The Republic of Ireland has called for an international clampdown on multinationals shifting profits around the world to avoid tax, after criticism that Irish loopholes helped technology giant Apple to shrink its tax bill.
A US Senate investigation into the tax affairs of the maker of iPhones, iPads and Mac computers has shone an uncomfortable spotlight on Ireland's tax regime and forced the government to defend itself against accusations of being Europe's onshore tax haven.
Other European governments, notably France, have previously criticized Ireland's low rate of corporation tax - 12.5 percent - but the revelations from Washington focus on loopholes in the Irish tax code that are more difficult to defend.
Richard Bruton, the minister in charge of attracting foreign companies to Ireland, admitted that companies need to be reined in.
“They play the tax codes one against the other; that is tax planning, and I think we do need international cooperation through the OECD to dealwith the aggressive nature of that,” he told state broadcaster RTE.
“Tax has always been an element of the Irish offering, and this will continue to be so, but what you have to avoid is what is known as harmful tax competition. We scrupulously avoid that.”
The U.S. investigation showed that Apple had paid just two percent tax on $74 billion in overseas income, largely helped by Irish tax law, which allows companies to be incorporated in the country without being tax resident. Britain had a similar rule but changed it over 20 years ago to stop tax avoidance.
Unlike Britain, however, Ireland is heavily dependent on foreign companies such as Google, Pfizer and Intel for employment - 150,000 of a labor force of around 2 million - and for its much-vaunted economic model of export-led growth.
While Ireland has successfully repelled attacks on its corporate tax rate from European neighbors, US pressure is more difficult to ignore.
By closing its own loopholes, Washington could threaten Ireland's status as European hub for multinationals, and economists said it would be better for Ireland to act first.
“In the long run, the US Congress, if they wanted to, could wipe out those 150,000 real jobs, and we don't want to provoke people by over-egging it, by doing things that are clearly upsetting the US,” said John FitzGerald, a professor at the Economic and Social Research Institute (ESRI), an Irish think-tank.
Ireland's Prime Minister Enda Kenny will face tough questions at a summit of European leaders in Brussels on Wednesday where the issue of tax avoidance will take center-stage.
Bruton said scapegoating individual countries was not the answer and pointed to the fierce competition Ireland faces in trying to attract companies.
“When I go into the boardrooms either in Asia or the US, I am followed into those boardrooms by Swiss, by Singaporeans, by Dutch, by Belgians who are offering specially put-together deals on the tax front,” he said.
“Ours is not a specially put-together deal; it is absolutely transparent, there are no side deals, no special arrangements.”
“We make no apologies for having a regime that is designed to promote employment. It is a regime we have had for close to 50 years.”
Additional reporting by Padraic Halpin