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Irish seek to hold the line in tax battle

(L-R) Ireland's Prime Minister Enda Kenny and Italy's Prime Minister Enrico Letta listen to European Commission President Jose Manuel Barros
(L-R) Ireland's Prime Minister Enda Kenny and Italy's Prime Minister Enrico Letta listen to European Commission President Jose Manuel Barros

By Conor Humphries and Padraic Halpin

CORK/DUBLIN (Reuters) - Until this week, Richard Bruton enjoyed the sweet spot in Irish government. While cabinet colleagues rolled out spending cuts and tax hikes, Bruton got the photo opportunities with foreign CEOs investing in their favorite corner of Europe.

Now the strategy that underpins Bruton's role as jobs minister and the country's hopes of recovering from the crisis that drove it to take an international bailout is under attack from the United States and the rest of Europe.

A U.S. Senate investigation found that computer major Apple used Irish tax loopholes to avoid billions of dollars in taxes, forcing Bruton to concede that large multinationals which shift profits to avoid tax need to be reined in.

Bruton's call for an international clampdown on aggressive tax planning by large corporates is a rare negative shot at a sector that Ireland has courted for decades and underscores the high stakes for Dublin, which faces pressure to act alone.

Irish Prime Minister Enda Kenny steered a careful path on Wednesday, saying on his way to a European Union meeting on tax avoidance that Ireland was helping lead a drive for a new international consensus on tax regimes for multinationals.

The strategy is one of, 'blame the game, not the player'.

International companies provide one in almost every 10 jobs in Ireland, where joblessness has been stuck at more than 14 percent for almost three years. With 4,000 workers, Apple is one of the top multinational employers.

Every four multinational jobs Ireland attracts adds three more indirectly in the local economy, according to the state Industrial Development Agency (IDA) which is tasked with attracting foreign firms.

Dublin's 'Silicon Docks' - where Google and Facebook are headquartered - is home to the country's largest theatre, newest five-star hotel and surrounded by modern apartment blocks.

LOOPHOLES

Previous spats with other European governments over Ireland's tax regime have centered on the country's low 12.5 percent rate of corporation tax, a rate Dublin has successfully argued is key to emerging from financial crisis.

But the focus on loopholes and concessions is more difficult to defend, particularly with European countries, who bailed out Dublin, angered by Ireland's role in helping multinationals to avoid paying tax on sales in their countries.

With a host of countries, including Singapore and Israel, vying with Ireland to attract big employers, the government is hoping international bodies like the Organisation for Economic Cooperation and Development will deal with profit shifting.

Multinational companies contributed three-quarters of the 4 billion euros of corporation tax collected last year and account for over 80 percent of the country's exports, the IDA says.

"If Ireland just decided to stop something tomorrow, there are many, many other jurisdictions that compete with us," said IDA chief executive Barry O'Leary.

Knowing U.S. firms' tax planning methods were set to come under scrutiny on Capitol Hill, O'Leary and a colleague spent the earlier part of this year visiting dozens of chief finance officers and tax chiefs at multinationals to reassure them.

O'Leary is relaxed about the potential damage to Ireland's reputation from revelations Apple, under CEO Tim Cook, used three Irish-based subsidiaries to help it pay just two percent tax on overseas income, a fraction of Ireland's already low 12.5 percent rate of corporate tax.

"You could take one school of thought that listening to Tim Cook yesterday, he spoke in very positive terms about the operating environment in Ireland," O'Leary said.

But behind the scenes, official Ireland is worried.

"Potentially the damage is huge. Ireland is getting mentioned too many times," said a senior Irish banker, who has worked in the country for 30 years.

"We're being seen as a tax haven. We're not. Ireland is not just a brass plate economy, we're a low-tax economy. You actually have to set up and work here but we're not being differentiated from countries like Bermuda where there's no infrastructure and no jobs."

HAPPY DAYS?

Richard Murphy, director of Tax Research UK, says Ireland is not a typical secretive low-tax or no-tax state, but is a conduit tax haven.

"The intention is to attract money through Ireland. The vast majority of what happens in Ireland is not actually to locate an activity in Ireland, it is to relocate profits to Ireland from which they immediately leave."

"The 12.5 percent is almost irrelevant."

In southern Ireland, a few kilometers south of Cork's Blarney Castle, where legend has it kissing a block of stone endows people with the gift of speaking eloquently, Apple is expanding its offices.

Builders working on the site are not bothered by the tax controversy, reflecting a view widely held here that if Dublin didn't offer concessions to multinationals someone else would and the small island of 4.5 million people would lose out.

"It's the congressmen in the states who are complaining, not anyone around here," said one construction worker, who declined to give his name. "For us it's happy days".

But from the office blocks of Dublin to the streets of Cork, there is a degree of irritation that the multinationals pushed things to their limits and in doing so, potentially risked Ireland's core selling point, the 12.5 percent rate.

"It's the one perk that we have ... Without it we're done for," said Orla Murphy, a housewife in Cork. "When its 12.5 percent, that's one thing. But they couldn't even stick to the great terms we had. That's what makes me cross."

(Additional reporting and writing by Carmel Crimmins; editing by Philippa Fletcher)

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