Ireland must be careful it does not allow the view to grow that it facilitates dubious tax practices, writes Colm Keena

With foreign multinationals playing such a key role in the Irish economy, Prof Antóin Murphy believes the State needs to be careful not to go too far in its efforts to attract business here with tax-based incentives.

The Trinity College professor says there is a danger Ireland will get a reputation as a tax haven or location that facilitates disreputable tax practices. Already, he points out, there have been complaints in the United States and in other European countries about Ireland's corporation tax regime.

"We are not a brass-plate location but we do need to be careful we don't attract too many of the Cayman Islands-type operators."

He says it would be better to reject new tax devices that could attract new business here but which could also cause damage to Ireland's image.

He points to the number of companies that have in recent times produced huge profits but have few employees. Some of these Irish-registered subsidiaries of foreign multinationals are producing hundreds of millions of euros in profits but can have fewer than 50 or even 20 employees.

He believes such high profit-to-employee ratios show the extent to which such Irish-based operations are tax driven.

Prof Murphy also believes there is inadequate regulation of the growing number of multinational operations locating here for tax reasons.

"The enormous danger is that we would lose our reputation. Say some financial institutions here got into difficulties and this reflected badly on our regulatory regime. We need plenty of good, well-educated people involved in regulation. We need more accountants, lawyers, tax experts."

Ireland's role in Microsoft's international structure is likely to increase in importance, he believes, following the change in the status of the Round Island One and Flat Island companies from limited to unlimited. Unlimited companies do not have to file public accounts.

It could be that Microsoft wants to keep hidden the scale of future developments.

Round Island One, which carries out research and development and controls more than $16 billion (€13 billion) of Microsoft assets, made a profit of €3.52 billion in the year to June 2004 and paid $308 million (€242 million) in Irish corporation tax.

Flat Island Company made a profit of $802.4 million in 2004 on sales of $2 billion (€1.5 billion), but paid no tax. It issues licences for software in Europe, the Middle East and Africa.

Microsoft's largest operation here is Microsoft Ireland Operations Ltd, which employs more than 1,200 people in four operations based in Sandyford, Dublin.

The publication of details of the Round Island and Flat Island operations and their effect on Microsoft's tax liability in the US led to negative comment there about the role being played by Ireland.

It also led to negative comment in Germany, where trade unions said Ireland's structures meant that taxes which should be paid in Germany were instead being diverted to low-tax Ireland.

"I'm delighted with the success of the IFSC and I think Dermot Desmond did a tremendous job in seeing what could be established, and I'm delighted to see so many young people getting jobs at home in Ireland, but we need to be cognisant of the fact that it is tax-driven."

Prof Murphy first became interested in the 1980s in the special role played by multinationals. He applied the term black hole to the phenomenon whereby Ireland's GDP was being affected by the overemphasis by multinationals on the productivity of their Irish operations, so as to locate more profits here and avail of the Ireland's lower tax rates.

In the period since then, he says, the issue has been accentuated by the growth of the Irish Financial Services Centre and the more recent changes to tax on property rights.

This latter development allows companies set up a structure whereby the group's Irish subsidiary charges other subsidiaries around the globe for the right to use or sell its products, thereby locating a huge proportion of the group's profits in low tax Ireland.

Ironically, he believes it was the fact that Ireland never developed a proper manufacturing sector that allowed it to develop the very successful model it has developed. "We've leapt from a donkey-and-cart economy to a post-industrial economy."

Because it had very little dependency on corporation tax receipts, Ireland could afford to lower rates in order to attract foreign investment.

Last year, partly due to a type of amnesty back in the US, Irish subsidiaries sent €26 billion back to the US out of total profits of €30 billion made by Irish-based subsidiaries.

The figures are huge in the context of Ireland's public finances. However, their very scale is what is causing questions to be asked in the jurisdictions that are losing out.

While multinationals employ little more than 15 per cent of the Irish workforce, their impact is much greater, Prof Murphy believes.

"They have been so successful in creating growth in the services sector and this in turn has fed into the construction sector." Buildings, he says, are needed for the legal, financial and accounting firms that are doing so well out of the multinational sector and whose employees require housing.

It is because of the key role played by multinationals in the economy here that he believes Ireland must be careful it does not allow the view to grow that it facilitates dubious tax practices.

While some new EU entrant states have tried to attract multinational investment through low tax rates, he believes Ireland has an advantage in its clear legal and property structures. It also has the advantage of being English-speaking "and Ireland looks like another US state for the multinational executives flying in".

In the great technological revolution of the past 10 to 15 years, Ireland has "acted like a pontoon between Silicon Valley and Europe".

"For the first time ever, Ireland has not missed out on a major technological revolution."

However, Prof Murphy believes the positive role Ireland has carved out for itself is very much tax driven. In time, corporation tax rates will become harmonised across the EU, he says.

"If the EU is to progress, rates will have to be harmonised. You can't have some sides playing the offside rule, and others not."

Ireland could have as little as 10 to 15 years to capitalise on the current advantageous corporation tax structure, he says.