Interview – There's more to Ireland than tax loopholes, medtech body insists
Changes to US laws governing inversion deals have forced AbbVie to abandon its bid for Shire, and across the Atlantic moves to halt exploitation of another tax trick could start to have a similar if less dramatic effect. The banning of the so-called double Irish dodge, in tandem with the rules making inversions less profitable, could knock Ireland’s crucial life sciences sector.
“Ireland is a small country, and very dependent on foreign direct investment,” admits Andrew Vogelaar, global head of medical technologies at the industry association IDA Ireland. But he insists that, as long as the country's 12.5% corporate tax rate is safeguarded, Ireland should remain a tempting location for companies even after the loopholes are closed.
The inversion rule changes do not seem to have put Medtronic off its $43bn acquisition of Ireland-domiciled Covidien, and the company has said that the blocking of the double Irish will have no effect either.
This allows Ireland-based groups, or even companies with Irish units, to establish subsidiaries in other entirely tax-free jurisdictions, thus vastly reducing their contribution to the Irish exchequer (AbbVie-Shire pact wobbles as inversion backlash spreads, October 15, 2014). It will be phased out over the next five years.
At least, if investment in the Irish life sciences sector is reduced as a result of the new rules, it will be from a relatively high bar: the industry is very healthy at the moment.
“There are probably 50,000 people employed in life sciences,” Mr Vogelaar tells EP Vantage, “roughly 25,000 [of whom] are employed in medical technology companies. Manufacturing employment in Irish life sciences is actually increasing, and that’s an unusual enough phenomenon considering the efficiencies and automation companies have put in over the last 20-30 years.”
Medtronic has a very substantial presence in Ireland, for example, with around 2,500 employees mostly working on cardiovascular products. Boston Scientific and J&J have sites in the country, and Stryker and Cook Medical have recently opened new facilities. IDA Ireland boasts that the country has the highest concentration of medical device businesses outside the US.
“The cardiovascular space is very strong for us – some 70% of the world’s drug-eluting stents are made in Ireland. C. R. Bard bought an Irish company and they’re ramping up employment rapidly as they have a big launch coming up – their Lutonix drug-eluting balloon. That product launch will be done from Ireland,” says Mr Vogelaar.
Lutonix was approved by the FDA three months earlier than expected, so maybe Bard will now step up hiring even more (Bard’s Lutonix makes early US DEBut, but Medtronic is not far behind, October 13, 2014).
Not a tax haven
The life science industry will not abandon Ireland, Mr Vogelaar says, as companies know they will be able to hire experienced staff. “The primary factor is talent. Companies can get [employees] that have experience of working in highly regulated environments – most of these companies manage their QA and regulatory affairs from Ireland as well.
“Continued investment into education and R&D is the key to that – you can have a 0% tax rate, but if you can’t get talent it’s no good to you.”
But even an industry employing more than 1% of the country’s population can be vulnerable to a loss of investment if other countries are more receptive to tax avoidance.
“Our understanding is that similar tax loopholes will be cut off in other OECD countries as well. It’s a global process,” Mr Vogelaar says. “What’s important to us is to absolutely secure the 12.5% tax rate. We want Ireland to be seen as a low-tax jurisdiction, not a tax haven.”
The country plans to compensate for the loophole closures with a relaxation of tax on intellectual property. “We’re consulting with companies to develop a knowledge development box, not too dissimilar to the UK’s patent box regime,” Mr Vogelaar says, “though it will have to be approved by the OECD and the EU.”
Assets managed under the UK’s patent box scheme are taxed at 10%, half the standard corporate tax rate that will apply in the UK from next year. If a similarly preferential tax rate is levied on assets managed from Ireland, the figure could be around 6%.
Companies would also be eligible for a 25% R&D tax credit, and Mr Vogelaar also said that there are plans to reduce personal tax for some wealthy people working in the sector.
Mr Vogelaar points out that nine of the top 10 pharma companies and 15 of the top 20 medical device firms have sites in Ireland. “Tax is definitely a part of it – but just a part,” he says.
But low taxation is a very significant factor in Ireland’s appeal as a corporate base, and many would argue that it has been good for the country’s economy overall. Bernstein analysts wrote that “the change made by Ireland is reasonable, and implementation is industry-friendly”.
If they are right, other companies could choose to follow Medtronic’s example and stay in the country despite the government’s interest in cracking down on tax avoidance.