November 30, 2015
There is something giant stirring in the corporate world.
The company that makes Viagra has just got into bed with the company that makes fake boobs and Botox, coming together in one of the biggest corporate deals ever. Dublin will be its headquarters. Not only does this tell you something about the enormous value of sex, it also tells you a lot about the value of Ireland’s tax rate.
While the lawyers and tax advisers might be celebrating, the truth is that although this deal may well be the biggest of its type, it could also be the last. Because it is only being done for tax reasons, and the country that lost the tax, America, isn’t too happy.
Pfizer and Allergan have merged and relocated the headquarters in Ireland to avoid tax, nothing else. The new firm will now pay 12.5 per cent Irish corporation tax rather than the US notional rate of 35 per cent.
The figures are enormous. The merger values the new company at roughly $160 billion (€150 billion). This dwarfs the Anheuser-Busch Inbev’s $117 billion purchase of SABMiller earlier this year.
In fact, the new Irish company is the second biggest deal of all time, just shy of Vodafone’s takeover of Germany’s Mannesmann in 2000.
With figures like this and tax avoidance the only ‘business reason’ for the deal, is it any wonder US politicians are not impressed?
This game of financial jiggery-pokery is called ‘inversion’. Allergan was already headquartered here, so Pfizer backed itself into Allergan, saving huge amounts of tax in the process. But the company is still, in reality, American.
President Obama labelled US companies that relocate in a low-tax country such as Ireland to avoid US taxes as “corporate deserters”.
So there can be no ambiguity as to what the White House thinks of these deals and, one must assume, the countries that facilitate them.
Change is coming.
But rather than seeing any changes to the way the world governs multinational profits as a threat, why don’t we look at this moment as an opportunity to reinvent our relationship with the multinationals? Why not be inventive and embed the multinationals more fundamentally in Ireland?
One of the ways to become real partners with the multinationals is to become shareholders rather than simply a production location with favourable taxes.
Normally when you want to get something done, you solve the other person’s problem, and if solving their problem is an opportunity for you, then the deal will be done.
Remember, Ireland would be nothing without multinationals. They are our capital base. Multinationals account for over 80 per cent of our exports, and no country on Earth is more vested in multinational corporations than Ireland.
Looking out, how do we become more attractive to them as a location without putting us on a collision course with their host countries?
If the problem is taking tax from them, don’t take tax – take shares instead. By taking shares in multinationals we could create an Irish sovereign wealth fund that is linked to the share performances of some of the best-governed companies in the world, plugged into the world economy like no other and providing huge wealth for future generations.
So how would something like this work and why would it be attractive to the multinationals? Well, they always say the first way to persuade someone to do something for you is to speak their language. Most quoted multinationals already reward their employees with share options and shares, so why not simply extend this to our total relationship with these companies – outfits such as Microsoft, Apple, Facebook, Google and the like?
Consider the fact that in 2012, American multinationals made $100 billion profit here on which they are supposed to pay 12.5 per cent tax, or $12.5 billion.
But in fact they only paid $4 billion. So they ought to pay $8.5 billion more than they do.
This is the type of money any tax equalization will come after – and in fact it would wipe out the annual Irish budget deficit a few times over.
But, of course, the multinationals may react to any tightening in the tax take as the signal to move. After all, most multinationals here are service businesses and service businesses are easier to move than manufacturing businesses.
Why not encourage the multinationals to pay the difference between what they actually pay ($4 billion) and what they “ought” to pay ($12.5 billion) in shares?
We could pledge these shares for future generations of Irish people in that sovereign wealth fund. The figures are significant – $8.5 billion is a lot of money, and it grows.
Shares are permanent wealth whereas taxes are more transitory income, like wages. In recent years, financial wealth has grown much quicker than income.
Look at the chart to see the difference between those people who depend on shares for their incomes and those people who depend on wages for their income.
Here I have taken a basket of the share prices of the top 20 quoted multinational companies that operate here.
You can see from the chart that in the period since the crash, 2008, wages have flatlined, whereas in contrast the share prices of the top 20 companies have gone up by close to 500 per cent.
Imagine an Irish sovereign wealth fund comprised of the shares of these companies, compounding at these rates.
This is the prize.
And why would the multinationals go for it? Because giving shares or share options is much cheaper for the company than giving cash. It always is.
And they are used to operating this way. What multinational treasurer would not look at this option?
Internationally, moving to a sovereign wealth fund would fundamentally change the relationship between the national state and the corporate world.
Ireland would have first-mover advantage and for years we would be the only country to do something like this because we are so dependent on the multinationals and have the dexterity to do something imaginative.
All countries need a story to sell. At the moment, our story is not only going stale but it is turning us into a target for countries that lose out tax-wise.
This way we could change the discussion by solving the multinationals’ problem, helping them be globally tax compliant and reducing the risk that they head off to another jurisdiction.
Furthermore, by investing in a sovereign wealth fund that can’t be touched for a generation, we reduce the risk that any tax windfall will be blown in the next electoral cycle. That can’t be a bad thing, can it?
But crucially, it is all about changing the Irish story internationally.
By matching our interests with the stakeholders and shareholders of the companies that we have operating here, we revolutionize the game.
We would be jumping together and both have skin in the game.
We could have a new story to tell, and there are no better people to go out and tell it to everyone.