Tax shifts won’t drive multinationals out of Ireland – Moody’s

Flows of new investment could ‘materially decline’ if changes are unfavourable

Global taxation shifts are unlikely to materially weaken the existing stock of foreign direct investors in Ireland, ratings agency Moody’s said as it affirmed its rating for the country.

While moves to implement an OECD (Organisation for Economic Co-operation and Development) wide digital tax are underway – in addition to discussions surrounding a common corporation tax – Moody’s suggested such discussions are unlikely to trouble the existing crop of investors, given their long-established presence in the Republic.

However, it said flows of new foreign direct investment could materially decline if any changes are unfavourable.

Moody’s, affirming its A2 rating, said the key drivers of its decision was Ireland’s high wealth levels and rapid growth, the country’s return to fiscal surplus and the fact that risk in the banking sector has largely receded.

“The Irish economy is highly competitive, which has enabled the country to attract sizeable foreign investment over the past five years,” the ratings agency said.

“The country’s attractiveness to multinational companies stems from its low corporate tax rate of 12.5 per cent, a highly skilled, English-speaking and flexible labour force, and easy access to European markets.

“Ireland’s status as a preferred destination for US multinational corporations in Europe also stems from the relative proximity with the US and a smaller time difference compared with most other parts of Western Europe.”

Elevated volatility

In spite of those positives, Moody’s said the large presence of multinational corporations also translates into elevated volatility. Additionally, the “very open nature” of the economy exposes the Republic to a plethora of external risks.

Such risks include a no-deal Brexit at the end of the transition period this year, although Moody’s said that is “not likely”.

While much focus is on the presence of multinationals in the Republic, Moody’s said “underlying domestic fundamentals remain strong, too”.

But it warned about Ireland’s high debt levels, the third highest Government debt globally on a per capita basis, only behind Japan and the US. However, it said vulnerability in the country to rising interest rates would be “manageable”.

On politics, Moody’s believes that the next Government will “not embark on a major shift in fiscal policy that would reverse declines in the debt trajectory”, although it conceded the uncertainty surrounding composition of the next Government.

An upgrade to Ireland’s rating would require further progress in eliminating crisis-era imbalances, Moody’s said, “in particular a further material reduction in the public debt ratio, ideally supported by a reduction of revenue concentration risk”.

The country’s rating could just as easily be downgraded if the trend in the debt ratio reverses. And, “although not anticipated, a material adverse impact of Brexit or global corporate tax reform on Ireland’s growth performance in coming years would also be rating negative”.