|The International Financial Services Centre (IFSC), Dublin.
Irish Economy 2011: It has been proposed that part of a claimed huge cache of
$800bn held on deposit by US multinationals in Dublin, could be used to fund
investments in new Irish businesses. Is this based on fact or leprechaunic fantasy?
Irish economist David McWilliams has been dreaming of leprechauns in his
quest for painless panaceas for his fans. In an article,
If I was Taoiseach… what I would do to save Ireland, published in The
Irish Independent on Jan 08,2011 and on his own website, McWilliams outlines 10 steps to save the country and
besides the absence of his proposal to exit the euro, the menu has the knack of
appealing to protected wealthy medical consultants and lawyers at one end of the
spectrum and to the desperate unemployed at the opposite end. The word 'reform'
does not appear once in the 10-step manifesto of more than 3,000 words.
Taoiseach Bertie Ahern's Fianna Fáil won the 2007 General Election with
a manifesto titled 'Next Steps,' which may prove that there is a market for step
McWilliams' Step 10 says "in the IFSC (Dublin's International Financial
Services Centre) there is over $800bn of US multinational money on deposit. This
cash is there as a result of the amazing success of the multinationals
repatriating their profits to Ireland to avail of the 12% corporate tax rate.
But if they want to redistribute these profits to their shareholders they have
to pay American corporation tax of 39%. To avoid this, they just keep all this
cash on deposit at the IFSC."
The Irish corporate tax rate is 12.5% and the US federal corporate tax rate
is 35%. However, the actual tax rates termed the 'effective' rates are lower
because of various allowances. In the US, the rate is about 22%.
Whether it's Moses in the desert awaiting a delivery of manna from heaven,
the cargo-cultists on the Madang Coast of modern day Papua New Guinea awaiting
the white man's gifts or Filipinos who have been searching since 1945 for
treasures claimed to have been hidden by General Tomoyuki Yamashita, ('The Tiger
of Malaya,' who had taken the surrender of British forces in Singapore in 1942
from General Arthur Percival) in the Philippines during the war years, desperate
people are a receptive audience for hope.
However, in the present case, there is no $800bn cash hoard in Dublin.
In December, the Federal Reserve reported that US non-financial companies had
$1.93trn in cash and other liquid assets at the end of September 2010, up from
$1.8trn at the end of June. Cash accounted for 7.4% of the companies' total
assets - - the highest share since 1959.
The US has about 7,000 public companies and of relevance in the Irish context
are the big companies in the Standard & Poor's 500, specifically in the health
care and information technology sectors. Cash holdings of the likes of
ExxonMobil are not of interest.Of the S&P 500's total $902bn in cash and short-term securities,
S&P analyst Howard Silverblatt said IT accounted for 39% at $352bn and health care made up 21% at
Microsoft had $43.2bn in cash and short-term securities; Cisco Systems
$38.9bn; Google $33.4bn and Pfizer $23.2bn.
The jump in cash holdings reflect spending cuts and restructurings during the
recession but also a response to low interest rates. The December
Fed flow of
funds statement (pdf) shows US corporate debt at a record high of $7.3trn. Cash as a %
of this debt was at 26.4%.
Firms need to keep more cash in the kitty if they have large debts because
these are raised and repaid in lumps, Andrew Smithers of Smithers & Co, a
research firm, told The Economist earlier last year. America’s non-bank
companies had held liquid assets worth around 23% of debt in the first quarter -
- a bit higher than the average of the past 40 years but still below the levels
Last year, JP Morgan Research estimated that 30-40% of the cash holding of
non-financial US S&P 500 companies was held overseas.
So 40% of the cash held overseas by IT and health care companies in
September 2010 was valued at $218bn but there is no reason to expect that it was
all held in Dublin.
This amount is spread across many countries and even though profits are
skewed towards semi-tax and full tax havens, the cash can be deposited anywhere
outside the US and the main use of such funds is to finance investments
US companies are taxed on their worldwide income if it is repatriated to the
US, the rate of 35% would apply with an offset for tax paid overseas. However,
as tax rates overseas are generally lower, there is an incentive to keep profits
The White House and the Republicans in Congress have signalled an interest in
reforming the system.
A 2004 tax amnesty allowed multinationals to return profits to the US at a
tax rate of 5.25%. Companies brought home $362bn, with $312bn qualifying for the
relief, according to the Internal Revenue Service. However, it has been claimed
that the funds were mainly used for share buybacks suggesting that companies
expanding overseas kept their funds there.
reports that companies are using mechanisms already to transfer cash back to
the United States tax free and it says Pfizer brought back $30bn to provide the
cash component of the purchase of Wyeth.
reported last October on how Google diverts profits to Ireland and then
McWilliams says that $80bn, 10% of the mythical cash hoard of $800bn,
"could be used to set up companies using the US money combined with Irish labour
and our tax system, as well as all the networks the multinationals already have
Together, we could build these companies, for let’s say 10 years, and then when
the companies (in effect subsidiaries) are strong enough, we would float them on
the Irish stock exchange and the US companies could repatriate the money
tax-free in dividends to their shareholders. This might prove to be a very
interesting initiative for them and for us and one where years of doing business
together pays off."
There is no crock of gold under an Irish rainbow and even if there was, it
would be difficult to envisage US companies risking the wrath of the US Congress
at a time of
long-term high unemployment, by investing directly on a large-scale, in Irish job
projects. Besides, these companies do not get involved in big-scale joint
Chip giant Intel does provide venture capital for
start-ups and its company Intel Capital has invested more than $9.5bn in over
1,050 companies in 47 countries since 1991. In that timeframe, 175 portfolio
companies have gone public on various exchanges around the world and 241 were
acquired or participated in a merger. In 2009, Intel Capital invested $327m in 107 investments with approximately 50% of funds invested outside the United States and Canada.
Intel Capital has participated in the 2009 round of funding of $10m for Limerick-based Powervation, which produces systems for improving the energy efficiency of computing gear. The VC unit has also provided funding to Dublin-based AdaptiveMobile Security, a provider of security solutions for mobile telephony.
In June 2010, the value of Intel Capital's portfolio
of investments was over $2bn.
Damien Callaghan of Intel Capital, is the chair
of an advisory board for the Innovation Fund Ireland while Jim O'Hara, former
Intel Ireland general manager, is chair of an Irish Government advisory
committee on the so-called 'smart economy' project.
There are always opportunities but Finfacts has argued that the 'smart economy'
strategy is doomed to fail. In looking to the future, it of course helps by
going to the trouble to first check the facts.
Irish Economy 2011: Rising Irish exports, the 'smart economy' and a jobless
Innovation: Ireland's 'smart economy' strategy, universities and free-lunch