Why Obama's tax clampdown won't cost Ireland
Ireland is the globe's largest host for so-called corporate inversions, the controversial trend that was about to see Pfizer reinvent itself as an Irish company until authorities in the US intervened this week.
The new rules from the US Treasury Department specifically make it more difficult to use acquisitions as a way to move US company headquarters abroad to take advantage of jurisdictions with more favourable tax rates - Ireland foremost among them.
The rules killed off a $160bn merger between Viagra-maker Pfizer and Irish-registered Allergan, which makes Botox.
It would have seen Pfizer move its tax residence to Ireland, to create this country's biggest company.
Some of the factors that make big deals attractive will continue to apply here, but without tax as a draw, this country's share of global M&A is set to plummet.
"Is this the end of inversion-driven deals? Yes, most likely," said Kevin Smith, an equity sales trader at Makor Securities London.
"Is this the end of sizeable cross-border merger activity? I really don't think so, as the traditional rationale for such deals - earnings accretion, economies of scale, procurement, etc - are still very apparent."
Without tax as a draw few of those pull factors apply here, however. The big question is whether Ireland will lose out on a tax bonanza as the deal flow dries up.
Most experts think not, because companies have been moving here to cut their taxes, not just to shift them around.
With the Pfizer deal now dead in the water, Allergan shareholders are the big losers, not the Irish Exchequer, according to Seamus Coffey, an economics lecturer at University College Cork. The idea that these inversions create a tax windfall for Ireland is questionable, he said. That's because of the way taxes are worked out globally.
The US applies its 35pc tax rate to US companies' worldwide profits, but discounts for tax that has already been paid elsewhere.
So, if Pfizer pays 20pc to London on its UK profit, it owes an extra 15pc in the US - not another 35pc.
If Pfizer had shifted its tax address to Dublin, where the tax rate is 12.5pc, it would owe nothing extra to Irish authorities on its UK income, Coffey said. That's because it would already have paid more than 12.5pc in taxes.
So Pfizer would have reduced its tax bill, the US would have lost out and Ireland would have gained nothing.
The new Treasury rules don't forbid inversions. But they do make them far less likely.
The latest version of the rules doesn't just stop so-called serial inversions. It goes after earnings stripping, the practice of moving profits out of the US into low-tax jurisdictions, driving down taxable US profits by paying interest to a parent company abroad. The positive impact Ireland might have had in terms of more business generated for local accounting firms or additional traffic at its airports from executives flying in for board meetings is outweighed by the harm such transactions do.
That harm is largely reputational.
In the US former presidential candidate Senator John McCain has labelled Ireland a tax haven, while Donald Trump called the plan to base the combined Pfizer and Allergan in the country "disgusting".
The country as a whole gets tarnished when the likes of President Barack Obama publicly complain about US corporations moving here.
It doesn't help that here in Europe "our own" officials at the European Commission are investigating Ireland over the taxes paid by Apple.
The issues are separate, but close enough to create associations in most people's minds.
It's also particularly worrying if, as Seamus Coffey points out, there's no real gains to offset the downsides.
This week the Department of Finance publicly welcomed America's tighter rules, pushing the blame for inversions back on authorities there.
"In relation to any transactions that may not involve real substance in terms of jobs and investment in the Irish economy, Ireland does not encourage such transactions," the Department said on Wednesday.
"The Irish government has made clear that we would welcome any changes made by the US administration to address this problem."
As well as the reputational concern there are more technical, but still significant, issues with the way big deals distort Irish economic statistics.
Tax inversions artificially inflate the size of Ireland's economy. When the headquarters of a group of companies becomes resident in Ireland, all of its global profits may be counted as part of the Ireland's gross national income
Since 2008, corporate relocations, without accompanying substance or employment, have boosted Ireland's Gross National Income by about €7bn, the Department of Finance thinks.
Companies with assets overseas of €523bn were headquartered in Ireland in 2014, up from €391bn in 2013, according to the CSO.
That didn't happen because corporate Ireland exploded abroad in a frenzy of expansion. It was largely a result of the sudden arrival here of big global companies like Perrigo, Jazz Pharmaceuticals and Allergan itself.
The impact on the statistics isn't just a paper exercise. It makes us look richer than we really are and even costs us money.
It drives up Ireland's annual contribution to the European Union budget, which is based on the size of the economy.
Halting inversions may help create a truer picture of the Irish economy, said Coffey, who carried out a study on effective corporation tax rates for the finance ministry in 2014.
"Inversions represent a reputational risk, sometimes for very little tax gain and at the cost of higher contributions to the EU," said Coffey. Curbing inversions is "not negative in any serious way for us". (Additional reporting Bloomberg)