The Coherence of Ireland’s Foreign Direct Investment Policy with Development Aid

ObjectivesMichael King and Frank Barry

Institute for International Integration Studies,Trinity College Dublin11 November 2009

1. Introduction to Policy Coherence2. Foreign Direct Investment3. Foreign Direct Investment and Aid 4. Policy Issues

• Tax Sparing• Support for Investment in Developing

Countries• Bribery and Corruption• Corporation Tax and Related Activities

Outline

• Policies should be “Coordinated, complementary and non-contradictory”. Weston and Pierre-Antoine (2003)

• PCD - a moving target.

Role of non-aid policies in overseas development objectives: 1. Doing no harm 2. Potential synergies and win-win scenarios

Policy Coherence for Development

• PCD first came to prominence with the Maastricht Treaty (1993)

• It took until 2005 for the EU to operationalise PCD into its work programme:– a biennial PCD reporting process as part of the

European Consensus on Development. Second report published this year.

• White Paper (2006)– “We will work for a coherent approach to development

across all Government Departments.”– Establishment of the IDCD in 2007.

PCD History

• Definition: Cross-border lasting/strategic investment directly in some means of production.

• Since 1920 FDI increasingly focused on developed countries.

• Nevertheless, FDI has been increasing in importance for Irish Aid partner countries.

• ODA is a larger component of GDP for all Irish Aid countries with the exception of Vietnam.

Foreign Direct Investment

Foreign Direct Investment (% of GDP)

-2

0

2

4

6

8

10

12

14

Year

% o

f GD

P

Ethiopia

Lesotho

Malawi

Mozambique

Uganda

Tanzania

Vietnam

Zambia

FDI in Irish Aid Countries

• Evidence of the last 50 years: a dynamic and diversified export base is central to achieving long run sustainable growth and poverty reduction in developing countries. • FDI and its associated technologies is a central ingredient in this strategy.

• Aid can reach the poorest effectively but can also distort incentives.

• Evidence on the macro/micro impact of aid flows is mixed. • FDI can benefit not just those directly employed but also the

poorest in society though general economic growth. • But FDI can also lead to environmental degradation and poor

labour conditions in some cases. Hence, the onus is on home and host-country regulation.

Aid and FDI

• An agreement where developed countries preserve the benefits of tax incentives offered by developing countries to foreign investors.– Tax incentives include generous tax treatment of investment expenditure,

tax holidays and the provision of public goods at below market process.• Tax sparing is

– vulnerable to taxpayer abuse and not necessarily effective in promoting growth

– should only be considered for the poorest countries – and the provisions should be given in respect of projects and investments

aimed at developing the domestic infrastructure of the source state.• Dept of Finance: Not in favour tax sparing with a small number of

exceptions.

Tax Sparing

Recommendations: 1. Ireland should seek to tax sparing arrangements with the least

developed countries. 2. A possible pilot arrangement with an Irish Aid programme country.

• Passive Support: Enterprise Ireland operates a support service for clients interested in accessing opportunities in Africa and elsewhere.

• Active Support?: None yet a case for additional support could be made from a PCD perspective.

• Reason for Irish Reluctance: Irish export credit insurance for beef exports to Iraq in the 1980s but the desirability of more active supports is questioned.

• Soft ODA: On occasion – IDA helped Costa Rica’s establish the highly-rated Costa Rican Investment Promotion Agency, CINDE.

Support for Investment in Developing Countries

• The OECD (2007) critique of Ireland’s performance– Absence of efforts to raise awareness amongst the

business community that bribing foreign public officials is a crime.

– Absence of obligations placed on public officials to report allegations or suspicions of wrongdoing

– Inadequate whistleblower safeguards. – Prosecutions are only brought if part of the crime was

committed in Ireland.

Bribery & Corruption

• According to the Dept. of Finance, Ireland’s deficiencies will be dealt with in:– Criminal Justice Bill on Money Laundering. – Finance Act (s. 41) - expressly denies the tax deductibility of bribes.– Particularly the Prevention of Corruption (Amendment) Bill 2008.

• Prevention of Corruption (Amendment) Bill 2008 should position Ireland at the centre of best practice – no doubt the first draft is a leap in the right direction.

• DETE: ‘actively engaged in creating awareness amongst companies and relevant agencies, of the OECD Convention on combating bribery of foreign officials’.

Bribery & Corruption

Recommendations: 1. An input to the committee stage of the draft Prevention of Corruption

(Amendment) Bill 2008 is an opportunity civil society. 2. Efforts to raise the level of awareness of the adverse effects of foreign

bribery within the public/private sector should be pursued.

• Does Ireland’s low rate of corporation tax encourage mobile multinational corporations to locate in Ireland rather than in some developing countries?– James Hines Jr. argues that corporation taxes will

only be a crucial determining factor when other locational factors.

– Competitors for Ireland’s FDI not likely to be developing countries.

Corporation Tax

Recommendations: 1. Whatever changes in EU tax policy are adopted should not worsen the

position of developing countries.

Transfer Pricing• Transfer pricing is fully legal when conducted within the OECD’s ‘Transfer

Pricing Guidelines for Multinational Enterprises and Tax Administrations’. • Pharma, electronics, printing/publishing, computers and finance are more

likely to be engaged in intra-firm trade with subsidiaries in Europe, Asia and the US rather than Irish Aid partner countries.

Transfer Mispricing• Transfer mispricing occurs when intermediary goods in a firm specific

cross-border supply chain are illegally distorted to minimise the total tax liability of the firm.

• No consensus around the level of worldwide mispricing.

Pricing Procedures

Recommendations: 1. Effective immplementation of the OECD policy guidelines to eliminate

transfer mispricing. 2. A tightening of the OECD policy guidelines in particular on pricing

procedures to narrow the space for transfer pricing.

• In fiscally challenging times, both PCD and aid effectiveness becomes more important.

• An important channel of development

Foreign Direct

Investment

Dynamic and diversified

export base

Economic Growth & Poverty

Reduction

Conclusion

• In fiscally challenging times, both PCD and aid effectiveness becomes more important.

• An important channel of development

Foreign Direct

Investment

Dynamic and diversified

export base

Economic Growth & Poverty

Reduction

Conclusion

1. Explore tax sparing arrangements with Irish Aid countries – a pilot agreement first.

2. Ensure the Prevention of Corruption (Amendment) Bill 2008 is best practice – won’t be a better opportunity for many years.

3. Ensure future changes in EU tax policy do not worsen the position of developing countries.

4. Open to better enforcement of transfer pricing guidelines and perhaps tightening of the pricing procedures.

Finally: Research required on numbers, benefits of policy changes. Improved institutional arrangements for detection and

enforcement of illicit activity and the ongoing evolution of guidelines are required.

Recommendations