Ireland's tax policies fill sovereign fund coffers

Countries like Saudi Arabia, Norway, and Chile have long established their own sovereign-wealth funds. Their aim is to set aside a portion of the money they earn from exports of commodities such as oil or metals to use in the future when production or prices may have fallen.

Now, Ireland is joining the ranks of countries with its own state fund, but the source of its funds is more unconventional and controversial. With the assistance of major American technology and pharmaceutical companies, taking advantage of Ireland's low tax regime, the nation of 5 million residents is swimming in money.

Over the past 8 years, Ireland's tax revenues tripled, reaching €22.6 billion last year, resulting in a budget surplus of about €8 billion, at a time when many other governments are struggling to reduce deficits and debt left behind by the COVID-19 pandemic.

The challenge for the Irish government is the uncertainty surrounding the longevity of business revenues over time and how long these enterprises will continue to channel a portion of their sales through the country. This led to the creation of the Future Ireland Fund, expected to accumulate €100 billion by the middle of the next decade.

This new state fund will help cover rising healthcare expenses, particularly as Ireland faces one of Europe's most significant demographic challenges over the coming decades, as reported by the Wall Street Journal.

"These funds are crucial for preparing our economy for the future," said Irish Finance Minister Michael McGrath in parliament. "We must use these surplus wisely."

The government plans to allocate 0.8% of the annual GDP to the new fund every year from 2024 to 2035. For 2024, this amounts to €4.3 billion, with an additional €4 billion to be transferred from another savings fund that will be closed.

Ireland became a magnet for American businesses when it reduced its tax rate from 40% to 12.5% in the late 1990s. It also offers a well-educated workforce and a gateway to the European Union without the burden of tariffs.

Until last year, 950 American companies operated in Ireland, including tech giants like Apple, Meta, Google, Amazon, and Pfizer, employing nearly 10% of the country's workforce.

The shift of foreign companies towards Ireland accelerated after 2015 when changes in international tax rules led some American companies to move intellectual property, such as patents and research, worth hundreds of billions of dollars to the country. This allows some companies, especially in the tech sector, to book their profits in Ireland, even if their products are produced and consumed abroad.

When this change was first implemented, the influx of American businesses to Ireland was so massive that the country's GDP inflated by 25% that year, despite this growth not being visible in the real economy.

During the pandemic, Ireland received another boost as sales of American technology and pharmaceutical companies operating in the country skyrocketed.

The Irish government is increasingly reliant on these revenues to fund its healthcare, education, and other essential sectors. In 2021, corporate taxation contributed to 17% of total tax revenues, up from 11% in 2015. Moreover, from 2011 to 2021, only three companies, believed to be Apple, Microsoft, and Pfizer, accounted for one-third of Ireland's total tax revenues from corporate taxation.

Given these circumstances, it's not surprising that the U.S. Biden administration is leading global efforts to curb the tax avoidance of large multinational corporations. In 2021, 136 countries worldwide reached an agreement on a global minimum corporate tax rate of 15% and the reallocation of tax revenues to the countries where products are sold or used.

The Irish government will pass a law to implement the new tax rates from the next year. However, they are well aware that the surplus revenues from recent years can suddenly dissipate if, for example, one of the major technology companies faces a fate similar to Nokia or BlackBerry, or if the U.S. government changes its tax policy, compelling companies to transfer their intellectual property to the U.S.