The Coherence of Ireland’s Foreign Direct
Investment Policy with Development Aid
Objectives
Michael King and Frank Barry
Institute for International Integration Studies,
Trinity College Dublin
11 November 2009
Outline
1.
2.
3.
4.
Introduction to Policy Coherence
Foreign Direct Investment
Foreign Direct Investment and Aid
Policy Issues
•
•
•
•
Tax Sparing
Support for Investment in Developing
Countries
Bribery and Corruption
Corporation Tax and Related Activities
Policy Coherence for
Development
Role of non-aid policies in overseas
development objectives:
1. Doing no harm
2. Potential synergies and win-win scenarios
•
•
Policies should be “Coordinated,
complementary and non-contradictory”.
Weston and Pierre-Antoine (2003)
PCD - a moving target.
PCD History
• 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.
Foreign Direct
Investment
• 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.
FDI in Irish Aid
Countries
Foreign Direct Investment (% of GDP)
14
12
Ethiopia
Lesotho
10
8
Mozambique
Uganda
6
Tanzania
Vietnam
4
Zambia
2
0
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
% of GDP
Malawi
-2
Year
Aid and FDI
• 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.
• 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.
Tax Sparing
• 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.
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.
Support for Investment in
Developing Countries
• 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.
Bribery &
Corruption
• 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’.
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.
Corporation Tax
• 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.
Recommendations:
1. Whatever changes in EU tax policy are adopted should not worsen the
position of developing countries.
Pricing
Procedures
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.
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.
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
• 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
Recommendations
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.