A St. Patrick’s Day lesson for Ireland on good tax policy

One of the enduring legends associated with Patrick, Patron Saint of Ireland — whose feast day many of us will celebrate Sunday — is the sprouting into a living tree of the ash walking stick he planted into the soil of Aspatria. 

Similarly, investment dollars planted in Ireland by dozens of U.S. multinationals have blossomed into a vibrant source of jobs and wages. Unfortunately, that source may find itself uprooted by a surprise tax ruling.

{mosads}What is the most important element of good tax policy? Certainly, reasonable arguments can be made for low rates, fairness, simplicity and ease of compliance. Yet, perhaps the most critical aspects are transparency and certainty. 

Failure to deliver all of these other tax policy considerations, while not optimal, can be adjusted for and often worked around. But abrupt changes — especially in the level of tax liabilities — that come without prior visibility can cause not just extreme anxiety but also massive uprooting of plans and aspirations in ways that destroy value and send taxpaying entities into a downward spiral.

The destructive combination of tax opaqueness and uncertainty explains why, although it seems irrational to some, there was such turmoil recently over unexpected reductions in the amount of income tax refunds some households received, even if their overall tax bills were lower.

The pain is not irrational at all, however, when you consider that families become accustomed to a certain annual cash infusion, and more important, make concrete plans counting on their continuation. 

The disappearing refund might represent a lost car down payment, a foregone opportunity to settle a medical debt, a sudden inability to meet a tuition installment or a missed vacation. In such situations, while lower tax rates are welcome, tax surprises are not.

Which brings us to the current state of affairs in St. Patrick’s homeland, whose prime minister, Leo Varadkar, and other government officials are presently in the U.S. promoting Ireland and its business-friendly atmosphere.

The Emerald Isle has gained a reputation as a tax paradise for U.S. corporations. That reputation is attributable both to competitive corporate rates and favorable tax provisions, This tax treatment and its certainty is important to massive companies like Apple and its suppliers, pharma companies, airplane leasing and others dealing in information technology.

The people of Ireland have enjoyed an enormous economic boost from the country’s inviting investment climate, as U.S.-based companies have come to dominate its business landscape. The Irish Times reports that they represent 25 of the top 50 enterprises.

According to the American Chamber of Commerce Ireland, U.S. foreign investment in the nation is valued at $387 billion — more than our investment in South America, Africa and the Middle East and more than in the BRIC countries (Brazil, Russia, India and China) combined.

This level of foreign direct investment is responsible for the employment of 20 percent of the Irish private-sector workforce — at average wages nearly 2.5 times the nation’s average salary.

And in 2016, the nation’s Office of the Revenue Commissioners estimated that these multinationals paid 80 percent of the island’s corporate taxes.

But even the lowest rates and most favorable tax provisions won’t promote such investment if they can’t be counted on. And that’s why recent rulings from Irish Revenue are so troubling, not only for U.S. companies investing there, but from the millions who benefit from their presence.

The agency delivered a notice of amended assessment to a leading global health-care company largely doing business in the U.S. but based in Dublin.

The assessment took a look back over five years and then handed the company a massive tax liability. In another case, the Irish government accessed a huge tax liability to a major supplier of Apple, again the assessment looked back over years. There are reports of more to come.

{mossecondads}These resulting additional tax liabilities sent shock waves through both stock markets and the foreign investment community. Not only did these notices represent out-of-nowhere change from years of past treatment of similar transactions, the government has largely refused to explain its reasoning. 

It goes without saying that these actions will endanger any existing and future investment planned there — and the many high-paying jobs that result.

Surely, much like St. Patrick’s living staff, job-creating foreign investors would prefer to stay firmly rooted in Ireland and benefit from the competitive tax rates and favorable provisions nourishing their growth.

But their future presence and positive impact will come into question if tax precedents can be suddenly torn up and tossed aside by the government.  

Let’s hope the government can find its way to raising a St. Paddy’s-style toast to U.S.-based firms’ contributions instead of barriers to their future investment.

Richard Manning is the president of Americans for Limited Government, a conservative organization working to limit the size and scope of the government.