This Country Won the Global Tax Game, and Is Swimming in Money
Countries like Saudi Arabia, Norway and Chile have long used sovereign-wealth funds to sock away windfall profits from periods of high prices for commodity exports like oil and metals for future years when their own production winds down or international prices plunge.
Ireland on Tuesday created its own rainy-day fund thanks to outsize profits from an unusual and controversial source of income: U.S. technology and pharmaceutical giants seeking to lower their tax bills.
In the past eight years, the country of five million has watched its corporate tax income triple to the tune of 22.6 billion euros last year, equivalent to almost $24 billion—giving it a budget surplus last year of a comfortable €8 billion euros when many governments are suffering from a postpandemic debt hangover.
Ireland’s government, unable to predict how much income it will make from corporate taxes year to year or how long the surge will continue for, said a new Future Ireland Fund could amass €100 billion by the middle of the next decade. The new fund will help cover increased healthcare bills as its population ages, with the nation facing one of the fastest rates of demographic change in Europe in the coming decades.
“These funds are vital to future-proof our economy,” Irish Finance Minister Michael McGrath told lawmakers. “We must use windfall receipts wisely.”
The government said it would transfer 0.8% of annual economic output to the new fund in each year from 2024 through 2035. In 2024, that would amount to €4.3 billion, with an additional €4 billion drawn from an existing savings fund that is being closed.
Ireland became a hot spot for U.S. companies by slashing its corporate tax rate from 40% to 12.5% starting in the late 90s, and offering a well-educated workforce and a tariff-free way into the European Union. By last year, there were 950 U.S. businesses operating in the country, employing just under 10% of all Irish workers, according to the American Chamber of Commerce Ireland. The biggest are Apple, Meta Platforms, Alphabet’s Google, Amazon.com and Pfizer.
But that role has been supercharged since 2015, when changes in international tax rules prompted some U.S. businesses to move hundreds of billions of dollars in intellectual property to the country, such as patents and research. That allowed some companies, especially tech giants, to register their profits in Ireland even if much of their output or content was made and consumed elsewhere.
When the change was introduced, the stampede of U.S. companies to Ireland was large enough that it inflated Ireland’s annual economic output by a quarter that year—even if much of the increase wasn’t visible in terms of the real economy. It received a further boost during the pandemic, which led to a surge in sales for the big U.S. digital and pharma companies operating in the country.
“The windfall that is coming to Ireland is a very concrete demonstration of the revenue that the U.S. is losing,” said Brad Setser, a senior fellow at the Council on Foreign Relations.
Setser estimates that between $10 billion and $15 billion of the revenue collected by the Irish government last year would have been collected instead by its U.S. counterpart “in a sane system.” That is a lot of money for tiny Ireland, but a relatively small amount for the world’s largest economy. Still, it could help partly defray Washington’s expenses such as U.S. support for Ukraine.
The Irish government, meanwhile, has become more reliant on profits from U.S. businesses to fund spending on health, education and other essential services. In 2021, it derived 17% of its tax revenue from levies on corporate profits, up from just over 11% in 2015. By comparison, the U.S. government derived just 5.3% of its revenue from taxes on profits.
According to the Irish Fiscal Advisory Council, just three companies paid a third of all corporate tax revenue between 2017 and 2021. IFAC didn’t name those companies, but Setser said tax records indicate they were Apple, Microsoft and Pfizer. The companies weren’t immediately available for comment.
Cumulatively, the profits moved out of reach of U.S. tax authorities have been large. In a recent paper, Navodhya Samarakoon, a doctoral student at the University of Michigan who previously worked on international tax affairs for the Treasury Department, estimates that U.S. businesses funneled $1.2 to $1.4 trillion in profits to low-tax jurisdictions via a complicated international loophole from 1998 to 2018. That loophole—known as the Double Irish—was closed in 2020, but many of its users continue to avoid paying U.S. taxes, according to tax experts.
“A chunk of profits has not come back to the U.S.,” said Samarakoon. “Combined with evidence of windfalls, that suggests a lot of profits remain in Ireland.”
The Biden administration has led a global effort to limit tax avoidance by large, international businesses. In 2021, some 136 countries struck a deal to have a global minimum tax rate of 15% on corporate profits and redirect tax revenue to countries where the products are actually sold or used.
Ireland’s government will introduce legislation to implement the new tax rates starting next year, McGrath said. But turning that agreement into laws across different nations has been slow, including in the U.S., where a divided Congress hasn’t yet ratified the deal.
Ireland has seen its share of booms and busts. Tax revenue from property transactions surged in the years running up to 2007, only to evaporate with the bursting of its property bubble and the collapse of its banking system in 2008. Debt that had been small quickly became among the world’s largest after the government decided to honor all the debts of its failed banks, in part because of worries that defaults might scare away U.S. and other foreign businesses.
Now it frets that at least one of the U.S. digital giants that it hosts could go the way of Finland’s Nokia or Canada’s BlackBerry, and swing suddenly from apparent dominance to bit player, with a big impact on the taxes it pays.
Another fear is that the U.S. government could change its tax code to make locating intellectual property overseas more costly. There are also growing signs that the era of unrestricted trade, which opened Ireland’s path to prosperity, has ended. Economists warned that the country’s economy is set to contract this year, in part because of U.S. rules restricting the sale of semiconductors to China, which applies to U.S. businesses based in Ireland.
The country also faces elections next year, in which the ruling coalition of center-right parties faces a challenge from Irish nationalist party Sinn Féin, which has long lobbied for greater government spending.
