Ireland needs to come out swinging in any Corporation Tax war with the UK
The UK's Chancellor of the Exchequer, George Osborne, has stoked up the political cauldron that is post-Brexit Britain even further. He announced his intention to introduce a Corporation Tax of under 15pc for the UK.
He hasn't said exactly when and bearing in mind the pace of political change over there right now, his plan might never happen. However, the Irish government and IDA Ireland cannot bank on it not happening and must assume that it will.
The move heaps more bad news on Ireland. It sends out a signal that the UK intends to compete more vigorously than before for international investment. It plans to fight a competitive battle on tax. The plan also brings the UK rate very close to ours which could go a long way towards reducing our chances of mopping up foreign direct investment that might otherwise have gone to the UK.
The UK is an FDI machine. In the year to 2015 it recorded 1,988 FDI projects, a 12pc rise on the previous record-breaking period. FDI inflows rose by 50pc in 2014 to a net investment inflow worth £44bn, representing one third of total EU inflows.
Its stock of FDI investment is around $1.3tn - the third highest in the world after the US and China. And it has been moving up the rankings. In 2013 it was ranked 8th in the world as a target for FDI. Last year, it was 3rd.
The big question is how much of that went to the UK because it is in the EU and how much of it could go elsewhere when it leaves? It is hard to strip out that precise figure. One indicator is the number of investments that involved a corporation setting up its European headquarters in the UK.
Britain's own inward investment department, the UKTI, boasts about how in 2014 it attracted the highest number of HQ-based investments in Europe at 35pc. The number of foreign investments involving some kind of headquarters function in the UK reached 370.
The biggest sector was financial and professional services, followed by creative industries and ICT, and then advanced manufacturing.
The biggest investors to date in the UK are the US, followed by the Netherlands, France and then Germany.
In 2014 the UK hoovered up $35bn of inward investment. Ireland, punching above its weight, managed to land $5bn. Basically, George Osborne is saying if Paris, Frankfurt or Dublin thinks it is going to carve up Britain's banking industry between them, it may have to think again.
Ironically, financial services are the sector where this low Corporation Tax rate will matter least. Either the UK keeps its European financial passporting arrangements as part of a new deal, or it doesn't. If it doesn't, then large chunks of the sector in London will have to go, irrespective of the tax rate.
There are other complex political dimensions to Osborne's announcement, and not just in Britain. There are no guarantees that slashing Corporation Tax will increase the total tax take for the British exchequer by creating more jobs. It could end up simply depleting the exchequer of badly needed funds required to support public spending in a recessionary economy. Fighting the battle with lower taxes will be politically difficult.
Equally, international corporations will be wary of accepting the lower tax deal in the UK, for fear that the EU will take retaliatory measures after Brexit has happened.
The announcement heaps more bad news on Northern Ireland which fought hard to get permission to introduce a 12.5pc Corporation Tax rate from 2018 onwards. The rate in the UK is currently 20pc and Osborne had committed to taking it down to 17pc by 2020 anyway. This regional specific tax advantage the North had looked forward to, may well be gone.
But there are other consequences for Irish companies. Exporting Irish companies, in the likes of the food or services sector, may well look again and targeting future investment in the UK in order to serve the UK market.
Any Irish entrepreneur thinking of locating a business, with a view to supplying the UK, might consider setting up in the North or in Britain to avail of lower Corporation Taxes and unfettered access to that market. This could deplete the number of new Irish SMEs who want to supply the British market.
Perhaps the biggest problem of all, is that Osborne has complicated the decision making process for businesses in the wake of Brexit. The possibility of a sub-15pc Corporation Tax rate might be enough to make some companies consider staying in the UK or going ahead with planned investments into the UK. But they cannot assess anything until they know whether the UK will remain part of the single market, or even whether Brexit will go ahead at all. The investment freeze this will trigger will be hard. It will also be slow to thaw.
In the meantime, IDA Ireland has to get to work aggressively pursuing any possible business from the UK. Ironically, Ireland is ill-equipped to handle any significant success in this area.
Imagine if we won 5pc of the City of London's financial jobs. Where would 18,000 corporate bankers, traders or fund managers and administrators live in Dublin? It would exacerbate the housing crisis. We wouldn't even have the office space in the centre of Dublin for them.
Potential investors in a place ask themselves several questions before making a decision between competing locations. They want to know about tax, access to skilled labour, the business environment etc. They also want to know how much tax they will pay on their income and share options. How much is a house to buy or rent?
They want to know what the schools are like for their kids and what the quality of life is like.
Osborne's reaction to Brexit shows just how worried he is. Equally, he isn't hanging about. He has ditched his target for balancing the books. He is now talking about slashing Corporation Tax rates.
The UK Trade and Investment department (UKTI), which acts like the British IDA, knows only too well what is at stake and how much the country stands to lose.
Its promotional literature is full of references to Europe and quotes from investors who chose Britain as an investment location. One said in a particular UKTI brochure: "The UK represents a big market opportunity and access to the broader European market made it an easy choice to use the UK as a Launchpad for our European business."
At 20pc, the UK's Corporation Tax rate is the lowest of the G7 countries and joint lowest of the G20 group.
The UK has been competing on tax for years. In 2008 its corporate tax rate was 30pc. When Osborne took over it was 28pc. It is now 20pc and heading for 17pc even without this announcement.
Its tax offering on intellectual property and entrepreneurial investment at 10pc is already incredibly low.
The Government has a tricky job to do. It has to support the UK in getting the best deal at the European table with one hand, and come out swinging, in the tax war, with the other.
Good luck with it.