Investing in Ireland: A survey of foreign direct investors

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Investing in Ireland: A survey of foreign direct investors examines the main factors that bring foreign direct investment to Ireland and the ongoing challenges in attracting investment. To support this study, the Economist Intelligence Unit conducted a survey of 315 global respondents during September and October 2011. All respondents had responsibility for or familiarity with their companies' investment decisions; and all had familiarity with their companies' current or prospective investments in Ireland. To complement the survey findings, the Economist Intelligence Unit also conducted wide-ranging desk research and in-depth interviews with several executives and experts.

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Investing in Ireland: A survey of foreign direct investors

  1. 1. Investing in IrelandA survey of foreign direct investorsA report from the Economist Intelligence UnitSponsored by Matheson Ormsby Prentice
  2. 2. Investing in Ireland: A survey of foreign direct investors Contents About this report 2 Executive summary 3 Introduction: Market access – Ireland’s FDI foundation 6 Four alternatives: Market access drives investment in China, Singapore, the UK and the US 8 The corporate tax infrastructure: An important ingredient 9 The talent base: A differentiator under threat?12 Ireland’s biggest disadvantages: Outside control of policy15 Responding to the crisis: Boosting competitiveness at the same time19 Financial regulation: Getting the balance right 21 Conclusion: Ireland’s unique selling proposition 22 Appendix: Full survey results 23 © The Economist Intelligence Unit Limited 2012
  3. 3. Investing in Ireland: A survey of foreign direct investors About this report Investing in Ireland: A survey of foreign direct investors is an came from multiple sectors, including pharmaceuticals. Economist Intelligence Unit report sponsored by Matheson Ormsby Prentice. It examines the main factors that bring To complement the survey findings, the Economist Intelligence foreign direct investment to Ireland and the main ongoing Unit also conducted wide-ranging desk research and in-depth challenges in attracting investment. Ronan Lyons was interviews with several executives and experts. Our thanks are the report author. Aviva Freudmann and Jason Sumner due to the following for their time and insights: were the editors. l Lionel Alexander, vice president and managing director (Manufacturing), Hewlett Packard To support this study, the Economist Intelligence Unit l Paul Duffy, vice president, external supply operating unit, conducted a survey of 315 global respondents during Pfizer September and October 2011. All respondents had responsibility for or familiarity with their companies’ l John Fitzgerald, head of macroeconomics, Economic and investment decisions; and all had familiarity with their Social Research Institute companies’ current or prospective investments in Ireland. l John Herlihy, vice president of international SMB sales, Overall, 60% of respondents were from companies with Google current operations in Ireland, and 27% were from companies not currently doing business in the country but planning l Bob Keogh, director, Goldman Sachs Bank (Europe) to invest within the next three years. A small proportion of l Philip Lane, professor of international macroeconomics, the sample (about 10%) was not currently invested and not Trinity College Dublin planning to invest in the next three years. Respondents were l Sean McEwen, director (Ireland), Abbott split roughly equally between large firms (51% from companies with over US$500m in annual revenue) and small firms (49% l Peter Neary, professor of economics, Oxford University from companies with revenue below US$500m). They held l Christian Saller, managing director, KAYAK Europe senior positions in their organisations (87% C-level) and were spread throughout the world: 55% from North America; 21% l Willie Slattery, executive vice president and head of from western Europe; and 24% from the Asia-Pacific region European offshore domiciles, State Street Corporation or emerging markets. By sector, 49% came from the financial l Michael Whelan, director and chief country officer (Ireland), services industry; 15% from the IT/online sector and the rest Deutsche Bank © The Economist Intelligence Unit Limited 2012
  4. 4. Investing in Ireland: A survey of foreign direct investors Executive summary Global foreign direct investment (FDI) dropped This report seeks to aid that process by precipitously from the height of the boom years examining Ireland’s competitiveness and the to the depths of the downturn and is only just challenges it faces in appealing to international now recovering. In terms of jobs created through investors. It is based on a survey of over 300 FDI, the numbers are stark: they declined from an executives with responsibility for and knowledge estimated 1.3m globally in 2006 to just 750,000 in of investments in Ireland, as well as a series 2009, according to the 2011 Global Location Trends of interviews with key FDI decision-makers in report by the IBM Institute for Business Value. But Ireland and abroad. The survey by 2010 there were evident signs of recovery, with suggests that almost 1m FDI-driven jobs created globally. As the report demonstrates, Ireland’s most investors important competitive advantages are access to EU markets, a competitive corporate tax see Ireland’s Nowhere is this resurgence more important infrastructure (including the headline rate and than in Ireland, where FDI played such a crucial unique selling role in its economic success before the financial a number of other incentives including double- proposition crisis and will determine so much of its economic taxation treaties and sector-specific incentives), as not a single prospects in the years ahead. And the signs a uniquely talented workforce – both home- there are pointing to recovery too. According to grown and from abroad – and a stable regulatory factor, but the IBM report, Ireland was the top destination framework that supports business. Indeed, the the powerful worldwide in 2010 for the average value of survey suggests that investors see Ireland’s combination of investment projects, and the second-largest unique selling proposition as not a single factor, but the powerful combination of these benefits that per-head recipient of FDI jobs after Singapore. benefits that Ireland offers. Each of these four IDA Ireland, the agency responsible for industrial Ireland offers. development in the country, reported a record cornerstones of Ireland’s competitiveness year in 2011, with 148 new investments creating is explored in detail in this paper: access to over 13,000 new jobs. Key questions are whether EU markets (see page 6); the corporate tax FDI will continue to grow again in Ireland infrastructure (see page 9); the talented and what policymakers can do to strengthen workforce (see page 12); and the regulatory the country’s unique selling propositions for framework, including specifically financial investors. regulation (see page 21). © The Economist Intelligence Unit Limited 2012
  5. 5. Investing in Ireland: A survey of foreign direct investors The disadvantages in the eyes of investors, one ingredient in the overall tax infrastructure; however, are largely out of policymakers and policymakers need to put it in context hands and include the country’s small size and when compared with other investment drivers. instability in the euro zone. On the whole, the Almost one-half of respondents (46%) say a survey sample and interviewees are bullish on low corporate tax rate is the most important Ireland, with two particularly positive findings government fiscal incentive they consider when emerging from the survey. First, of the 315 investing abroad, and this was a particularly respondents, only ten say that they plan to important component in decisions to bring reduce their level of investment in Ireland over investment to Ireland originally. The headline the next three years. Second, extrapolations from rate is clearly important. However, evidence survey responses suggest that the respondents’ from the survey and interviews suggests levels of investment over the same time frame that excessive focus on the headline rate could create up to 20,000 new jobs. Although threatens to overshadow the total corporate this is based on opinion data and is not a rigorous tax infrastructure including double-taxation economic forecast, it is a demonstration of treaties, tax credits, transfer pricing or other investors’ strong confidence in Ireland as a place sector-specific incentives. It also needs to be put to do business in the near term. In addition, in context with other aspects of competitiveness, interviewees overwhelmingly view the financial such as personal income tax reform or access crisis as an opportunity to boost Ireland’s to skills and talent. When choosing among competitiveness. government incentives, pharmaceutical firms were the most likely to cite the corporate tax rate The key findings from the research are as follows. as their biggest draw to foreign markets, with 65% pointing to this factor. Respondents based Access to European markets is Ireland’s in the euro zone attached a similar importance FDI foundation. Survey respondents and to low corporate taxes (64%). US investors put interviewees were clear about the foundation less emphasis on the issue (35%), as did those of their investment in Ireland: market access. planning to invest in Ireland for the first time In general, global investors say their prime (33%). motivation for entering foreign markets is Investors praise Ireland’s pool of domestic and access – for 58%, this is the most important foreign workers, but income taxes could be consideration, far outweighing the second and discouraging senior talent. Survey respondents third most popular factors, namely availability and interviewees say the quality of the local of key skills (34%) and government incentives labour force is a strong point, especially the (32%). When it comes to Ireland specifically, presence of formal qualifications and more innate access comes out on top, with “access to EU abilities such as a practical approach to problem- market” named by 46% of respondents, compared solving. Nonetheless, interviewees are concerned with 30% citing legal and fiscal stability and 29% about what they see as imbalances in Ireland’s citing the competitive corporate tax rate. Other personal tax system. As a result of tax credits that important drivers are also tax-related, including are generous by international standards, there favourable double-taxation treaties (16%) and is a large gap between the average all-in tax rate sector-specific incentives (14%). paid by the typical worker, which is among the lowest in the OECD, and the marginal tax rate The headline corporate tax rate is important for for top earners, which is among the highest. competitiveness but it should be thought of as Interviewees believe that these high marginal © The Economist Intelligence Unit Limited 2012
  6. 6. Investing in Ireland: A survey of foreign direct investors tax rates will make it less attractive for senior Respondents believe the Irish government’s executives to settle in Ireland. post-crisis response is on the right track and view the country as an investment The biggest disadvantages for investors are opportunity. While there was little belief outside the Irish government’s direct control, among respondents that Ireland would rebound but respondents say more should be done to quickly, there was definitely a sense, particularly improve regulation and reduce red tape. The among interviewees, that Ireland’s economic biggest downside of doing business in Ireland, crisis represents a huge opportunity from an cited by 51% of those surveyed, is the size of the FDI perspective. Overall, investors have more domestic market, but this is a factor policymakers faith in the current Irish government than can do very little to influence. Three other factors the previous one, although views are far more which received more than 30% of responses favourable among investors currently located in included instability in the euro zone (33%), the country than among those based outside. uncertainty in relation to government finances The government’s priorities are also in line with (32%), and Ireland’s peripheral location (31%). investor expectations – stabilising the financial Ireland’s location mattered more to financial system, attracting inward investment and services firms than other sectors participating addressing the budget deficit. in the study, highlighting the importance of clusters. Investors across the board say Ireland Some post-crisis policies will not require could improve on regulation and red tape. trade-offs between stabilising the financial system and boosting Ireland’s investment Ireland is generally perceived as a more costly competitiveness, but in other areas place to do business than other investment policymakers will have difficult choices. locations. According to investors, Ireland Tackling the high cost of doing business in compares unfavourably with other countries Ireland is both a domestic vote-winner and a across a range of cost criteria, with wages and competitiveness-booster. Likewise, tackling salaries the biggest concern: 51% say Ireland is the deficit supports both domestic economic more expensive than other locations where they sustainability and convinces international are invested, compared with 16% who say it is investors that Ireland is a sound place in which cheaper. The cost of raw materials, the cost of to do business. Other aspects of Ireland’s living and the price of utilities and infrastructure recovery, however, have very real trade-offs. also compare unfavourably. The high cost One example is higher value-added tax, which of doing business was highlighted across all may help close the deficit but pushes up sub-groups in the survey, but the perception is Ireland’s already high cost of living, affecting greatest among those with no presence in Ireland competitiveness. Another potentially more and no immediate plans to invest. There were serious issue is the area of financial regulation, variations according to location – euro zone and where interviewees believe that the government US investors were much more likely to believe has failed to distinguish adequately between Ireland was a costly place in which to do business regulations on domestic banking and those on than investors from other developed countries. international financial services. © The Economist Intelligence Unit Limited 2012
  7. 7. Investing in Ireland: A survey of foreign direct investors Introduction Market access – Ireland’s FDI by almost 40% of FS respondents, compared with about 25% of others. In turn, the cost base foundation matters more for non-FS respondents, with over 40% mentioning either labour or non-labour The single most important reason why companies costs as a factor for going international, almost in the survey look to invest in countries A major outside their home markets is to access new twice the level of FS respondents. factor behind markets: three in five (58%) respondents Ireland’s specific advantage: access to Ireland’s highlighted market access as one of their top the EU three motivations for setting up international success in When asked specifically about Ireland’s main operations, ahead of eight other factors, the 1990s, including availability of key skills (34%), competitive advantages, access to European and a key government incentives (32%) and ease of markets topped the list, with 46% of respondents citing it, much more than any other factor (see differentiator doing business (32%). The respondents’ four Figure 1). Interviewees’ opinions reflected the top FDI locations other than Ireland all offer between market access as a key part of their competitive survey findings. “A major factor behind Ireland’s Ireland of the proposition, either domestically, as in the case of success in the 1990s, and a key differentiator between Ireland of the 1970s and of the 1990s, 1970s and of the US and China, or regionally, as with Singapore was improved access to the EU as a result of the and the UK (see sidebox, this chapter). the 1990s, Single Market,” says Peter Neary, professor of was improved economics at Oxford University. Financial services and the rest access to the – differing FDI priorities EU as a result The importance of market access is similar across Differences between first-time of the Single financial services (FS) and non-financial services investors and those with existing (non-FS) respondents, with 55% of non-FS operations in Ireland Market. respondents mentioning it as a key factor for The factors stressed as Ireland’s main competitive going international, compared with 61% of FS advantages by those planning to invest there respondents. There were differences in secondary for the first time generally mirror those cited by Peter Neary, professor factors, though. Government incentives and the sample as a whole, with access to EU markets of economics at Oxford University the ease of doing business are both mentioned (44%) the principal competitive advantage, © The Economist Intelligence Unit Limited 2012
  8. 8. Investing in Ireland: A survey of foreign direct investors Figure 1 In your view, which competitive advantages does Ireland have to offer? Respondents could select up to three responses (%) All Financial Services Non-Financial Services 60 60 50 50 49 46 40 43 40 30 33 30 30 31 30 28 29 26 27 26 20 23 23 23 24 25 24 20 22 16 15 15 15 16 10 14 10 11 1212 13 12 9 10 9 10 8 6 Ireland, in 0 0 clusters Existing rate regime Access to EU Corporate tax markets Access to agreements English-speaking incentives infrastructure member of euro zone IT telecoms Sector-specific government Double-taxation Ease of doing business Legal fiscal stability Access to EU skills Access to skills locally particular Dublin, thanks to the International Financial Services Centre although greater emphasis was placed on access other aspects of the corporate tax infrastructure, to government and ease of doing business. such as double-taxation agreements). For first- (IFSC), is a Access to skills, either locally or from across the time investors the picture is different, with access global centre of EU, was less important: just 36% of respondents to EU markets the most significant factor. For excellence for mentioned either factor, compared with 51% of financial services particularly, the presence of a mid- to back- all respondents. cluster of similar companies doing similar things was also important for an ongoing presence. office staff. For respondents with existing operations, the “Ireland, in particular Dublin, thanks to the corporate tax rate was the main driver that had International Financial Services Centre (IFSC), is brought them to Ireland originally. It was cited a global centre of excellence for mid- to back- Bob Keogh, director of by nearly one-half of these respondents, and office staff,” says Bob Keogh, director of Goldman Goldman Sachs Bank according to almost one-third the corporate tax Sachs Bank (Europe). “Just as Mayfair teems with (Europe) rate will continue to underpin the attractiveness traders, the IFSC has a core of people at work in of Ireland’s business environment (in addition to the sector for the long term.” © The Economist Intelligence Unit Limited 2012
  9. 9. Investing in Ireland: A survey of foreign direct investors Four alternatives: Market access drives investment in China, Singapore, the UK and the US Four countries topped the list of alternative (the US and China) or regionally (Singapore and investment locations for respondents besides the UK). After market access, each of the top Ireland: China (33%), Singapore (29%), the destinations had different investor propositions US (28%) and the UK (27%). The remaining (see Figure 2: Word clouds). China’s proposition 16 options each received less than 20% of is clearly based around its role as a growth responses. Among financial services firms, market as well as its low cost, including taxes. China was even more attractive (35%), while Singapore’s offering is based around a stable Hong Kong displaced the UK as the fourth most system, ease of doing business and low taxes. attractive destination (25%, as against 23% Investment into the US focuses on its domestic for the UK). Other popular FDI hosts in western market and the business opportunities there, Europe were the Netherlands, Switzerland while the UK’s offering is about market access, and Belgium, chosen by 13%, 10% and 4% of ease of doing business and skilled labour. respondents respectively. Among the top four destinations, the main driver was market access, either domestically Figure 2. FDI propositions: Word clouds (main reasons why respondents chose FDI locations) China US Singapore UK © The Economist Intelligence Unit Limited 2012
  10. 10. Investing in Ireland: A survey of foreign direct investors 1 The corporate tax infrastructure: An important ingredient Following the EU-IMF loan to Ireland in late tax infrastructure that policymakers must also 2010 and Ireland’s ongoing fiscal deficit, the monitor, and the tax infrastructure can be seen country’s headline corporate tax rate has become as one of four cornerstones in Ireland’s FDI a pivotal issue in its relationship with the rest proposition (along with market access, skills of the EU. Since then the corporate tax rate has and talent, and a favourable regulatory regime). become a symbol of Ireland’s sovereignty, with The survey shows that Ireland’s competitive fears that a higher rate will reduce investment corporate tax rate is indeed a key component into the country. Overall, the survey shows that of its FDI proposition. As mentioned above, of the headline rate is part of a larger corporate those survey respondents who already have Figure 3 The most important fiscal incentives for investors (%) All Financial Services Non-Financial Services 50 50 49 45 45 46 40 40 41 35 38 35 34 30 30 31 25 25 25 24 24 20 20 21 21 20 20 20 20 20 15 18 15 15 16 14 10 13 10 5 5 0 0 Low corporate Double taxation Transfer pricing Access to local Training other RD Personal tax rate agreements with taxation rules sources of credit human resources tax credits tax rates treaty countries funding grants © The Economist Intelligence Unit Limited 2012
  11. 11. Investing in Ireland: A survey of foreign direct investors FDI operations in Ireland, corporate tax was Importance of corporate tax rate differs the single most cited factor originally bringing by sector FDI to Ireland, according to almost one in two The importance of the corporate tax rate varies respondents (44%). However, it is far from significantly by industry, with pharmaceutical the only factor in the tax infrastructure. firms (65%) and those based in the euro zone As mentioned above, 29% of respondents (64%) most likely to cite its importance. Firms highlighted the corporate tax rate regime from the US (35%) attached far less significance as one of Ireland’s three main competitive to this incentive. For firms planning to invest in advantages (See Figure 1, page 7). In addition, Ireland for the first time, the tax rate was also 16% mentioned double taxation treaties and 14% less of an issue (33%), and they attached almost mentioned sector-specific initiatives. Taken as equal importance to transfer pricing rules (31%). a whole, the response suggests that the entire Interviewees urged policymakers to put the corporate tax package is an important driver for corporate tax rate in context with other drivers as investors and policymakers should not focus only well. “While factors such as a common currency on the headline rate. And as Figure 3 (page nine) and low corporate tax help, it is ultimately shows, other tax incentives play a large role in Deutsche Bank’s ability to serve many markets from investment decisions, in addition to the rate. Dublin, thanks to technology, that matters most,” says Michael Whelan, director and chief country officer (Ireland) for Deutsche Bank. Similarly, Double-taxation treaties are also other interviewees say that when it comes to important deciding where to put core business, the key issue Ireland’s corporate tax infrastructure is not for senior management is making profits, with only about the rate of tax. Another government the tax treatment of that profit more an issue for incentive to be cited by more than one in three their advisers. It is important also to compare the investors was the network of double-taxation “effective” corporate tax rate (the headline rate agreements between countries. This was after credits and exemptions) with the headline particularly important for financial services firms rate in Ireland and in other countries. Of the 16 (39%) and firms from the euro zone (44%). The euro zone countries shown, Ireland’s effective rate network of double-taxation treaties was cited as of 11.9% is in line with both the mean (11.8%) a key factor by more than one-half (56%) of firms and median (12.7%) rates paid elsewhere in the with no presence, current or planned, in Ireland, single currency area.1 According to the World Bank, while it was significantly less important to firms companies in the euro zone are in effect paying already present and with plans to expand (19%). similar amounts to those in Ireland. Extending treaties in this area could see a new type of investor come to Ireland. One of four cornerstones Ireland’s tax infrastructure – which includes not Research and development tax credits only corporate tax rates but also the network of RD tax credits were cited by 18% of the sample double-taxation treaties and other taxes – can be as a whole, but there were some important regarded as one of four cornerstones of Ireland’s differences across the sub-sets of respondents. FDI proposition. So while the government is For example, RD tax credits were cited by just understandably keen to defend a core competitive under one in three firms planning to expand in advantage, excessive focus on corporate tax Ireland as important (29%), and also featured as rate ignores the importance of the wider tax an important issue for information technology infrastructure, and can also hide changes to 1 Malta is not included in the (IT) firms (30%) and companies based in Ireland’s competitiveness in other areas. This Paying Taxes study and was developed countries outside the euro zone and includes personal income tax rates, which are omitted from the analysis. the US (32%). discussed in the following section.10 © The Economist Intelligence Unit Limited 2012
  12. 12. Investing in Ireland: A survey of foreign direct investors Figure 4 Headline and effective corporate tax rates in the euro zone, 2011 (%) Headline corporate tax rate Effective corporate tax rate 35 35 34 33 30 32 30 31 30 46 29 25 26 25 25 25 25 23 20 21 21 20 20 19 19 15 15 15 15 15 14 14 13 13 10 12 10 10 9 8 8 5 7 5 5 4 1 0 0 Slovenia Greece Portugal Spain Luxembourg Belgium Slovakia Estonia France Cyprus Ireland Finland Austria Germany Italy Netherlands Sources: World Bank; PricewaterhouseCoopers, Paying taxes.11 © The Economist Intelligence Unit Limited 2012
  13. 13. Investing in Ireland: A survey of foreign direct investors 2 The talent base: A differentiator under threat? Access to skills – both home-grown and from was the only euro zone member to fully open its across the EU – is of increasing importance for labour markets immediately to the ten new EU Ireland’s FDI proposition. Just over one-quarter member states from Central and Eastern Europe The reason (28%) of all survey respondents mention the which joined in 2004.) Indeed, when asked to list that Pfizer educated and skilled local workforce as one Ireland’s main disadvantages (see next section has expanded of the country’s key competitive advantages, for full analysis), a lack of skilled labour was in Ireland so while a further (23%) mention Ireland’s base the factor least commonly cited (by just 6% of of skilled labour from across the EU. (Ireland respondents). extensively is the country’s proven ability – Figure 5 from as early as Percentage of persons with upper-secondary or tertiary education, ages 25-34 the late 1960s (%) – to deliver. 100 100 The people are 90 88 88 91 90 80 85 87 87 87 80 reliable and 70 81 82 82 83 84 70 75 can handle 60 71 60 64 complexity. 50 50 52 40 40 30 30 Paul Duffy, vice 20 20 president with Pfizer 10 10 0 0 Portugal Greece Ireland Sweden Spain Italy EU27 Belgium UK France Denmark Germany New members Austria Finland Netherlands Source: Eurostat.12 © The Economist Intelligence Unit Limited 2012
  14. 14. Investing in Ireland: A survey of foreign direct investors Unique aspects of the workforce than 5% in tax, once all the factors, including Those interviewed for this report particularly benefits, had been taken into account. This was the fifth-lowest percentage in the OECD and the In the area of stressed their companies’ ability to access a skilled workforce by setting up in Ireland. The lowest in the euro zone. However, the top “all-in” income taxes, country’s domestic labour force is the youngest marginal income tax rate in 2009 for top earners Ireland’s in western Europe; it is highly educated and was 50%, one of the highest in the OECD, a competitiveness benefits from relatively flexible regulations. situation exacerbated by the introduction of the Universal Social Charge in 2011, a new tax has been While the level of formal education qualifications on income.2 seriously is one area where Ireland’s local labour force undermined. performs strongly, it is not unique in this There is concern among interviewees about regard, as Figure 5 shows. However, a number Ireland’s personal income tax regime. “In the of interview respondents also pointed to innate area of income taxes, Ireland’s competitiveness Willie Slattery, executive (and more difficult to measure) advantages of has been seriously undermined,” warns Willie vice-president and head Ireland’s workers. These include the ability to Slattery, executive vice-president and head of of European offshore handle complexity and to identify and resolve European offshore domiciles for State Street, a domiciles for State Street financial services company. Likewise, Mr Whelan issues early. Paul Duffy, a vice president with Pfizer, a pharmaceutical company, describes a of Deutsche Bank says it is “naive to think that major factor behind his company’s development personal tax rates can be increased without any in Ireland: “The reason that Pfizer has expanded collateral damage to Ireland’s FDI proposition”. in Ireland so extensively is the country’s proven ability – from as early as the late 1960s – to According to Mr Herlihy of Google, if Ireland is deliver,” he says. “The people are reliable and can not attractive to senior executives, around whom handle complexity.” operations in Ireland are built, it will find it more difficult to bring new projects here: “Ireland must Similarly, John Herlihy, a vice president at facilitate key executives to come here. Junior Google, says: “There is a degree of flexibility, talent joins a company to learn and leave; senior both innate and regulatory, about Ireland’s talent comes to build and stay.” workforce that is unique in Europe. Perhaps because of Ireland’s history, the spirit is to The issue of personal tax rates is relevant to both resolve differences when they are found, and Ireland’s fiscal correction and its desire to win then move on, resolve and move on.” new FDI projects and jobs. For example, Ireland competes internationally for front-end financial services (trading and investing). Both Mr Keogh Attracting top talent – the role of of Goldman Sachs and Mr Whelan believe that personal income taxes given the high density of traders in London, if While there is consensus among both Ireland actually wants to win significant business interviewees and survey respondents about the in this area and bring traders to Dublin, the only quality of labour available to firms that set up in way to compete would be through lower marginal Ireland, there is concern about how attractive tax rates on personal income. Ireland will be for talent, especially senior talent, into the future. Income taxes – a weakening For a typical worker, Ireland’s taxes are very low competitive advantage? in terms of overall income, but for higher earners Survey respondents were asked to rate the 2 Figures in this paragraph are taken from the OECD’s it has some of the highest marginal rates in the competitiveness of Ireland’s tax regime across Taxing Wages 2010 and world. In 2010 a married couple with one earner six headings, including corporate tax, RD tax Taxation Database. on the average wage and two children paid less credits or training grants. Income tax was the13 © The Economist Intelligence Unit Limited 2012
  15. 15. Investing in Ireland: A survey of foreign direct investors weakest perceived competitive advantage of could be raised through taxation without further the six. In particular, among IT firms surveyed, threatening the incentive to work. the net score of favourable to unfavourable in Ireland must Another alternative to direct taxation is indirect this area was just +3%. Similarly, among firms facilitate key based in euro zone countries and other non-US taxation, that is, taxes on consumption rather executives developed economies, the net score was positive than income. However, Ireland’s value-added tax (VAT) rate, at 23% since the 2012 budget, is to come but small, with the bulk of respondents saying among the highest in the world. More worryingly, that personal tax rates were about the same as in here. Junior other investment jurisdictions. For firms planning higher VAT pushes up the cost of living, and talent joins to invest in Ireland for the first time, personal Ireland is already recognised as a high cost-of- a company income tax is viewed as more competitive than living location. Just 20% of survey respondents in other FDI locations (a net score of +43%). stated that when it came to cost of living, Ireland to learn and compared favourably with other FDI destinations Those planning to invest in Ireland for the first leave; senior time view the personal income tax system in the in which they had operations, while 42% said talent comes to country as more attractive than those who are Ireland’s cost of living was worse. build and stay. already investing. This gap between firms which The third type of taxation is on wealth, are already established and those planning to do in particular property. The single biggest so suggests that hidden taxes, such as employers’ contributor to the fall in tax revenue has been Pay Related Social Insurance (PRSI) and the John Herlihy, the loss of revenue associated with Ireland’s Universal Social Charge, may be an unexpected vice president of booming property market. However, the taxes cost once they have settled in Ireland. international SMB used – in particular stamp duty – are regarded sales, Google internationally as inefficient and prone to Alternatives for addressing tax contributing to boom and bust cycles. Ireland competitiveness is the exception among developed countries The gap between low average taxation and in that it does not have a recurring tax on very high marginal income tax rates is just one property, which presents the government with pressing concern in relation to income tax in an opportunity to consider a land value tax. This Ireland. Another is the Irish government’s need type of tax, on the value of sites rather than to raise tax revenue significantly, with a deficit on buildings, encourages the productive use of of over €16bn projected for 2012, compared land and makes it less attractive to hold land with gross government receipts of €53bn. One speculatively, which has been a major reason for area to examine is Ireland’s comparatively Ireland’s property bubble. generous tax-free allowances at lower-income levels. In Ireland, until 2010, it was possible to Land value taxation, or site value taxation, could earn €18,000 without entering the tax net. In be a key source of stable revenue and one that contrast, the tax threshold for workers in France is both fair (as wealthier households pay more) is €6,000 and €8,000 in Germany. and efficient (as the supply of land is fixed and will not respond to changes in taxation), unlike Raising further revenue from income tax does taxes on income or consumption, which distort not need to be done at the expense of Ireland’s economic outcomes. competitiveness: by bringing tax credits in Ireland into line with those elsewhere, more14 © The Economist Intelligence Unit Limited 2012
  16. 16. Investing in Ireland: A survey of foreign direct investors 3 Ireland’s biggest disadvantages: Outside control of policy Ireland’s four main disadvantages in the eyes (31%). The other two relate to risks associated of global investors lie largely outside the with the current national and international government’s immediate control. Two relate macroeconomic situation: the instability of to facts of geography. The size of the domestic the euro zone (33%) and uncertainty about market was cited as a downside by one-half of government finances (32%). The six other factors all respondents (51%), and Ireland’s peripheral listed were each chosen by less than one in location was mentioned by nearly one-third five respondents. Figure 6 Ireland’s biggest disadvantages in the eyes of investors (%) All Financial Services Non-Financial Services 60 60 50 53 50 51 49 40 40 41 35 30 33 32 33 30 31 30 31 20 23 20 21 20 19 18 17 17 15 15 10 14 14 15 10 12 11 9 7 6 7 5 0 0 Size of Instability Uncertainty Peripheral High cost Red tape Poor Tax burden Poor IT/ Lack of domestic in the about geographic of doing and transport/ communications skilled market euro zone government location business bureaucracy physical infrastructure labour finances infrastructure15 © The Economist Intelligence Unit Limited 2012
  17. 17. Investing in Ireland: A survey of foreign direct investors Location matters more to financial firms, for example, are more concerned about services firms poor infrastructure, both physical (32%) and Ireland’s peripheral geographical location ICT (19%) than those in financial services (15% matters more to financial services firms (41%) and 7%). The high cost of doing business was than to those involved in IT or pharmaceuticals highlighted disproportionately by firms with no (17%). This may seem strange, given both presence in Ireland and no plans to set up here: legislative (EU single market) and technological 34%, compared with 19% for the whole sample. developments that enable internationally trading services firms to use Ireland as an export base. The best small country? However, as Christian Saller, the managing Since taking office in early 2011 the Irish director of KAYAK Europe, a technology firm, taoiseach (prime minister), Enda Kenny, has explains, geography can still matter, both for stated on a number of occasions that he wants to attracting talent and for doing business. When make Ireland “the best small country in the world KAYAK was choosing its EMEA headquarters, both in which to do business”. According to the World Zurich and Dublin were on its shortlist, but it Bank’s 2012 Doing Business rankings, Ireland ultimately opted for Zurich owing to reasons of ranks 10th worldwide for ease of doing business, geography. Zurich was chosen because it met two behind a number of small economies but also particular criteria: the ease with which KAYAK was some larger countries, including the US (4th), able to hire skilled multilingual staff prepared to the UK (7th) and Korea (8th). Ireland’s ranking move to the chosen city, and the ease with which fell two places from 2011, principally owing to employees could get to other European locations poorer relative performances in registering when working. Even in online commerce, face-to- property and enforcing contracts. face matters. The table below compares Ireland’s performance Other challenges – high costs and with best practice globally across six headings of bureaucracy doing business. The metric used is the number While the top four factors are all largely outside of days associated with a procedure. As it shows, the control of policymakers, other disadvantages there is significant room for Ireland to improve did feature among investor concerns. The two across most of these headings. While time spent most frequently cited of the remaining six were on administrative burdens relating to trading the high cost of doing business (19%) and across borders and paying taxes is close to red tape and bureaucracy (17%), with poor best practice globally, those associated with physical infrastructure, including transport, also starting a business and registering property registering with about one in six respondents. take up significantly more time than the There were some differences across sectors. IT one day in leading countries. In the areas of Days spent on certain business procedures, Ireland and best practice Area Best practice Ireland Starting a business 1 13 Construction permits 26 141 Getting electricity 36 205 Registering property 1 38 Paying taxes 3.2 3.2 Trading across borders 5 7 Source: World Bank 2012 Doing Business rankings16 © The Economist Intelligence Unit Limited 2012
  18. 18. Investing in Ireland: A survey of foreign direct investors Figure 7 Ireland’s tax and cost competitiveness compared (%) All Financial Services Non-Financial Services 60 60 50 50 51 48 49 48 46 47 46 40 43 40 42 37 38 30 34 35 34 34 30 32 27 20 20 20 10 10 0 0 -10 -10 -14 -16 -20 -19 -20 -21 -22 -24 -26 -27 -28-26 -28 -30 -30 -32 -30 -35 -38 -40 -40 Other Training Personal Double- RD tax Corporate Utilities, Rents Cost of Raw Wages incentives grants tax rates taxation credits tax rate infra- living materials salaries treaties structure Note. Net score compares favourably minus compares unfavourably. construction permits and getting electricity, the it is cheaper (a “net score” of -35%). The figure delays associated with these procedures mean rises to 57% for emerging-market respondents that Ireland ranks 27th and 90th respectively and 69% for those with currently no presence in worldwide. These are areas well within the Ireland. High wages are an important ingredient control of policymakers, and action taken for attracting talent, but mean that productivity – even if policymakers were to perceive that has to be high to compensate. For raw materials, the actual benefit to business of one particular cost of living and rents and utilities, about two in process is limited – would show determination five respondents say Ireland is more expensive, to international investors, who rely on such with less than one in five saying it is cheaper. international rankings to inform their decisions. These net scores are outlined in the bottom half of Figure 7 – all are negative and significant, Costs in focus: comparing Ireland with unlike Ireland’s tax competitiveness, shown in other investment destinations the top half of the same figure, where all net Respondents were asked to rate how Ireland scores are strongly positive. compared in terms of six different sets of business costs to other locations in which they The cost base: regional differences did business: wages and salaries, raw materials, There are important regional variations in cost of living, rents, utilities and infrastructure, how expensive Ireland’s cost base appears to and the overall tax burden. Ireland compares investors. In particular, firms from elsewhere unfavourably with other destinations for FDI in the euro zone view Ireland as an expensive across all cost headings other than tax. This is location for business costs, for the cost of living (a particularly the case for wages and salaries, net score of -46%), but also rents (-37%), wages where one-half of respondents (51%) say and salaries (-32%) and utilities (-28%), while US Ireland is more expensive, while just 16% say respondents report similar scores. For firms from17 © The Economist Intelligence Unit Limited 2012
  19. 19. Investing in Ireland: A survey of foreign direct investors developed countries other than the US or the euro zone, though, Ireland’s cost competitiveness is typically much less of an issue. On salary costs, the net score is negative but much smaller than for other regions (-9%), similar to that for cost of living (-8%), while rents has a net score of zero. For firms from emerging markets Ireland is not cost competitive in wages and salaries, with a net score of -48%. Utilities and infrastructure costs are also not competitive compared with other countries (a net score of -22%). Looking at firms by current status in Ireland, firms not located in Ireland and with no plans to set up there found it particularly expensive for business costs: a net score of -65% for salaries, -47% for utilities, -46% for cost of living, and -33% for rents. However, while firms planning to invest in the country did view it as more expensive for wages, aside from that it was viewed as typically in line with other FDI destinations. For firms established in Ireland and planning to expand, the cost of living (net score of ‑16%) was one concern, while another was the level of rents (net score of -11%).18 © The Economist Intelligence Unit Limited 2012

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