Friends with benefits: A taxing problem for Ireland in a post-Brexit world

So near (shore), so far

Britain outclasses anywhere in the EU for attracting inward investment, partly because it is in the EU, and Brexit will leave some of those tens of billions looking for a new target. Since Ireland already does well in this, Brexit could turn out rather well for the emerald isle.

On the surface, a UK exit from the EU could mean good things for Ireland – such as an even larger chunk of the market for EU-based data centres, software development and support operations, helped by being native English speakers and cheaper than Brits, French or Germans.

The UK and Ireland have always enjoyed free movement of goods and people, so a happy version of Brexit is that Ireland becomes a unique, low-tax portal to both the UK and EU. That would swell the ranks of the 105,000 tech sector workers as well as the roughly same number whose employment comes from them. Given Ireland already has substantial sites for PayPal, MongoDB, eBay, Oracle and many more, the foundations are ready for the 20 per cent of Irish exports that come from tech to grow.

Despite expensive electricity and physical distance from the big markets, Ireland also has a good chunk of the data centre market with the new Apple cluster reckoned to use more power than Dublin. EU "safe harbour" rules means that any EU state is as good as any other for handling personal data and if the UK keeps its tradition of Ireland "not really being foreign" it may end up being the only place where you can access both markets. Since the UK is the EU’s second largest economy and the most digital, then it may be impractical for new American and Chinese EU presences to be anywhere else.

EU membership has made Ireland’s tech sector a giant compared to the republic’s size, driven by tax breaks that attracted the likes of Intel, Microsoft and Google.

Let’s not forget, though, that a good percentage of this has come from reallocating profits so that they fall under Irish rates, rather those of more expensive EU members. Recall that during the financial crisis, Germany leaned heavily on Ireland to bring corporate taxes up to the 30-35 per cent German firms must pay and even the 20 per cent in Britain looks steep in comparison, not bucking under that pressure could pay back big time.

Tax is one of the biggest factors that could change post Brexit.

Nothing would change on the day if the UK votes to leave the EU and little when it comes into effect since laws will remain in place until they are repealed or changed through lengthy legislative process.

Tax rules, however, are typically changed at least once a year in the Budget. There also exist, of course, powers to change parts of tax regulations almost at a whim by those in power, or at least in office. Tax being a vital source of national income, it’s likely this could change quickly. Chancellor of the Exchecquor George Osborne Wednesday made his position clear.

Helping Ireland further would be the fact that in the UK there exists considerable and growing political momentum to find ways to tax multi nationals, especially American tech firms for having huge turnover in the UK, but claiming that none of the profits were made there. With its low tax rate, Ireland’s attractiveness would only increase.

Since David Cameron has committed to not running for another term that leaves scope for a break in current policy when it comes to taxing big international businesses. The Labour Party’s Jeremy Corbyn has made it clear he’s no friend of multinational American firms while any politician will lick their lips at taxes designed to keep money in the UK.

Many in the UK will likely vote for Brexit because they want Britain to control immigration and whereas Brexiteers think of Romanians as the competition, Irish citizens like my parents are far more numerous and fewer will come to work in the UK, a fact that stands to boost the Irish tech sector at the expense of all those UK-based firms.

The winners will not only be IBM, Dell, Facebook and other giants, it may even boot up an indigenous tech sector, which currently finds it hard to compete with multinationals who pay little tax, get grants from the national government, find planning permissions go in their favor, cheap infrastructure and can offer stability and good pay.

Losing Irish tech workers has the air of unreality to it and sounds like the scaremongering of the former Taoiseach Bertie Ahern that border controls are inevitable since Britain’s only land border is with Ireland, which in the minds of UKIP and Irish politicians could become a conduit for Syrian refugees.

This is of course nonsense, but the immigration debate is driven by emotion, not numbers or basic geography so roadblocks, passport checks and so on are a possibility if EU negotiations with the UK get bogged down or turn nasty.

New, different VAT regimes are more likely to hurt Irish trade. VAT is at the centre of how the EU is funded and since it is levied at each stage of the process requires coordination at the EU level as goods and services flow between member states. Brexit would add a lot of friction to Irish tech doing business with the UK if that integrated tax regime breaks down.

Buying software from Microsoft Ireland (which I do) is seamless and VAT can be handled simply by supplying my firm’s VAT ID. It’s very easy, however, to see a post Brexit government imposing an import tax on software that pretends to be Irish to UK tax.

As well as the export issue, like any modern economy the largest percentage of ITPros in Ireland work either inhouse or for firms that provide services to clients who need support and development. Dublin has done very well out of being a near shore centre of IT work for firms like State Street and Accenture, especially for the finance sector, which has led to growth in FinTech and security start-ups as well. Some of this is highly vulnerable to Brexit, partly because of the turmoil it will cause in banks and funds, but also the problems of compliance with both EU and newly different UK financial regulation, although - ironically - that will generate more work in the short term.

Currently the non-UK EU financial centres are like the Northern Irish football teams in Europe, and Brussels has long laboured to shackle “Anglo Saxon” banking and if they succeed then the near-offshored Irish financial technology sector will be clobbered.

Britain is one of Ireland’s largest trading partners so a Brexit will hit the Republic and there are clearly some scenarios where a UK exit could hurt Ireland in clear ways.

Ultimately, the biggest injury could come from what happens to the EU should the UK, Europe’s second largest economy by GDP and fourth largest contributors, pulls out.

The EU could easily oscillate between sticks and carrots for the UK to stay and although Ireland is liked in Brussels, nations have interests, not friends and little Ireland may get shafted. The stresses of Brexit and attempts to retain the UK may even cause the EU to break up - or to become less of a free market. That would be catastrophic for Ireland, since it’s indigenous market is vastly too small to support the native tech sector in its current form. And, once the blood is in the water to tax the multinationals, then Ireland will be forced to ally with the big national markets such as Germany or face punitive action as a result over its taxes.

So given that Ireland is doing rather well out of Britain in the EU, Brexit upsides depend upon the UK being gracious to Ireland and the downsides seem almost inevitable, so it's rather good for the Irish diaspora in the UK that they get to vote on it. ®