland’s ruling class has decided to stand up to the European Union, illustrating the difficulty in securing an international consensus.
Ireland’s elite may succeed in its appeal and get away with helping transnational capital escape taxation. Or it may find itself on the wrong side of both an emerging capitalist order and an intensifying popular struggle against global exploitation.