This record is a partial extract of the original cable. The full text of the original cable is not available.

C O N F I D E N T I A L SECTION 01 OF 03 DUBLIN 001505 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 01/31/2015 
TAGS: EINV ETRD ECON EI
SUBJECT: GRANTS AND TAXES: THE RECENT IRISH FOCUS ON U.S. 
FIRMS 
 
 
Classified By: Ambassador James C. Kenny; Reasons 1.4 (B) and (D). 
 
¶1.  (C) Summary: The Irish Government is determined to 
maintain its approach to grants and taxes for foreign firms, 
despite recent press coverage of U.S. companies that 
highlighted problems with these investment incentives.  The 
coverage focused on three areas: EU obstruction of Irish 
grant aid to U.S. firms; U.S. reports on questionable tax 
practices by Irish-based U.S. companies; and, renewed 
pressure for EU tax harmonization.  Irish Government 
officials told Post that they hoped to reverse EU reluctance 
to approve large grants to U.S. firms, a posture reflecting 
the Commission's failure to recognize intense global 
competition for investment.  The officials also said that 
they would resist EU pressure on Irish tax structures, which 
had underpinned Irish economic success and helped U.S. firms 
to compete more effectively against international rivals. 
Notwithstanding the focus on grants and taxes, Post believes 
that Ireland's chief concern in its bid to remain an 
attractive destination for U.S. investment is the erosion of 
the country's cost competitiveness.  End summary. 
 
Background: Irish Press Attention to U.S. Firms 
--------------------------------------------- --- 
 
¶2.  (U) November saw substantial Irish media coverage of 
issues relating to U.S.-invested firms, a sector that 
typically receives less press attention than its significance 
for the Irish economy would merit.  There are currently over 
620 U.S. firms operating in Ireland, employing over 90,000 
people and supporting an estimated 250,000 jobs in Irish 
industry (one-eighth of the total labor force).  In 2004, 
these firms exported roughly USD 55 billion in goods and 
services and spent over euro 17.2 billion on payroll and 
services.  According to the U.S. Department of Commerce and 
local American Chamber of Commerce, the stock of U.S. 
investment in Ireland in 2004 stood at USD 73 billion, and 
U.S. firms have accounted for 88 percent of new FDI projects 
in 2005.  The recent Irish reporting that bore upon the 
U.S.-invested sector focused on two subjects: 
 
A) Irish grant aid.  In mid-November, the Irish Times 
reported that Ireland's Industrial Development Authority 
(IDA, the Government's FDI-promotion agency) had asked the EU 
Commission to extend indefinitely its initial review of a 
proposed euro 50 million IDA grant to Johnson and Johnson 
subsidiary, Centocor, which is building a pharmaceutical 
plant in Cork.  The request aimed to avoid a likely formal 
Commission investigation into the possible 
competition-distorting effects of the IDA grant within the 
EU.  The IDA's action was reminiscent of its decision last 
March to withdraw a proposed euro 170 million grant to Intel 
only days before the Commission was expected to rule against 
the grant.  Irish reporting on this link cast doubt on the 
IDA's ability to offer large grants to foreign firms, a 
long-standing plank of the Government's investment incentive 
strategy. 
 
B) Corporate taxes.  On this issue, Irish coverage followed 
reports concerning, on one hand, renewed pressure for EU tax 
harmonization and, on the other, the use of Irish corporate 
tax benefits by U.S. firms.  Regarding the latter, the Wall 
Street Journal reported in November that Microsoft had placed 
intellectual property with Irish units to save USD 500 
million in U.S. taxes, and a subsequent New York Times 
editorial described Ireland as a tax haven that facilitated 
the outflow of U.S. jobs and investment.  The Irish media 
later reported that the IRS was pursuing USD 500 million in 
back taxes from the U.S. software group Synopsis over its 
Irish subsidiaries' transactions.  Irish reporting 
highlighted domestic concerns that U.S. firms were exploiting 
Ireland's 12.5 percent corporate tax rate with questionable 
transfer-pricing methods.  (As a theoretical example, U.S. 
firms could sell assets to Irish subsidiaries at low prices 
in order to minimize their profitability, and thus tax 
liability, in the United States; the Irish subsidiary could 
then resell the assets and be taxed at the lower Irish rate, 
while its profits would form part of the earnings that would 
grade the U.S. firm's overall performance.) 
 
U.S. Business Responds 
---------------------- 
 
¶3.  (U) The American Chamber of Commerce used the occasion of 
its annual Thanksgiving lunch to respond strongly to the 
press coverage.  AmCham President Eoin O'Driscoll, an Irish 
citizen, said that U.S. reporting had misrepresented 
Ireland's transparent tax structures and could damage 
Ireland's reputation as a foreign direct investment (FDI) 
destination.  He noted that, in an environment of intense 
global competition for FDI, Ireland would rely not only on 
permissible state aid and an effective tax regime, but also 
on a strong education system, a vibrant business culture, and 
new research and development capabilities.  He called on the 
Government to urge Member States to recognize that Europe was 
losing competitiveness when measured against other regions. 
In separate remarks, AmCham CEO Joanne Richardson pointed out 
that U.S. firms exemplified corporate responsibility, having 
paid euro 2.7 billion in Irish taxes in 2004.  Finance 
Minister Brian Cowen, who also attended and spoke, emphasized 
that the GOI would resist any pressure within the EU for 
Ireland to change its 12.5 percent corporate tax rate. 
 
The IDA's Views 
--------------- 
 
¶4.  (U) On December 2, Post discussed recent attention to tax 
and grants with Ray Bowe and Enda Connolly, Chief Economist 
and Spokesperson/R&D Division Manager, respectively, for the 
Industrial Development Authority (IDA), the Government agency 
that oversees Ireland's investment promotion strategy.  In 
2004, the IDA paid out euro 66 million in grants to foreign 
firms and negotiated 70 new business projects involving a 
total investment of euro 5 billion over the coming years.  At 
the start of 2005, moreover, the number of IDA-supported 
foreign companies was 1,022, including 478 U.S. firms.  Bowe 
was directly involved in negotiations with the EU Commission 
in the Intel and Centocor cases, and the Wall Street Journal 
quoted Connolly in its article on Irish tax benefits. 
 
 
Irish Frustration with the EU on Grants 
--------------------------------------- 
 
¶5.  (C) Bowe noted that Irish frustration with the EU in the 
Intel and Centocor cases centered on the application of the 
Multisectoral Framework on Regional Aid for Large Investment 
Projects, adopted in 2002.  He observed that, since the 
Multisectoral Framework was relatively new and untested, EU 
Competition Directorate officials tended to be conservative, 
slow, and not business-friendly in interpreting the 
Framework's grant review guidelines.  They also had wide 
discretion with the review criteria, including their 
estimates for the market share that grant-recipient firms 
would garner.  Most importantly, according to Bowe, these EU 
officials did not see their work in the context of the 
overarching Lisbon Agenda, nor did they fully consider that 
the EU was fighting for investment in a highly competitive 
global environment.  For example, Intel had made clear that 
it would look not to other Member States, but outside the EU, 
as an alternative to further investment in Ireland.  Connolly 
conveyed his sense that the Commission was beginning to "wake 
up" to this reality, and he added that the IDA intended to 
pursue possible grant aid for Intel and Centocor as both 
firms moved to the second phases of their respective Irish 
investments. 
 
¶6.  (C) Connolly cautioned, however, against overstating the 
importance of grants in a foreign firm's decision to invest 
in Ireland.  He described such aid as a "contribution to 
start-up costs," ranking well below other determinants of 
Ireland's attractiveness as an investment destination, such 
as an educated work force, a pro-business climate, a 
transparent legal framework, and favorable tax structures. 
The fact that the value of grant aid per number of jobs 
created by foreign firms had continuously fallen in Ireland 
since 2000 showed the decreasing significance of grants in 
investment decisions, remarked Connolly.  With the 2004 
accession of ten Member States, moreover, general EU 
guidelines for regional aid were scheduled to tighten in 
2006, restricting IDA grants primarily to the Border and 
Mid-West regions.  Ireland, said Connolly, had accepted this 
eventuality; in fact, grants were rarely now provided for 
projects in Dublin and Ireland's east coast.  Bowe pointed 
out that Ireland would continue to provide aid for research 
and development and small/medium businesses under the EU 
"horizontal aids" program, which the Irish Government did not 
expect to change significantly in the next five-ten years. 
 
The Advantages of Low Taxes 
--------------------------- 
 
¶7.  (C) Regarding the Wall Street Journal and New York Times 
pieces, Connolly emphasized that, since the 1950s, Ireland 
had structured its taxes to induce investments from foreign 
firms -- "but on the back of their substantive operations on 
the ground" (a point he made in the Wall Street Journal).  He 
argued that these operations were not, as U.S. reporting had 
implied, an "excuse" to shift around company funds; rather, 
they had driven and sustained Ireland's rapid economic growth 
in more recent decades.  He pointed out that Irish tax 
arrangements performed a less publicized, but critical, 
function for U.S. firms in allowing them to retain and invest 
a greater share of their overseas earnings.  This option made 
U.S. firms more competitive against foreign companies whose 
home governments did not exercise the same scope of 
jurisdiction over overseas earnings that the U.S. Government 
did.  Connolly added that U.S firms, decision to move a 
portion of the ownership of their intellectual property to 
Ireland also enabled them to take advantage of vibrant 
research and development programs in Ireland.  The most 
innovative ideas, he said, were no longer found only in the 
United States; firms realized that they had to tap into other 
countries, expertise in order to remain leaders in their 
fields. 
 
¶8.  (C) Ireland would continue to resist any move within the 
EU to harmonize tax rates that might push Ireland's corporate 
tax higher, said Connolly.  He explained that Ireland's 
opposition to harmonization had a powerful spokesperson in EU 
Commissioner for the Internal Market (and former Irish 
Finance Minister) Charlie McCreevy, as well as a like-minded 
ally in the UK.  The new Member States were also opting for 
lower corporate taxes, and Belgium, too, had recently cut its 
rates.  Connolly noted that, in contrast to Ireland, the 
higher taxes needed to fund the social model espoused by such 
Member States as Germany and France had been an obvious drag 
on economic growth.  He added that German/French complaints 
about Ireland's low tax rates were hypocritical, since German 
and French firms in Ireland, particularly those that were 
family-owned, were notorious for tax avoidance.  These firms, 
said Connolly, were expert in sheltering revenues through tax 
haven arrangements in former colonies and Switzerland in 
order to minimize their profitability, and thus their tax 
burden, in Ireland. 
 
Comment: Cost Competitiveness -- The Real Investment Concern 
--------------------------------------------- --------------- 
 
¶9.  (C) Comment: Ireland recognizes that a corporate tax rate 
hike would likely send investors to the exits, so the GOI has 
made clear that it would fight to the last man to block moves 
toward EU tax harmonization.  Oddly, however, the 2006 Irish 
Government budget unveiled on December 7 (covered septel) 
included a proposal to eliminate the remittance basis of 
personal income taxation for resident foreign businessmen. 
Currently, the tax system allows foreign executives in 
Ireland to receive their salary outside Ireland's 
jurisdiction and pay tax only on money they "remit," or bring 
into, the country to support themselves.  U.S. firms have 
been quick to point out that the budget proposal to eliminate 
this allowance would discourage executives from establishing 
operations in Ireland.  In other words, the personal income 
tax structure would work against the investment incentives 
offered through low corporate taxes. 
 
¶10.  (C) Actually, Ireland's chief concern in its bid to 
remain an attractive destination for U.S. investment is not 
so much its tax and grant strategy, but rather the erosion of 
the country's cost competitiveness.  Irish-based foreign 
firms face some of the highest costs in the EU for labor, 
utilities, and land.  In 2004, for example, the annual 
average cost per employee in Ireland (encompassing wages and 
taxes) was euro 38,100, compared to euro 33,200 in Germany, 
euro 28,400 in Spain, and euro 7,700 in Poland.  In recent 
years, GOI economic strategists had acknowledged these high 
costs and appeared willing to concede simple manufacturing 
investments to lower cost regions like India and China in the 
belief that Ireland could promote itself as a producer of 
higher-value, knowledge-intensive goods and services.  These 
strategists worry now, however, that U.S. firms seem 
increasingly willing to target such regions for investments 
in this sort of higher-end production.  For example, Intel 
and Microsoft in recent weeks both announced billion-dollar 
investments in India that have the kind of research and 
development components that Ireland would relish.  Post does 
not anticipate any near-term exodus of U.S. firms from 
Ireland, and, in fact, large U.S. pharmaceutical and banking 
investments were announced the week of December 5. 
Nevertheless, the likely acceleration of investment in 
higher-value production in places like India and China does 
pose longer-term challenges for Ireland to build upon its 
current FDI base. 
KENNY