Prepared by Luis Catão.
Ireland has a preferential tax rate of 10 percent for manufacturing and certain internationally traded services. Moreover, foreign firms installed in Ireland have traditionally benefitted from substantial government subsidies and grants from the Industry Development Agency (IDA). Both are part of an industrial policy aimed at making Ireland an attractive destination for foreign investment—a strategy consistently pursued since the 1960s. The Irish government is committed to keeping the 10 percent preferential tax rate for manufacturing until 2010.
Other important implications include disincentives for the development of backward and forward linkages within the domestic economy and limited scope for technology transfer. Transfer pricing favors the expansion of the assembly stages of the production process in the low-tax country and discourages local purchases of intermediary inputs as well as production for the home market. Cost-intensive activities—such as R&D or labor-intensive services—are also discouraged, as tax deductions on such expenditures are higher in high-tax countries. An analysis of these issues, however, is beyond the scope of this chapter.
Transfer pricing practices may also be present in services but the lack of more detailed data on service activities prevents a systematic investigation of the issue.
This unexplained productivity difference between EU and non-EU firms operating in Ireland will form the basis for estimates of transfer price presented in Section 3.
These figures also refer to the year of 1990. Earlier IDA figures, available for 1984, indicate that profits accounted for 39 percent of the net output of foreign firms, as opposed to 6.5 percent for indigenous manufacturing.
US Department of Commerce, Bureau of Economic Analysis, Survey of Current Business (June 1993).
Reported in Kennedy, K.A., “Linkages and Overseas Industry” in Foley, A. and D. McAleese, Overseas Industry in Ireland, Dublin, 1991.
According to the latest data from IDA’s Irish Economy Expenditure Survey of 1990.
This can be seen by comparing royalties and other receipts by Irish-based U.S. firms with that of the total for U.S. firms abroad. While the payment of royalties, license fees and imported services by Irish subsidiaries account for 19 percent of worldwide U.S. receipts on these items, the net asset value of Irish-based U.S. firms represents only 1 percent of the worldwide net assets of U.S. manufacturing firms abroad.
Honohan, P. “Transfer Pricing in Ireland - A Cautionary Note,” Central Bank of Ireland, Research Paper 2R/84, 1984.
McGuire, M. “Transfer Pricing and its Effects on Economic Indicators,” Central Bank of Ireland, mimeo, 1990; Conroy, C. “Low Labor Content Sectors: Implications of the Interpretation of Macroeconomic Data”, Economic and Social Research Institute, mimeo, 1994.
This implicitly assumes that factors such as differences in managerial efficiency are negligible. This may not be unrealistic in light of the very low barriers to flows of managerial manpower across the EU.
These estimates were obtained using data from the latest available industrial census (1990).
Although available BOP data do not permit a sectoral disaggregation of these flows.
If these companies use Ireland as a platform for the European market, there are advantages in retaining part of the profits in Ireland to fund future investment in the EU.
Comparability with 1993 figures is more hazardous due to the introduction of the INTRASTAT system, following the abolition of custom controls within the EU from January 1993.
Net factor payments abroad have been somewhat higher than the gross remittance of profits, interest and royalties. Taking the year of 1990 for comparison purposes, the difference between GDP and GNP—i.e., net factor payments abroad—was IR£3,197 million, or 11.6 percent of GDP.