Ireland is referred to as a tax haven because of the country's taxation and economic policies. Legislation heavily favors the establishment and operation of corporations, and the economic environment is very hospitable for all corporations, especially those invested in research, development, and innovation.
Before deductions, the United States has a corporate tax rate of 35%. Ireland’s taxation rate for corporations is 12.5%. In addition, Ireland only charges a corporate tax rate of 6.25% for revenue tied to a company’s patent or intellectual property. This lower rate is intended to provide tax breaks for the protection and support of royalties derived from intellectual property. Some taxation exemptions, such as offshore revenue tax exemptions, have been a policy since the 1950s.
Ireland’s taxation policies on research and development positions offer great incentives for corporations to invest in innovative ideas. Ireland has enacted policies allowing research and development intensive start-ups the ability to claim back taxes. This is true even if the start-up is incurring losses and cannot pay their corporate tax. In addition, the 25% tax credit is applied against the corporate tax rate of only 12.5%.
Ireland is heavily reliant on the corporate tax levied as approximately $46.6 billion – or 11% of total revenue – was collected by the country in 2016. Thus, it has an incentive to remain a corporate tax haven and not implement adverse policies. Ireland has a tax treaty with 71 countries, 25 of which are developed countries.
Transfer pricing allows corporations to shift profits from high-tax jurisdictions to low-tax jurisdictions. Thus, a corporation is trading with different subsidiaries rather than with external companies. This artificial shift, when performed by multinational corporations that produce up to 70% of the world’s trade, will result in lower taxes. This transfer pricing policy resulted in Apple Inc.'s (NASDAQ: AAPL) Irish operations being investigated by the United States Senate and the European Commission. This arose after Apple had a 3.7% effective tax rate on $31 billion of revenue in 2014.
The Irish government is considered pro-business and not bureaucratic. The country’s cost of living is among the lowest when compared to other European countries, which is an extra incentive for transnational corporations. Salaries, insurance, rent, and materials cost less than many other countries in Europe.
The financial environment of Ireland allows for special-purpose vehicles to be established for the reduction of taxes. In 2013, 742 special-purpose vehicles were located in Ireland. In 2014, the estimated assets held in these vehicles was estimated at 421.9 billion euros. The reason for the high usage of special-purpose vehicles relates to financial transparency, as Ireland has little to none. The government does not require transnational corporations to provide public accounts of turnover, subsidies received, profit or amount of taxes paid.