Ireland’s economy is in a state of chaos thanks to a taxation system that is both inefficient and unfair.  About the only group not complaining are the many American companies who consider the Emerald Isle their home away from home.

In 2003,  Irish political leaders had a brilliant idea: set the corporate tax rate ridiculously low (12.5 percent) and foreigners — particularly Americans — would flock to their country in droves.  They were right.  Almost 1,000 foreign companies have their European headquarters in Ireland.   Eight of the top 10 U.S. technology companies including Google Inc. (NASDAQ: GOOG) Apple Inc. (NASDAQ:  AAPL) and Facebook have operations there as do eight of the top ten pharmaceutical firms including Pfizer Inc. (NYSE: PFE), 15 of the top twenty-five medical device companies such as Medtronic Inc (NYSE: MDT), and Citigroup Inc. (NYSE: C) and other major financial institutions. Their importance cannot be overestimated to the country known at one time as the Celtic Tiger cannot be overestimated.

American employ more than 85,000 workers in Ireland and their overall impact is greater when those affected indirectly are considered. Their success has not gone unnoticed particularly as Ireland wrestles with a gargantuan deficit and is in danger of default on its sovereign debt. Some German members of the European Parliament are demanding that Ireland double its corporate tax rate as a condition for receiving a bailout Experts in Ireland say the government would never agree to such a condition.

“Ireland is extremely unlikely to touch the corporate tax rate,” says Philip Lane, a professor of international economics at Trinity College in Ireland, in an email to 24/7 Wall St. “The low rate is the cornerstone of the export sector, since so many multinationals are attracted here by the low rate.  If Ireland raised the rate,  there is a risk that revenue would fall and, more generally, that the economy would shrink even more.”

Ireland is a key stop on the magical mystery tour that U.S. companies send their profits to avoid the clutches of Uncle Sam known as transfer pricing.  It’s easy to see why: U.S. corporate income tax rates are 35 percent, one of the highest in the world, which is why some experts have argued they should be lowered to bolster the economy.  The practice, which Bloomberg News says “combines tax planning and alchemy,” enables multinationals to save some $60 billion annually. A recent Bloomberg story explained how this works.

Forrest Laboratories Inc.  (NYSE: FRX) sells the anti-depressant Lexapro only in the U.S.  for about $99 a bottle.   Workers in Dublin test the medicine and then Forest Laboratories Ireland Ltd.,  its Irish unit sells Lexapro to its U.S. parent.  The process, which is perfectly legal, shifts the profits from Lexapro to Ireland.  Forrest Laboratories reaps a huge benefit.

“Overall, Forest’s Irish operations, which employ about 5 percent of its 5,200 workers, reported $2.5 billion in sales during fiscal 2009, the most recent year for which figures are available,: according to Bloomberg News. “That equals about 70 percent of the parent company’s $3.6 billion in net sales.”

The majority of foreign investments in Ireland comes from U.S.   companies eager for both the tax benefits and access to an educated English-speaking workforce.  Ireland’s economic woes do not seem to be spooking U.S. companies to a large degree.  Foreign direct investment fell 4 percent last year in Ireland, better than the 40 percent drop-off seen in the rest of the world, according to IDA Ireland, a government agency responsible for attracting business investment.  Irish exports fell by less than 3 percent, far better than the 20 percent decline seen globally.   Indeed,  IDA Ireland says service exports grew 2 percent last year.

“Corporations are locating here because of the talent, because of the tax, the technology capability, the strong track record and the demographics of the population in terms of future growth,” says IDA Ireland CEO Barry O’Leary in a statement to 24/7 Wall St.  ” Also it is important to emphasise Ireland is now a more competitive environment for Business costs in terms of energy, private rents, office rents, services, construction and labour. …The downward trend of a low corporate tax, among emerging EU countries continues, yet despite this, Ireland continues to win investments from high calibre companies due the combination of a favourable tax rate mixed with a highly educated, young, workforce necessary to drive innovation and growth”.”

Pressure is beginning to mount on the Irish government to raise its corporate tax.   EU EU commissioner for economic and monetary Affairs, Olli Rehn is quoted in the Irish Times as saying a tax increase is a matter of time. “..it’s a fact of life, Ireland will not continue as a low tax country. But it will rather become normal tax country in the European context.”

Experts in Ireland disagree.  They say that the European Union does not want to be seen interfering in domestic Irish affairs even though if the country needs a bailout like Greece it may have to accept terms that it might find distasteful.  Indeed, there is growing internal dissent about the government’s economic policies as in other European countries and the U.S.  The Wall Street Journal noted today that Ireland is pursuing one of the toughest budget cutting programs in Europe, which seeks to bring the deficit to under 3 percent of GDP by 2014.  Of course, some are irate.

Jack O’Connor, president of the Irish Congress of Trade Unions, recently blasted the government for pursuing economic policies designed to appease international financial markets at the expense of the people.

“Seemingly, we must prove our determination to repay the debts incurred through the profligacy of those at the top of our society by crucifying those at the bottom,” he says in a statement.  “There is no map to the future only a set of staging posts on the road to perdition.”

Experts in Ireland argue that all hope is not lost.  Indeed,  Irish corporate taxes are so low compared with the U.S. that a slight increase probably wouldn’t cause American companies to flee the country  They also argue that the Irish Government will be resist the pressure to kill what many see as the U.S. corporate gift that keeps on giving.

“There is little doubt the there will be pressures from some of our European partners to raise our taxes – even more so if Ireland needs to utilise the EU/IMF bailout fund,” says John McHale, Professor & Head of Economics School of Business and Economics National University of Ireland, Galway, in an email. “But I think it unlikely that Ireland will be forced to turn to the fund for a bailout.   And even if that did come to pass, any Irish government with fight tooth and nail to avoid higher corporate tax rates being part of the conditions for access to the fund.”

–Jonathan Berr

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