Dublin and Amsterdam: Do Substantial Foreign Investments Help Raise Household Incomes?

Multinationals’ intense investment activities in preferential tax jurisdictions such as Ireland and the Netherlands bring both positive and negative consequences for these countries. On the one hand, substantial FDI inflows (with two countries capturing a sizeable 39% of the EU’s total figure of USD439 billion in 2015) make the largest metropolitan areas of Ireland and the Netherlands the two most productive in the EU. On the other hand, in light of the fact that many foreign companies only register in the cities to benefit from advantageous tax policies, without expansion of operations, superior labour productivity does not translate fully into elevated household earnings. Dublin has only the sixth largest household disposable income among 39 major cities in the EU, while Amsterdam ranks far lower, in 25th position.

Labour Productivity and Average Disposable Household Income Rankings of 39 Major EU Cities: 2015

Source: Euromonitor International

Note: GVA stands for gross value added.

Multinationals boost cities’ GDPs through profit allocation strategies but tend to add little in actual employment

Undeniably, although labour productivity is the single most important driver of household incomes, it is not the only one. Average household size contributes as well. For instance, Amsterdam records a prevalence of single person households. As such, a person living alone, even though with a high paying job, can end up with a lower income than bigger households.

However, due to the cities’ role in multinationals’ FDI strategies (which include reporting of profits in jurisdictions with low corporate tax rates), it is also hardly disputable that local households do not benefit from foreign investments as much as they should. Amsterdam and Dublin, despite offering respectively, some of the most sizeable (relative to total population) and educated metropolitan labour pools in the EU, lag behind many other EU metropolises in terms of employment rates, with correspondingly 74% and 67% of the working age (15-64) population being employed in 2015. It is thus not surprising that in the same year, less than a third of GDPs of both Dublin and Amsterdam made it back as total household disposable income, compared to 45% in Paris or 54% in London.

Tax competitiveness more important than tax fairness?

Tax policies of Ireland and the Netherlands are a key factor behind such a substantial gap between economic output and total disposable earnings of households in the two countries’ most important urban agglomerations, Dublin and Amsterdam, respectively. During the post-downturn austerity mode, calling for fairer tax practices, the European Commission embarked on a fight against aggressive tax avoidance by large companies. The most notable achievements so far are ordering in late-2015 the recovery of EUR20-30 million after the Netherlands was found to grant selective tax advantages (effectively classified as illegal state aid) to a Starbucks’ subsidiary, as well as an August 2016 case with a similar line of reasoning involving Ireland and Apple, albeit with a much more substantial penalty of EUR13 billion.

The national governments are adamant as they fear collecting the payments will undermine their countries’ reputation as attractive corporate headquarters. The latter is undoubtedly a valuable asset, however as long as EU member states are solely driven by considerations of individual tax competitiveness, multinationals will continue to exploit loopholes to minimise their tax burden, a by-product of which is disposable income deprivation of local households.