Credit Paulo Nunes dos Santos for The New York Times
CORK, Ireland â As lord mayor of this quiet seaside city in southern Ireland, Chris OâLeary seems to have a situation most other local politicians can only dream about.
Blue-chip international companies like Apple, Dell and IBM have all set up shop in and around this city, filling newly built office blocks near the cityâs port and sprawling office parks in the suburbs. The companies set up shop here for the cheap workers, business-friendly lawmakers and â above all â Irelandâs low corporate tax rate. Since the height of the financial crisis in 2011, the regionâs unemployment rate has fallen by more than four percentage points, to 9.9 percent, or roughly the national average, according to government statistics.
âWhat has made us different is how weâve gone about our business,â said Mr. OâLeary, 55, in his city hall office, decorated with a black-and-white photo of President John F. Kennedyâs visit here in 1963 and a copy of the cityâs centuries-old charter.
That way of business is now under attack, though â and the potential benefit of Irelandâs most recent tax strategy for attracting companies is in doubt.
In recent years, other European countries have accused the country of acting like an unfair low-tax haven. The European Commission, for example, is investigating whether Ireland gave Apple a preferential tax deal that broke the regionâs tough state-aid rules. While lawmakers and the company have repeatedly denied wrongdoing, the country is already phasing out the most controversial loopholes.
Ireland has since turned to a new inducement: a low tax rate on revenue generated from patents and other intellectual property held in Ireland. Such an incentive â announced last month to be 6.25 percent, or half of the countryâs corporate tax rate â could be most attractive to patent-heavy industries like technology and pharmaceuticals.
But many tax experts say the benefits will be significantly smaller than many had expected, particularly for global tech giants.
Because of recent changes to global agreements, Ireland must limit what type of intellectual property can be included in these low-tax structures, known locally as a âknowledge development box.â Such restrictions have been demanded by several European countries, particularly Germany, which raised concerns that Ireland and other countries would turn to such structures to unfairly lower corporate tax rates.
Under international law, Ireland and other countries like Britain and potentially the United States can offer the tax breaks only on intellectual property derived from research carried out in their national borders. Much of the research and development for technology companies is done outside Ireland. So revenue from global patents like those linked to Googleâs search algorithm, many of which were developed in the United States, will not be eligible for the reduced tax treatment.
âIt wonât be much help to many international companies,â said Anna Scally, head of the technology, media and telecom practice in Ireland at KPMG, an accounting company that has helped global companies with their Irish tax arrangements.
Some local policy makers are concerned that Irelandâs ability to entice international companies may be hampered by the restrictions on the countryâs latest tax proposals. But others cite Irelandâs flexible (and increasingly multicultural) work force and its close ties to the United States as the reasons global companies, particularly those from the tech industry, will continue to knock on Irelandâs door.
âWeâre closer to Boston than we are to Berlin,â said Mr. OâLeary, Corkâs mayor. âCompanies arenât just coming for the corporate tax rate.â
While lawmakers often play down its importance, Irelandâs 12.5 percent tax rate (versus 35 percent, before deductions, in the United States) has been a mainstay in the countryâs decades-long strategy to attract the worldâs largest companies. With few natural and manufacturing resources, Ireland and its politicians instead have turned to one of the worldâs lowest corporate tax rates as the countryâs primary competitive advantage in the global economy.
The bet has paid off. The country collected $ 4.2 billion in corporation tax in the first nine months of the year, or almost 50 percent more than the period last year, according to government records.
âWe see tax as just part of the overall package that we can offer companies,â Richard Bruton, Irelandâs minister for jobs, enterprise and innovation, said in an interview.
Companies do not appear to be shying away from the country. Representatives from Google, Apple, Microsoft and Facebook declined to comment on Irelandâs new tax mechanism. But just last week, for instance, Apple said it would increase its work force in Cork by 20 percent, to 6,000 employees, by 2017. IBM and Pfizer, the drug maker, also recently announced plans to expand their Irish operations.
Mark Redmond, head of the American Chamber of Commerce Ireland, a lobbying group that represents many of the companies, said there were other incentives, including tax breaks of up to 25 percent on research and development conducted in Ireland, that still were available to international companies.
âThe knowledge development box is not the only show in town,â Mr. Redmond said.
And experts say global pharmaceutical companies, many of which operate research and development facilities in Ireland, could benefit from the countryâs 6.25 percent tax rate on revenue derived from locally held intellectual property more than their counterparts in the tech industry.
âThe low rate eventually could encourage companies to carry out R.&D. here in Ireland,â said Joe Tynan, head of tax at PricewaterhouseCoopers in the accountancy firmâs Dublin office.
Still, for regulators who have tried to limit Irelandâs tax advantage, the restrictions placed on the countryâs knowledge development box represents a victory in the global push to close unfair tax loopholes. Some companies in Ireland had lobbied for a wider definition of what type of intellectual property, especially linked to online advertising and search patents moved from other countries to Ireland, that could be included in the tax mechanism. Those efforts, though, failed.
Pascal Saint-Amans, tax director at the Organization for Economic Cooperation and Development, which has been charged with drafting new standards to avoid multinational tax avoidance, said these low-tax mechanisms had to be linked solely to intellectual property from research and development conducted within a countryâs borders.
Otherwise, Mr. Saint-Amans added, international companies could unfairly move patents between countries in a bid to pay the lowest amount of tax.
âThe greater amount of global intellectual property you include in these mechanisms, the more likely it is that they will be harmful,â he said. âThe goal should be to attract real R.&D. to a country, not to compete just on tax rates.â