JOINT COMMITTEE ON EUROPEAN AFFAIRS (Sub-Committee on Ireland's Future in the European Union) debate -
Wednesday, 29 Oct 2008

Impact of Referendum Result on Business, the Economy and Irish Business Abroad: Discussion.

Chairman

I welcome the delegation to the sub-committee which was set up to consider Ireland's future in the European Union. We have broken our terms of reference into a number of work modules, one of which concerns understanding the effect of the result of the Lisbon treaty referendum on the national interest. As part of considering the national interest, we are considering a number of areas which include economics and business, the effect the result of the referendum could have on our national prosperity and the effect it might have on our ability to attract in the future the investment that has been so important to the country in the past. That is the reason we invited all the delegates today. They are very welcome and we are grateful to them for attending.

In terms of how we are structuring the business of the committee, we are giving ten minutes to each organisation, Enterprise Ireland and the IDA. We then hand the discussion to the floor, with a lead speaker programme. Each speaker will have ten minutes in which to put questions to the delegates, have them answered and perhaps speak again. Discussion then goes to the floor and anybody who has not spoken will have six minutes to do so. Finally, all the lead speakers will have one further session in which to pose any further questions. This may seem elaborate but it is done in order to allow everybody the opportunity to speak and to allow the delegates engage in dialogue with members of the committee.

Before I hand over I will remind everybody of the rules of parliamentary privilege. I draw the attention of witnesses to the fact that members of the committee have absolute privilege but the same does not apply to witnesses appearing before the committee. I remind my colleagues of the practice that they should not comment upon, criticise or make charges against any person outside the House or an official either by name or in such a way as to make him or her identifiable.

We hope that in their presentations the delegates will talk about the effect the Lisbon referendum had on Ireland's ability to attract investment and generate jobs at home and what the long-term effects may be.

Mr. John Dunne

We are honoured to be invited to present to the committee and we wish it well in its endeavours.

I shall be brief. Mr. Barry O'Leary will give the detail of our position. In broad summary, it will be no surprise to the members to hear me say that the single European market has been a crucial factor in helping the IDA achieve a disproportionate amount of investment in Europe, particularly from the United States. It follows from that, and will equally be no surprise, that we have been keen supporters of the Lisbon treaty because we see anything that increases the efficiency of the Single Market as being good for investment and therefore good for Ireland, economically and socially. We would therefore be concerned about the implications of the "No" vote. We do not see any short-term significant problems emerging but we are fearful of what the outcome might be if the perception were to grow, particularly in the United States, that Ireland was, in some way, weakening its overall position within the European Union.

That is a general position and I ask Mr. O'Leary to provide more detail.

Mr. Barry O’Leary

I thank the committee. Perhaps I will first put mobile foreign direct investment in the Irish economy into perspective. Currently, there are approximately 152,000 people employed in foreign direct investment companies in Ireland of whom 136,000 are full-time permanent employees. When one adds in the indirect jobs involved that probably translates as 300,000. Foreign direct investment companies account for approximately 85% of manufactured exports from Ireland. The companies spend €16 billion in the Irish economy and last year paid about €3 billion in corporation tax, with a payroll of approximately €6.7 billion. It is quite significant from the point of view of impact.

In 2007, the IDA backed 114 investment projects. These were for a combination of existing clients and brand-new companies. Of those, 30 had no operating experience in Ireland. Over €2 billion in capital investment was secured and approximately 60% of the jobs created paid in excess of €40,000 and 9,000 new full-time jobs were created. Approximately 60% of the investments located outside Dublin.

In terms of competition for investment, Ireland competes with both European Union countries and non-European Union countries, depending on the particular type of investment. Typically, if we are looking at a European operation centre or headquarters the competition is more than likely going to be within the European Union or Switzerland, which is a strong player. In some of the other areas the field is much wider. For example, Singapore could be a possible location for capital-intensive projects. Some competitions are clearly based in the European Union and other competitions are outside it.

There is no doubt that one of the great attractions of Ireland, apart from many of the fiscal and operating advantages, is that we are located within the European Union. We market that in particular to companies from the United States and now increasingly to India and China. Therefore, any dilution of Ireland's relationship with the European Union would not be helpful in terms of winning foreign direct investment. As our chairman said, no immediate effect is evident at this stage but there is no doubt that if over time the Lisbon issue does not reach a satisfactory conclusion it could have a negative impact on foreign direct investment. The IDA called for a "Yes" vote and we issued some press releases. We were disappointed with the outcome. The chairman did an "op-ed" piece in The Irish Times. While there is no immediate effect, clearly in time there will be if the Lisbon Agenda issue is not satisfactorily concluded.

Mr. Frank Ryan

I thank the Chairman and members of the sub-committee for the opportunity to attend and present Enterprise Ireland's views. Ireland and its enterprises are dependent on international trade for economic well-being and to ensure our future national and regional prosperity. Ireland's membership of the European Union has been a key factor in the transformation of the economy in the past two decades. In particular, our access to the vast European Union Internal Market — the richest and most sophisticated in the world — has played an important role in growing enterprise in Ireland.

In 1973 when Ireland first joined the then European Economic Community, Irish GDP was 58% of the European average. By end 2007 its GDP was 144%, the second highest in the European Union. Of course our unprecedented economic success has not resulted solely from our membership of the European Union. Our growth was built on the co-operation, collaboration and hard work of Irish businesses, citizens and Government, with the core objective of increased prosperity for all. However, European Union membership helped facilitate this growth through Structural Funds, participation in pan-European programmes, access to a single market and membership of economic and monetary union, EMU.

Current economic conditions are extremely challenging and uncertain. The world economy is facing a prolonged period of at best sluggish growth. European Union membership provides certainty and stability for Irish enterprise and the global investment community and gives additional credibility to our financial markets. Assurance of our position within the European Union is of heightened importance in these uncertain times.

The growth and diversification of Ireland's trade and investment patterns in recent years are closely linked to unrestricted access to approximately 500 million consumers in the European Union market. Irish companies have access to those customers on an equal footing to any other company in the European Union. That has been vital for the growth of the Irish export base. In 1960 approximately four fifths or 80% of Irish exports went to the United Kingdom, now less than one fifth of exports go to the United Kingdom. Between 1973 and 2007 Irish exports of goods to member states, excluding the United Kingdom, jumped from 21% to 45%. In the past ten years Irish companies have doubled their exports of goods into European Union member states, excluding the United Kingdom, to €40 billion. European Union members, excluding the United Kingdom, accounted for approximately 50% of Ireland's exports of services in 2006.

The Single Market is also a platform for building strong businesses that can prosper in the global economy. Companies that cut their teeth competing in a continental market are better equipped for global competition. The benefits of that competition are passed on to Irish consumers. Europe is an important market for Enterprise Ireland client companies, with 54% of their exports going to countries in the EU in 2007. In addition to the existing markets, the eastern European states provide new opportunities for Irish exporters. Ireland's membership of economic and monetary union has made business easier and more cost effective. Exchange rate risk in trade within the eurozone has been eliminated and price transparency has improved, increasing competitive behaviour among Irish exporting countries and facilitating cross-border trade.

As a member of the EU, Ireland has increased access to international markets and power to shape the rules of international trade. The EU acts as a multiplier in our foreign economic policy. It gives us a strong voice on trade issues. We exert more influence collectively than we ever could as an individual country, acting alone. The most important players in the global economic landscape for the foreseeable future are continental powers. The EU gives us that continental capacity and voice for ourselves.

Ireland has contributed enormously to European integration through our six Presidencies of the Union, our active engagement with its institutions and policy formulation. We are not a passive policy taker. We have a strong voice in influencing and shaping policy at the European table. Irish people have reached the top echelons of the EU's political and organisational structures. Our role in shaping policy is illustrated by Enterprise Ireland's ongoing work over a three-year period with nine other European agencies in TAFTI, the European network of innovation agencies. This work helped to shape the new EU state guidelines on aid for young innovative enterprises. In Ireland the majority of these concerns are high technology companies and are spread across Ireland and a range of sectors. Enterprise Ireland has the target of supporting 200 innovative high technology start-ups between 2008-10, with 50% of these located outside Dublin. The funding guidelines Ireland was able to influence as a key member of TAFTI are crucial to supporting these companies of the future. Ireland continues to act as a key influencer in this area and is currently the chair of TAFTI.

The Lisbon Agenda was designed to make Europe more competitive and innovative in a worldwide context. Indigenous Irish SMEs are central to the growth of the economy and will remain a significant contributor to exports, employment and economic growth in the future. It is clear that we are now facing a much sterner challenge than that of recent times and all our efforts and energies must be focused on sustaining and developing our small and medium enterprises. Accordingly, Enterprise Ireland is undertaking a range of key activities supporting the achievements of the commitments made under the Lisbon Agenda. This includes investing in research in emerging technologies which can generate ideas and processes with commercial potential, assisting researchers in commercialising research to get the knowledge out of third level institutions and into companies — in order to realise new sales opportunities and working one to one with client companies, regardless of sector or stage of research and development, to assist them to invest in research and development and use technology to their advantage.

The EU's €50 billion Seventh Framework Programme for Research and Technological Development 2007-13, FP7, is the main instrument for funding research in Europe. FP7 has a budget of €50 billion, complements national funding for research and development and is crucial for ensuring that Irish researchers and enterprises achieve the targets set out in the strategy for science, technology and innovation. Nearly €200 million was secured by Irish researchers under the sixth framework programme. Enterprise Ireland has responsibility for the enhanced national support structure for FP7, headed by a national director and supported by a core unit. Enterprise Ireland is working to achieve a target of €600 million in funding for Ireland over the lifetime of the seventh framework programme.

In 2007 Irish research teams continued to develop their role in ongoing space science missions including, for example, space astronomy and research, with advanced materials for use in micro-gravity environments. Some 16 Irish-based companies and five third level organisations secured contracts from the European Space Agency during the year, with a total value estimated at €7.1 million. The renewed Lisbon Agenda specifically recognised the important contribution SMEs make to economies at regional, national and European levels. Responding to the needs of SMEs has thus been a paramount consideration of the development of economic and enterprise policy in Europe, and collaborative effort has resulted in a small business Act for Europe. This Act sets out measures that each state, including Ireland, can take to support small companies in areas such as public procurement, upskilling and innovative capacity and make it easier to do business across Europe and further afield.

The support Ireland has received from the Structural and Cohesion Funds has been vital to developing the framework conditions essential for the success of Ireland's enterprise centre. Structural and Cohesion Funds have been invested in roads, environmental services, public transport, education and training, upskilling and the promotion of new industry. Ireland deliberately concentrated its Structural Funds on programmes to strengthen our competitiveness, focusing on three main areas, namely, infrastructure, human capital and the productive sectors, including manufacturing, tourism and agriculture. This strategy has worked. The Economist Intelligence Unit recently ranked Ireland as the 11th best country in which to do business.

The European Union has been extremely beneficial to Irish enterprise through a wide range of channels, providing access to markets, giving Ireland a voice on the world stage, increasing participation in cross-border research and development, and maximising Ireland's influence on policy matters. In addition, the Structural Funds we have received have provided the framework conditions from which our companies can grow. I am pleased to have been given an opportunity to outline the positive impact membership of the European Union has had on our enterprise base, the success of our economy and the national and regional well-being of our citizens.

Deputy Timmy Dooley

I thank the delegation for its input into our deliberations and the support it has shown on the Lisbon treaty. I recognise the ongoing work of the IDA and Enterprise Ireland in a difficult environment. During the debate on the Lisbon treaty, some of those campaigning on the "No" side endeavoured to muddy the waters concerning a reference to foreign direct investment in the common commercial policy area of the treaty. The reference clearly related to foreign direct investment by European companies outside the European Union, rather than inward foreign direct investment. I ask our guests to comment.

I ask the delegation to elaborate on the impact of tax harmonisation in terms of attracting companies to Ireland. Unanimity, an issue this forum has discussed with other delegations, clearly applies.

What are the key factors in attracting foreign direct investment to Ireland? From the IDA's perspective, what will be the negative impact if we fail to ratify the Lisbon treaty? Will our guests from Enterprise Ireland indicate whether the 200 companies the organisation supports have expressed concerns as a result of the rejection of the Lisbon treaty? What has been the IDA's feedback since the "No" vote? Has it received queries from the companies it supports or have the companies it is attempting to attract to Ireland raised concerns?

Mr. Ryan referred to FP7, the seventh framework programme. In the event that a two-tier Europe develops and Ireland does not remain a key member of the European Union, will it become more difficult for Ireland to participate in framework programmes? There was a sixth framework programme and there will clearly be an eighth programme. Does Mr. Ryan have any concerns about whether we will be able to continue to secure funding under these programmes? He referred to a funding target of €600 million.

Mr. Barry O’Leary

In terms of the Lisbon treaty debate on foreign direct investment and some of the clouded discussions we heard at the time of the treaty campaign, we do not believe the treaty debate per se will have any effect on flows of FDI, which will continue. The impact of tax harmonisation, particularly with regard to the common consolidated corporation tax base, is not an issue around the Lisbon Agenda per se. It is a separate issue, in respect of which some countries are trying to see whether they can have enhanced co-operation, as distinct from a common corporation tax base. We always need to be vigilant as regards moves on the taxation front. In this instance, it is very important that we do not lose sight of the movements of other countries. A number of countries support Ireland’s position. Most professionals say a system of enhanced co-operation would be extremely difficult to enforce, but we must keep an eye on what is happening in that regard.

We have not received much feedback from companies on any negative impact of our referendum result. On the day after the result, our London office received four telephone calls, all offering congratulations from British companies on the Irish vote. This demonstrates the different view taken by some. However, the referendum result is not given significant attention.

Deputy Timmy Dooley

Will Mr. O'Leary clarify whether the calls were from outsiders or key corporations?

Mr. Barry O’Leary

Four key corporations in the United Kingdom called. That was the only official feedback we received around that time.

Deputy Timmy Dooley

It is important to tease out this issue. Does Mr. O'Leary think they saw a greater competitive advantage for them as a result of our dislocating ourselves to some extent from the central hub of Europe?

Mr. Barry O’Leary

No, I think it reflects some British views towards the European Union.

Deputy Joe Costello

Did they offer to invest in Ireland?

Mr. Barry O’Leary

I do not think so. With regard to a negative impact of the result, as time passes, the majority of multinational corporations are probably of the view that while it has happened, they are sure Ireland will sign up to the Lisbon Agenda. If that does not happen over time, it could negate some of the attractions of Ireland. If everybody else has a strong position on the European Union, but ours is weak, this would be a factor in decision making that might not help us.

Mention was made of the key factors in attracting foreign direct investment. When looking for a location, corporations usually have between ten to 20 factors that they score. Clearly, corporation tax is a vital incentive in attracting foreign direct investment to Ireland, but there are other locations that offer lower corporation tax rates. In some of the countries with which we compete such as Switzerland and Singapore, two very developed economies, companies can negotiate to have ten years tax free. Other economies in some of the newer states in eastern Europe also offer low tax rates.

People skills and education qualifications are other factors that rank highly when choosing a location. Another factor is that we have established clusters of businesses. Take, for example, the west, particularly the Galway area and Athlone, where the medical devices cluster has a strong pull. In Cork the pharmaceutical industry has an established cluster. A track record in successfully implementing major projects is also important. Ireland has a high proportion of the world's leading multinationals. That track record and the fact they continue to this day are important. This year the large multinationals have come around again.

Another important factor in attracting business is the collaborative possibility in research and development. Immigration policy is very important because of the need for a flow of people with skills. Take Google, for example, which services 46 languages and has 1,500 employees here. The ability to bring people with the necessary skills into the country is important. There is a broad selection of factors in the scoring in the selection of a location.

Deputy Timmy Dooley

Is market access included?

Mr. Barry O’Leary

It would be taken as a given. However, we must differentiate in that regard.

On market access, some companies coming to Europe with projects only have European market access in mind, whereas those with more capital intensive projects have global supply plans.

Chairman

I will be handing over to Deputy Timmins in a couple of minutes. Does Mr. Ryan want to respond to any of the points made?

Mr. Frank Ryan

A comment was made on tax harmonisation. The 12.5% tax rate is very important to indigenous companies in that it increases their cash flow and affords them the opportunity to invest further in research and development which over time is the key differentiator. This allows them to innovate in developing new products and services and bring them to the European marketplace.

The single market is as important to us as the air we breathe. We export 80% of everything we produce and need access to markets. Our being part of an EU second tier or an also-ran group of companies could not really be considered as a viable option.

This is a small island off a larger island off the coast of Europe and we need others to work and trade with. This is relevant to the Deputy's question on research and development expenditure in respect of the FP7. We have access to this programme because of our membership of the European Union. I do not know how a two tier European Union could structure these deals. We have access to the programme which we need. Economically, we are in a position to assimilate and participate in such programmes. Ten years ago we were doing nothing under the early framework programmes. We were not able to participate and did not have the competence to do so. We have it today and expect to achieve our target of €600 million in funding for Irish universities and companies under the FP7 programme. We need to be part of it.

Deputy Billy Timmins

I thank the gentlemen for their presentation. Reference was made to corporation tax amounting to €3 billion and to a figure of €6.7 billion in wages. Reference was also made to a figure of €16 billion. To what did this refer?

Mr. Dunne and Mr. O'Leary have stated the ramifications of the "No" vote are not imminent but that they clearly will be in time. What is the timeframe for this? Is it six months or 12 months? Does it put pressure on the Government to ratify the Lisbon treaty? It appears from what the delegates are saying — they can correct me if I am wrong — that if we do not ratify it, we could run into difficulty with foreign direct investment. What was in the Lisbon treaty, if anything, that would have assisted us in securing or increasing foreign direct investment in Ireland? How do we compare with the United Kingdom regarding foreign direct investment?

I am sure the IDA advised the Government on corporation tax. Would there be any merit in increasing or decreasing the rate? If we decreased it, we would take in €3 billion. Would this assist in securing jobs about which the IDA is concerned? Does it have concerns about any major companies? Concern is sometimes expressed to the effect that major companies may pull out. What implications would increasing or decreasing the rate of corporation tax have? Is the balance perfect?

Some 85% of our manufacturing exports are produced by foreign direct investment companies. What percentage of the 85% goes to the 500 million people in Europe?

Prior to and after ratification of the Nice treaty, did the delegates have any discussions with the 12 countries that benefited from the consequent enlargement? Have these countries developed since they joined the European Union in terms of attracting the investment we are seeking?

Mr. Barry O’Leary

In respect of foreign direct investment, the €16 billion was made up of €6.7 billion in payroll, €3 billion in corporation tax and the balance in goods and services purchased in Ireland by the multi-national companies. Regarding a timeframe when this might become problematic, it is very difficult to say but perhaps in a year to 18 months. It is possible that because of the economic turmoil at present the eye might not be as closely on the matter as it might otherwise be.

In respect of statistics on Britain and how we compare with them, I do not have these with me. What members must do is look at the flows of foreign direct investment. The role the IDA plays concerns mobile foreign direct investment. This means, for example, a company such as Intel looking for a facility around the globe and choosing Ireland. That is "mobile" because the firm has a choice. If one takes a company such as Wal-mart or Tesco coming into Ireland to acquire Dunnes Stores, it might pay €10 billion for the acquisition but it does not really increase economic activity. One must differentiate between mobile flows and financial flows. On a per capita basis, we are significantly ahead. In terms of foreign direct investment I suspect we are about six or seven times greater per capita than the United Kingdom would be.

A member mentioned the corporation tax rate and the maximum rate of 12.5%. Clearly we want to see the maximum rate being 12.5%. From the point of view of competitiveness one must always keep in mind what other countries are doing. Therefore, if there is downward pressure on corporation tax rates around the globe, which is the case, we should always take the 12.5% rate as the maximum rate rather than as the minimum. One might have to adjust that.

I do not have the precise statistics concerning the 85% of manufactured goods from the multi-nationals but the United States takes a fair share, particularly in the pharmaceutical industry. I suspect, though it is only an estimate, that approximately 60% would go to the European Union from here.

There was a question about dealing with the 12 other countries. The IDA would not do that and it would be done through political channels.

Deputy Billy Timmins

I wish to have the corporation tax issue clarified. Mr. O'Leary believes that the maximum rate should be 12.5%. Does he think there is a necessity to decrease the rate? He said there is downward pressure on it globally. Is there merit in our Government seeking to decrease that rate?

Mr. Barry O’Leary

Tax is one part of competitiveness. There is always a balance to be made as to where the effective tax rate should be. This should be kept under constant review rather than considered necessarily as something to do today. It is important to recognise that since Ireland introduced a low corporate tax rate we have been getting more corporation tax payments because we were attracting more economic activity into Ireland. Where that balance should be, at 10% or 12.5%, or lower than 10%, is something that is part of the overall competitiveness agenda and should be kept under review.

Deputy Billy Timmins

Does Mr. O'Leary see a time when that could be reduced?

Mr. Barry O’Leary

Everything is possible. What Ireland must always do is look at what the competitive offerings are around the globe and be flexible enough to adapt if that became a critical factor. However, tax is only one of a number of items at which companies look. I mentioned before that if it were tax alone that counted, countries such as Switzerland and Singapore would win fairly easily.

Deputy Joe Costello

I thank the IDA and Enterprise Ireland for those interesting presentations.

At the outset Mr. Dunne said that the single European market was crucial for Ireland. How do both organisations work to market Ireland? Might there be a graph that shows how foreign direct investment has increased in respect of the number of companies involved, year after year, perhaps since we joined the EU? Perhaps Mr. O'Leary does not have that type of information but it would be very interesting to know it. I would also like to know how we rate internationally in terms of attracting foreign direct investment and whether that took a major leap forward when we joined the European Union and the Single Market came on-stream.

Mr. O'Leary stated that 85%, which is colossal, of all Irish manufacturing products came from foreign direct investment. Does that include services? I understand approximately 45% of our international exports are services. Will Mr. O'Leary indicate what type of service industries are backed by foreign direct investment?

A number of speakers referred to the rating for the importance of various factors in attracting foreign direct investment — whether it is the fact that we speak English, provide access to the Single Market, have a young educated workforce or our corporation tax. It was indicated that the latter factor is an important one and that pressure is evident from other countries at present in that respect. One of the presidential candidates in the United States indicated that he is interested in trying to curtail the degree of investment leaving the United States for other countries in order to attract a lower tax rate. I understand the tax rate in the United States is approximately 35%. Will Mr. O'Leary comment on that and the impact of a possible new President of the United States next week with that policy platform? In Mr. O'Leary's experience have companies come to Ireland simply to channel their profits through Ireland rather than to make direct investment in Ireland because of the discrepancy between our low tax rate and theirs?

Mr. Barry O’Leary

In terms of the growth in foreign direct investment, in the past ten years there are various tables one can use. The stock of American manufacturing investment in Ireland has probably increased by approximately 250% in the past ten years. Another factor in foreign direct investment is how much employment it creates relative to the scale of the country. IBM published a figure based on how many jobs were created per 100,000 of population by foreign direct investment companies. The leading country in the world was Singapore, the second was the Czech Republic and the third was Ireland. That is another benchmark.

The figures I mentioned related to manufacturing exports but it is reckoned that by 2010 services exports will exceed manufacturing goods. A number of strong foreign direct investment companies are involved in the services area. Services include clinical trials, supply chain management, software, and a range of services including shared services. Ireland is now the tenth largest economy in terms of exporting services. We see that as being a growing part of the portfolio.

Deputy Costello inquired about whether companies were just setting up in Ireland to channel funds through it. The reality is that the majority of foreign direct investment companies in Ireland have substantial activities, as in hundreds and thousands of employees. Companies that run substantial sums of money through Ireland with very little substance are highly unlikely to be able to use Ireland as a low tax location because in practically all cases there are double taxation agreements and revenue authorities around the world will not allow one to run incredible amounts of funds if one does not have substance. One of the great attractions of Ireland's tax rate is its transparency. It is simple to understand with a maximum rate of 12.5%. That is unlike some of the other jurisdictions where substance is not a requirement.

Mention was made of the criteria to attract foreign direct investment and how they were scored. Again, it often comes down to individual projects. We are aware of one large global pharmaceutical company and each time it has a project it sets up a project team which lists the six, eight or ten most important items to be considered in a location decision. It decides how many percentage points will be given to regulatory track record, the tax side of things, etc. There is, therefore, no hard and fast rule. Often companies will have different priorities.

The changing political environment in the United States was mentioned. One of the candidates has come out as regards how US companies are benefiting in low tax jurisdictions. It is unsustainable for the United States to believe everything can be done there if its companies want to supply global markets. By and large, US multinationals move abroad to supply international markets. They benefit substantially from this trade in exports and it also enhances profit flows back into the United States. Therefore, it is important to recognise that if the United States wants to supply European or Asian markets, they will need to have a presence in these markets.

Deputy Joe Costello

Does than mean Mr. O'Leary would vote for Senator McCain, if he had the chance to do so.

Mr. Barry O’Leary

He gave us a free advertisement during the debate, in which he mentioned an 11% tax rate.

Deputy Joe Costello

On research and development, we are not meeting European targets in terms of our financial input. The European target is 3% but we are at a figure of about 1.56%. Does money coming from Europe include a figure for the part of the research and development target required of this country?

As regards the trade union movement, many foreign companies have a certain antipathy towards trade unions and collective bargaining. Will Mr. O'Leary make a statement on whether this creates difficulties in the workplace?

Mr. Barry O’Leary

On the research and development spend, Deputy Costello mentioned that Ireland was not meeting European targets. The targets, as set out, were relatively ambitious. Ireland is still a relatively young player in research and development. It is really only since 2000 or 2001-02 that any serious funding has gone into it. That the support of the Government recently provided is to continue is very positive. In both IDA and Enterprise Ireland supported companies, as well as in academia, substantial progress is being made on the research agenda, but it takes time to catch up, coming from a low base. It is important, however, that definable progress be seen. We should take comfort from a number of announcements both by Irish-owned and foreign-owned companies this year.

On the question of trade unions, one finds that the majority of companies which have come to Ireland since the early 1990s do not have unions. They have found that the operating conditions in Ireland to be conducive in terms of the flexibility and agility the modern marketplace requires. It is repeating, in effect, the corporate culture in the United States. If they come from a background of non-trade union participation in the United States, they will most likely want to find a location where this will also apply within the European Union.

Senator Pearse Doherty

Cuirim fáilte roimh an toscaireacht. I welcome the delegation. Unfortunately, I was not present for the presentation as I had to attend a division in the Seanad on education cuts.

I want to refocus the discussion on the Lisbon treaty and the European Union, as these are the issues the sub-committee is tasked with examining. What has been or will be the impact of the rejection of the Lisbon treaty on foreign direct investment?

Mr. Barry O’Leary

As I indicated, there will not be an effect on foreign direct investment. However, if a satisfactory outcome to the Lisbon Agenda is not achieved over time, there will be an effect because one of the attractions of Ireland is that it has access to the European Union market. If our relationship with the European Union was diluted, it could have negative implications for us. However, it is impossible to give a timescale.

Senator Pearse Doherty

Mr. O'Leary is surmising that there will be an impact based on a number of assumptions, for example, that our relationship with the European Union may be diluted and that the European Union may move ahead without Ireland. I do not know if he has information to show that foreign direct investment in France increased following the French rejection of the proposed constitution.

On what basis is the argument on foreign direct investment made? A number of those who have come before the sub-committee indicated that foreign direct investment in Ireland will decline as a result of the rejection of the Lisbon treaty. The same speakers also indicated they were not aware of jobs or potential investors being lost or markets being closed. With or without the treaty, Ireland will remains in the European Union and, as such, investors will continue to have access to the European market. Withdrawal from the European Union is not on the agenda. On that basis, how can Mr. O'Leary make assumptions?

Mr. Barry O’Leary

Investors look for surety, whether on our corporation tax rate or commitment to the European Union, both of which are taken as a given. As I stated, in the case of individual companies we know from our history that one of the great attractions of Ireland and one of the reasons we made such great inroads into foreign direct investment from the United States has been our commitment to the European Union. In the past week I have been through Germany twice. All one needs to do is read German newspapers and magazines to see that Ireland is shown in a negative light. The reasons vary and include issues around the Lisbon treaty. This is a factual case of what is appearing in print around Europe.

The United States is not the only country from which we attract foreign direct investment. Over time the Germans have been the second or third most important investors. If the perception in Germany is that Ireland is unfriendly towards the European Union — that is the perception — it will have an effect on foreign direct investment.

Senator Pearse Doherty

I questioned Mr. Paul Rellis, president of the American Chamber of Commerce Ireland, when he referred to the perception that many investors were questioning whether Ireland wanted to be in the European Union. He stated that if the Taoiseach were to clarify what we knew from a recent opinion poll, namely, that there was no question of Ireland withdrawing from the European Union and that we wanted to remain at the heart of the European Union, such a statement would be beneficial to the companies with which he dealt. Would such a clarification be helpful to the potential investors with which the IDA deals?

Mr. Barry O’Leary

While clarification is fine, surety is required and it depends on a number of factors in the Lisbon Agenda. Statements of intent are very good but multinationals like surety.

Senator Pearse Doherty

I congratulate the delegation on the successful trade mission to China. In terms of hard evidence, was the rejection of the Lisbon treaty raised by any potential investors from China?

Mr. Barry O’Leary

I can speak about the part of the mission in which the IDA was predominately involved, namely, financial services. Of particular importance to financial services is what is known as the "passporting" of financial products within the European Union. In other words, if a company operates under the Irish regulator for a life assurance product, our passport can secure it entry into other countries. The issue of the European Union passport was definitely raised in terms of Ireland's attractiveness for financial services.

Senator Pearse Doherty

In that case, the IDA was able to clarify that the rejection of the Lisbon treaty did not alter the position in any shape or form.

Mr. Barry O’Leary

In terms of the current relationship, that is correct.

Senator Pearse Doherty

May I ask something else? Mr. O'Leary spoke a lot about corporation tax and our ability to set it in order to deal with whatever economic or global situation arises. If the treaty contained measures that allowed the way corporation tax is agreed to be changed from a unanimous vote to a qualified majority vote, basically removing our right to a referendum on corporation tax, or if this was contained in any subsequent treaty, would this alarm him or potential investors? He mentioned that investors want certainty. Currently, Ireland has a double lock in terms of corporation tax. We have the requirement of a unanimous decision or a veto on it, but we can also call for a referendum. If any new powers are to be given to the European Union to change the mechanism of how to vote on corporation tax, that would have to go to the people. Therefore, we have a double lock. If one of those locks was broken or relinquished, would that be a matter of concern for the IDA or potential investors in terms of our surety of being able to set our corporation tax?

Mr. Barry O’Leary

The veto we have currently is very important. My understanding is that any change in the tax system in Europe would be outside the Lisbon Agenda, but could potentially be by way of enhanced co-operation. However, enhanced co-operation would lead to differentiating tax systems within Europe. Some of the discussions have been on an opt-in or opt-out basis. Our advice is that enhanced co-operation would be extremely impractical to introduce and that a number of European countries are against it.

Senator Pearse Doherty

The committee has sought legal opinion on this matter, because it is an issue that has been disputed. The legal opinion that has come back from counsel is that Article 48 of the Lisbon treaty allows for a mechanism for both non-direct taxation, including corporation tax, to be changed from unanimity to QMV without recourse to an Irish referendum. That is legal opinion and that is what Sinn Féin argued throughout the referendum campaign. That creates an unsure situation for potential investors. They are unsure that Ireland could set its own corporation tax into the future. However, we still have a veto on that.

I wish to draw delegates' attention to something a previous speaker said to the committee, a member of the Dutch European affairs committee. When I asked why it was important to hand over our veto and switch to QMV, he gave a good example of why Europe sees the need to do this, namely, the British rebate system. Denmark cannot tolerate the fact that it subsidises Britain in terms of that system. However, if the British Prime Minister forfeited that rebate, he would be crucified in his country. One way to overcome that is to change the terms from unanimity to QMV. In that way the British Prime Minister would be able to give it up through the back door. The fear among the Irish public is that this mechanism in the Lisbon treaty will allow corporation tax be changed from a veto position to a qualified majority position.

Mr. Barry O’Leary

I am not competent to answer the legal interpretation. Any time we have looked at the issue or sought the Attorney General's advice through the Department of Enterprise, Trade and Employment, the response has been that the veto is firm in terms of Ireland deciding its corporation tax rate.

Senator Pearse Doherty

I agree the veto is firm, but Article 48 allows for the veto to be removed with the consent of the Irish Government. It allows it to be moved to qualified majority voting, which removes the double lock we have on corporation tax. For example, Mr. Paul Rellis, who was before the committee previously, argued that no such article or provision existed within the treaty. However, he stated that if such a provision was included in a future treaty, it would be a matter of concern for investors. If such a provision was included in a future treaty, would that be a concern for investors with whom the IDA deals?

Mr. Barry O’Leary

Does the Senator mean if Ireland was to lose its veto?

Senator Pearse Doherty

Yes, if Ireland lost its ability to use its veto.

Mr. Barry O’Leary

Of course it would. The veto is very important for maintaining our tax attractiveness.

Chairman

Thank you, Senator. Do the delegates imagine that any Irish Government, with their advice, would ever want to give up its veto in respect of the setting of the corporation tax rate given the role it has had in attracting foreign direct investment? Second, if Ireland and perhaps one other country did not ratify the Lisbon treaty, what would be the long-term effect of this decision on our ability to attract inward investment and develop employment indigenously?

Mr. Barry O’Leary

On the first question, I do not foresee circumstances in which the Government would give up its veto in respect of corporation tax. It has proven to be very effective in attracting foreign direct investment to Ireland and I do not foresee any Government negating its position on it.

If Ireland did not ratify the treaty, countries in Europe would be less likely to co-operate fully with it. This would be a natural tendency given that Ireland would be regarded as having received great benefits from membership of the Union. The tenet of comments I read in newspapers in Germany last week was such that I would not be encouraged by our ability to obtain the support of the Germans if we wanted to carry out certain initiatives. Failure to ratify the treaty could have negative implications.

Chairman

I thank Mr. O'Leary.

Deputy Beverley Flynn

I welcome the two delegations and thank them for their presentations. They mentioned they were very supportive of a "Yes" vote in the referendum on the Lisbon treaty and that they campaigned therefor. One of the main reasons for their stance was the veto in respect of corporation tax. Did the IDA and Enterprise Ireland take legal advice on what the treaty stated on corporation tax before endorsing it? Were there other features in the Lisbon treaty that the delegates felt were pro-business, thereby encouraging them to campaign for a "Yes" vote?

My second question is related to the fact that approximately 300,000 people are either directly or indirectly employed by multinationals in Ireland. They comprise a significant percentage of the voting public. What was done proactively by either of the delegates' organisations to target them with a view to promoting a "Yes" vote given the delegates' opinion on the significant impact of ratification on the future of those employees' jobs? While we have rejected the Lisbon treaty and while many say renegotiation is not possible, are there any clarifications or improvements the delegates believe could be made, even at this stage, to improve the package and enable us to ratify it in the future, as desired? How might these improvements be sold to the Irish people? If, through enhanced co-operation, a common tax rate were arrived at by a number of member states, how would it affect us in Ireland?

Mr. Barry O’Leary

Regarding the veto on corporation tax, the advice the IDA received was from the Department of Enterprise, Trade and Employment, which in turn sought an interpretation from the Attorney General. This is always the process we use.

We did not target the 300,000 people employed directly or indirectly by multinationals proactively but did so in radio interviews and through a press release we issued in an "op-ed" piece in The Irish Times, bearing in mind the influence of the normal political party system in this process.

On the question on clarifications and improvements, somewhere along the line the message did not appear to come across in a clear and precise way. It needs to be much clearer in the future. It is very hard to say what might be the outcome of enhanced co-operation on corporation tax and the impact of this on Ireland. It depends on the number of countries that will undertake this. Currently it is believed that if enhanced co-operation were to be introduced, seven or eight European countries might do so but in order to get that scheme off the ground co-operation outside that group is needed.

Enhanced co-operation would only fragment the tax structures that exist around Europe today. An example is that of the Dutch, who have a headline tax rate fixed in the high 20s. People use various mechanisms in the Netherlands to come out with, at times, effective tax rates as low as 5% or 6%. It will probably make the tax system more complicated when some countries are in the system and some are outside it. Even in the countries which opt for enhanced co-operation, companies will have voluntary participation. We feel that it is so complex it will not be put into operation.

Deputy Beverley Flynn

We have a copy of the legal advice received in respect of Article 48. I will pass it to the witnesses and perhaps we might have a written statement on what improvements there might be as a result of this advice on how to deal with the issue in the future. Concerning the poll that was taken, many people said that corporation tax was a fundamental issue in their decision to vote "No".

Mr. Frank Ryan

The clarification that might help the Deputy concerns just how much of our country and its well-being depends on exports and where those exports end up. We require people to buy those products and services. Much of the debate has been on how we feel about Europe and now perhaps a reflection on how Europe feels about us is in order. Those countries are our customers.

Trade is a complex area. Our current position in Europe has allowed us to position Ireland in international markets as a country that hangs out with the most advanced countries in the world. On the Enterprise Ireland side of things, on our trade missions and through our 31 overseas offices, the products and services that we help companies market come from companies that supply sophisticated products and services. Ireland is the home for such services. If one wishes to buy that type of service one looks at the United Kingdom, France, Germany and Ireland. We want to see Ireland maintained in that core group of top-class suppliers of products and services. Clarification of the extent of the trade and where Ireland's competitive position is now would be helpful.

Mr. Colm Burke, MEP

I apologise for being late but was unfortunately delayed at another meeting.

I am in Brussels every week and last week we were in Strasbourg. Over a period of four days I was at 20 meetings and the issue of Ireland and the Lisbon treaty came up during at least ten of those meetings. The questions asked included when there might be a solution and what kind of proposals would come from Ireland. The issue comes up to that extent in Brussels. I agree with the point made about the coverage it is receiving in the European newspapers.

I know there is an economic downturn globally at present and this means the issue of getting new investment and new companies into a country, or even getting expansion of existing companies, is far more competitive. Is there any evidence that the Lisbon treaty issue is being used against us, for instance in a situation where a company proposes to bring new investment or create new jobs within the EU, where there may be a choice of a number of countries of which Ireland is one? Is the issue being used against us by other countries?

The other point that particularly concerns me is the pharmaceutical area. Nine of the top ten companies in the world are based in the Cork area and there has been fantastic investment there in the past 12 months alone, because of the assistance provided by the delegates' organisations. Pfizer is investing approximately €200 million and Eli Lilly is investing €400 million. Has Mr. O'Leary seen any evidence of projects being put on hold where it had been intended to make further developments? What time period do we have in which to resolve the issues and when we resolve the issues what kind of reassurance do we need to give that we are extremely committed to Europe? A question mark has been placed over our commitment, especially by some European countries. Reference was made earlier to Germany. We are saying we have a commitment and the vast majority of Irish people are committed to Europe but even if we resolve the issues, that may not be the perception abroad. What is Mr. O'Leary's view?

Mr. Barry O’Leary

I will take the last point on the pharmaceutical industry first. We have not seen any projects being put on hold but the pharmaceutical area is quite different to other businesses because it is a very capital intensive one. It is usually a case of a €1.5 million investment per employee. Such companies act as global supply plants because they are so expensive. If one is spending €200 million or €1 billion one is not going to duplicate those plants around the world. Cork will continue to attract investment in that area.

We have not seen evidence yet of other countries saying companies should not be going to Ireland because we did not agree to the Lisbon treaty. However, we would not see the interactions. That type of comment might be made by somebody from a European country in discussion with an American multinational. They might say across the table that one of the factors to be considered is Ireland's position on Europe but we have no evidence of that as such. If one reads the European press there is a perception that Ireland is not held in a good light.

Mr. Colm Burke, MEP

The only reason I raised the issue of pharmaceutical companies is because of a conversation I had yesterday with someone who had no difficulty getting contract work in Ireland for the past ten years but who recently could only get work in Qatar. I am concerned that there appears to be a levelling off of activity in the pharmaceutical area.

Mr. Barry O’Leary

Mr. Burke mentioned that Eli Lilly invested €400 million in Cork and Pfizer invested €200 million. Gilead is building an 80,000 sq. ft. plant in Carrigtwohill at present. Alcon the Swiss company announced 190 jobs recently in Cork in the life sciences area. That indicates there is still a fair bit of business. The traditional pharmaceutical industry is facing a number of challenges in terms of the lack of new drugs coming through the pipeline but Cork is getting some biopharmaceutical companies, which is a newer technology. Apart from Eli Lilly and Pfizer, Centocorp has invested approximately €300 million.

Chairman

I apologise to Deputy McGrath for not calling him earlier.

Deputy Michael McGrath

No problem. I join my colleagues in welcoming the delegation from the IDA and Enterprise Ireland. I thank them for their presentations and contributions to date. I very much admire the work of both organisations because they are working at the coalface to try to attract investment into Ireland. The critical role of foreign direct investment has been highlighted time and again but people forget that indigenous Irish companies have choices also about where they invest their money. They can invest it in Ireland, elsewhere in the European Union or outside the European Union. The role of Irish companies is critical to the debate also and that should not be forgotten.

Do Mr. O'Leary and Mr. Ryan agree that given the current competitive climate in terms of attracting investment, be it from foreign direct investment or indigenous industry, very often the decisions companies have to make in terms of where they locate their investments are so marginal that the critical issue of uncertainty may well be the factor that will tip the scales against Ireland.

That is my grave concern as regards the position Ireland is now in as a country in the European Union, having already rejected the Lisbon reform treaty. Mr. Ryan made the point very well earlier when he said that Ireland being in the second tier of the EU was simply not a viable option from a business perspective. There is also the fear of the unknown, because by excluding ourselves from the reform process, the other member states may well wish to adopt further integration measures, from which Ireland will be excluded, by virtue of its rejection of Lisbon. That is an issue which perhaps Mr. Ryan and Mr. O'Leary might comment on, namely, that fear of the unknown and degree of uncertainty which might give rise to difficulty for Ireland.

I want to nail the issue about corporation tax because it was a key plank of the "No" side in the Lisbon referendum. We have seen an attempt here again today to deliberately muddy the waters, particularly by Sinn Féin. The position is quite clear. Setting the corporate taxation rate is a matter for the Irish Government, which could increase it tomorrow, should it choose, without recourse to the Irish people. The suggestion of a double lock or that in some way, by virtue of a technicality, we are relinquishing our right to veto changes in the corporate taxes regime in Europe, is completely nonsensical, and that issue should be nailed. It is a matter of our sovereignty and the Government will continue to set the corporate tax rate in this country, independent of anything that emerges from Europe. We should be quite clear on that.

I should like to ask Mr. O'Leary, in particular, about the corporate view in the United States. What is the US corporate view as regards the integration of the European Union? Does he believe the US corporate view might be one of some suspicion if Ireland was to exclude itself and remain outside the heart of Europe? Would there be a fear as regards any loss of political stability on the part of Ireland? One example of that could be a question mark over the ability of Ireland, as an economy, to respond to the global financial crisis. I know the US Administration and institutions were watching what was happening in Europe just as closely as we were following what was happening in the United States. That is, indeed, a dramatic change from times past. Does he not agree with me that by virtue of our full membership of the EU, the protection afforded us through membership of the eurozone and the ECB is a matter that US corporations regard as being important in terms of their investment decisions? That protection is not something we would enjoy, were we not at the heart of Europe.

Mr. Frank Ryan

I shall be brief because many of the questions pertain to Mr. O'Leary. Deputy McGrath is quite right that Irish companies have the freedom to invest anywhere they want in the world. The international investment scenario is a two-way street. It is not well known, but US companies in Ireland employ around 90,000 people. Irish companies in the United States today employ some 75,000. That is normally not mentioned or even known. It is not just a one-way flow from the United States. Definitely, the US has benefited substantially from Irish investment there.

The muddying of the waters occurs as regards a two-tier Europe, say, in relation to the framework programme, on which we have the €600 million target. One must consider the position of a committee that might be deciding on those particular investments. In the back of its mind might be a consideration as to whether Ireland was in, in terms of Europe. It is not just how we see matters, but rather how others perceive things as regards decisions they may be making.

On the global financial crisis, certainly in terms of indigenous industry the support of the European Central Bank has been of fundamental importance. It has been fundamentally important that we are inside the eurozone. I should hate to think how we might have fared in the last few months had we been outside the eurozone.

Mr. Barry O’Leary

Mr. Ryan has covered most of the issues. In the current climate of financial crisis, our membership of the European Union is incredibly important. It was noted that investment calls are sometimes very close. It is correct that such calls are marginal and there is a very thin line between Ireland winning and losing, which is also the case with other countries. The more attractions Ireland can offer, the better. For this reason, Ireland's commitment to Europe is incredibly important in continuing to win foreign direct investment.

Deputy Michael McGrath

When marginal calls have to be made and different countries are competing for investment, will Ireland's rejection of the Lisbon treaty be used by other countries to show we are not at the heart of Europe and are unwilling to take difficult decisions and move forward with the reform agenda that would benefit business and the corporate sector? Based on the assumption that European integration proceeds without Ireland and we remain in the second tier, does Mr. O'Leary believe other countries would use this argument when bartering or promoting their position?

Mr. Barry O’Leary

My personal view is that most countries and companies believe Ireland will sign up to the Lisbon Agenda.

Chairman

There is a difference between the Lisbon Agenda and the Lisbon treaty. The former is the broad strategy to deliver economic prosperity to the European Union while the latter is the issue about which the sub-committee is concerned. If there was a perception among multinational companies and local employers that the Lisbon treaty, as opposed to the Lisbon Agenda, would not be ratified, would it affect the type of marginal calls we need in our favour for investment and employment?

Mr. Barry O’Leary

I should have referred to the Lisbon treaty rather than Lisbon Agenda. Over time, such a perception would have an effect.

Deputy Timmy Dooley

We need further clarification on the issue of corporation tax. I concur with Deputy Michael McGrath's comments in this regard. It is open to the Irish Government to raise or reduce taxes at any stage without reference to the people by way of referendum. If there is a misconception that Article 48 would dilute the Irish position, more clarity is required. I do not believe the IDA or Enterprise Ireland are in a position to provide such clarity, other than identifying that the low corporate tax is a vital element of their work and that it is highly unlikely that any Administration of whatever hue would want to change the corporate tax rate given its importance. Mr. O'Leary also indicated that the corporate tax rate is not the only key element and noted that other countries have lower corporation tax rates than Ireland. Nevertheless, it is a vital part of the package.

Further clarification is needed on this matter. Perhaps the sub-committee should invite officials from the Department of Finance and legal experts to come before it. They could provide a context and legal advice on the overall setting of taxation policy and the general motivation of a Government in dealing with the issue.

I thank our guests who provided truthful replies and did not seek to instil fear. Mr. O'Leary expressed his hope and belief that the Lisbon treaty will be passed at some point. I may not be as confident as he is in that regard, which is the reason we seek to understand what are the pitfalls if the treaty is not ratified or the current Administration fails to put forward a proposal which proves to be acceptable. The sub-committee must take account of the impact should we reach a point when we are unable to ratify the treaty. The delegation is not in a position to take this point much further, other than to express a belief that the treaty will be passed. Mr. Ryan has stated the facts clearly with regard to indigenous companies and the difficulties they face in terms of perception.

Chairman

We have more time left so I will allow those signalling they wish to make a comment to do so.

Mr. Colm Burke, MEP

I am aware that the IDA and Enterprise Ireland always sell Ireland in a positive way. I had the privilege of being on one trip to China, in the capacity of Lord Mayor of Cork, with members of those organisations. As politicians, particularly those of us in Brussels or Strasbourg, we need to continue to sell the positive message from Ireland. It is important that it is not all doom and gloom. We will come to a resolution about how Europe proceeds, together. That may not come today or tomorrow, but we will find a resolution in the not too distant future. We must ensure we have maximum consultation on the matter. This committee is doing that. We will come to a solution, but it is important we are positive in how we approach it.

Deputy Beverley Flynn

I want to clarify a point with regard to selling the treaty. Apart from the corporation tax issue and the general idea of keeping Ireland at the centre of Europe, was there anything in the treaty that encouraged the IDA and Enterprise Ireland to support it? Was there any specific pro-business aspect to it or do they just support the general idea of keeping Ireland central to Europe?

Mr. Barry O’Leary

From a foreign direct investment point of view, the answer is "Yes", because of the commitment to Europe. When we started selling Ireland as a location for foreign direct investment, the number one factor was European Union access. This was around the time of the Single Market, etc. That built up Ireland's reputation of being committed Europeans and a successful economy. There are many aspects of the Lisbon treaty that are important, but to cut to the business end, commitment and surety on tax are important.

Chairman

I thank all of our guests for their presentation. One of the main jobs of this sub-committee is to analyse the effect the decision on the Lisbon treaty has had on our national interest and consider the effect it may have on our future. The testimony given by witnesses will be helpful to us in doing that work.

In response to a point made by Deputy Dooley, although we got legal advice with regard to Article 48, the issue was still discussed at length today. We will get back to him on that point. Perhaps we will get a note that sets out the context in which we got the advice. It is, undoubtedly, a crucial point.

The sub-committee adjourned at 5 p.m until 9.30 a.m on Thursday, 30 October 2008.