Ireland s Celtic tiger and the impact of corporate tax rate on inward FDI. Can Bulgaria benefit in a similar way by its low corporate tax level?

Transcription

1 Ireland s Celtic tiger and the impact of corporate tax rate on inward FDI. Can Bulgaria benefit in a similar way by its low corporate tax level? Name: Ivan Radkov Student number: Course: Bachelor thesis Supervisor: Dr. Koen Vermeylen Date: 17/07/2012

2 Table of Contents 1. INTRODUCTION FOREIGN DIRECT INVESTMENT (FDI) Definitions Trends Determinants CORPORATE TAX RATE Measures Differentials within the EU THE CASES OF IRELAND AND BULGARIA. COMPARISON Market size Labor cost Openness to trade and trade barriers Trade balance Exchange rate GDP growth Corporate Taxation Other factors CONCLUSION AND FURTHER RESEARCH REFERENCES FIGURES AND TABLES

3 1. INTRODUCTION Foreign direct investment is perceived as playing a catalyst role in the economic growth of countries. In times when investment projects are scarce and investors fear the fragile nature of the economy, attracting FDI investments has become an even more important topic for governments. Furthermore, it is common to find in the media information about tax competition between countries or alternatively an intended tax harmonization between EU member states. This paper focuses on two EU states Ireland and Bulgaria, as popular FDI destinations which have managed to attract considerable amounts of FDI arguably due to some extent to their low corporate tax rates. The corporate tax rate and its influence on inward FDI represent an interesting field which has been approached in different ways within the EU. For example, the effective annual tax rate in France is 30% while it is 12.5% in Ireland and as low as 8.8% in Bulgaria (European commission, 2011). It is important to mention that the corporate tax rate is not the single and key factor in attracting FDI. There are many other determinants which impact investors decisions on business location. However, a surprising fact is that there is no prevailing set of FDI determinants used extensively in academic research. In addition, in some research the magnitude and/or direction of a certain determinant has been found to be inconsistent and/or controversial. The sensitivity analyses by Chakrabarti (2001) have found that the only robust and universally accepted factor which encourages FDI is market size as measured by the country s GDP. Apart from that, all other factors such as corporate tax, labor cost, openness to trade, trade barriers, trade balance, exchange rate and GDP growth have shown to be only more likely correlated with inward FDI. In section 2, the notion of FDI and its continuous growth trend are discussed. This section also provides an overview of possible FDI determinants and the extent to which they play a role on FDI decisions as summarized by Chakrabarti (2001). In order to narrow down the topic of the paper, only one of these factors affecting FDI the corporate tax level, is more extensively discussed. The subsequent section covers different corporate tax rate notions and outlines the effective average tax rate (EATR) as the best indicator for measuring tax burden a measure introduced by Devereux and Griffith (1999, 2003) and later adopted in the work of the European Commission. In addition, the present tax differentials among EU member states are also covered. Section 4 of the paper presents a detailed picture of the economic situations in both Ireland and Bulgaria illustrated by the previously mentioned FDI determinants. For this purpose, data and reports from various sources including the United Nations Conference on Trade and Development (UNCTAD), European Commission (EC), Organisation for Economic Co operation and Development (OECD) and the Centre for European Economic Research (ZEW) in Mannheim will be used. I have chosen Ireland because it is an old EU member state and currently exhibits one of the most attractive 3

4 corporate tax levels in EU 12.5%. Moreover, I will look at its economy during the period when Ireland experienced a great economic surge, referred to by many as the Celtic tiger phenomenon. The reason for including Bulgaria in the analysis as well is that it is one of the new EU member states and is also the country with the lowest EATR of 8.8% in the EU. I will use the period for Bulgaria which represents a relatively stable phase of economic development. In order to make a comparison between these two tax havens within the EU, I will look at the similarities and differences in their macroeconomic landscapes as depicted by the FDI determinants mentioned in section 2.3, and use the EU15 average as a benchmark. I expect to find great similarities in the business climates of the two countries and more specifically in their tax regimes. Nowadays, the most widely discussed in the media aspect of their economies is the fact that both Ireland and Bulgaria have a firm stance on keeping the low corporate rates in times of economic distress and shrinking fiscal revenues. Apparently, they believe in the efficiency of their taxation policies and defend them under the EU pressure to raise their tax levels. In section 5 of the paper, I will discuss improvements of my work and will point out directions for future research. 2. FOREIGN DIRECT INVESTMENT (FDI) 2.1 Definitions Taking into account that both Ireland and Bulgaria are EU members, I will use the European commission definition for FDI, i.e. foreign direct investment is the category of international investment in which an enterprise resident in one country (the direct investor) acquires an interest of at least 10 % in an enterprise resident in another country (the direct investment enterprise). This definition can be further expanded by distinguishing between two types of foreign direct investment: the establishment of an entirely new firm, so called Greenfield investment, and the complete or partial purchase of an existing firm via a merger or an acquisition. An additional classification of FDI concerns how the home company plans to invest in the host country. On one hand, a company can "slice" its production chain by delegating different parts/stages of its production process to separate locations (countries) in which the production costs are lower. This is defined as vertical FDI (Eurostat, 2007). On the other hand, a company can duplicate" its production chain entirely and place its production in several locations so that the company is closer to that market (Eurostat, 2007), known as horizontal FDI. In order to stay focused on the main topic of the paper, I will not differentiate between vertical and horizontal FDI or Greenfield and M&A projects, but will look at the broader picture and try to establish a comprehensive image of the corporate tax rate as a determinant of FDI. 4

5 2.2 Trends Since the world has become increasingly interconnected and is more often than ever before perceived as a global market, multinational corporations have managed to cover immense market territories and launch their operations in numerous countries. Furthermore, many start up companies have adopted expansion strategies at early stages of development and are quickly moving into the global economy. This has led to tremendous increase in the amount of FDI throughout the world. Before presenting actual numbers for FDI activity, I would like to differentiate between two popular measurement techniques, namely stock versus flow. While a stock is a quantity measured at a given point in time, a flow is a quantity measured per unit of time (Mankiw, 2010). Referring to the topic, a flow is the FDI activity over one year whereas a stock is the quantity accumulated at a specific time (at year end). For example, the total world stock of inward FDI in 1987 amounted to $1,337,186mil and increased to $17,950,498mil in 2009 (US dollars at current prices and current exchange rates, UNCTAD). The inward FDI flow measures for the beginning and end years of the periods of interest for Ireland and Bulgaria are as follows: Ireland: $322mil (1987) and $9, 651mil (2001) Bulgaria: $535mil (1998) and $3, 351mil (2009) 2.3 Determinants As mentioned in the introductory part, no clear set of FDI determinants has been agreed upon by practitioners. This stems from the fact that many researchers have employed different perspectives, methodologies, sample selection and analytical tools into their work (Chakrabarti, 2001). As a result, the academic literature abounds with mixed outcomes and controversial conclusions. Nevertheless, Chakrabarti has managed to compile a comprehensive meta analysis using a wide range of academic works dating from 1968 to In the paper, the author examines eight possible determinants of FDI: market size, labor cost, openness to trade and trade barriers, trade balance, exchange rate, growth rate and tax. The following paragraphs provide some more details on each of these factors. Market size. Market size as measured by the host country s Gross Domestic Product (GDP), has been singled out as the only factor which has extensively been proven to significantly and positively affect inward FDI. Labor cost. Although it seems intuitive and widely accepted, a host country s wage has not always been proven to attract FDI. Theoretically speaking, cheap labor would most probably attract FDI but some papers, among which that of Owen (1982), have established an insignificant relationship between wage differentials (as is the case between US and Canada). 5

6 Openness to trade and trade barriers. Another factor which has given mixed results is openness to trade as measured by the ratio of exports plus imports to GDP. The logic behind its role as a FDI determinant is the following: since most of the FDI projects concern the tradable sector, a country s degree of openness should be a key factor. It is important to note that trade barriers are another related FDI determinant which I will not treat as a separate aspect. The reason for this is that even from a theoretical point of view, a higher degree of trade barriers means limited openness to trade. Although the issue of trade barriers is not as noticeable nowadays as it used to be in the past, some companies still face such trading restrictions. A popular way to legally circumvent this obstacle is starting a business in the country imposing the restriction. Here again, different researchers have come up with controversial results regarding the extent to which openness is an important FDI determinant. Exchange rate. The next possible FDI determinant is the exchange rate. According to the currency area hypothesis (Aliber, 1970), a country whose currency is weak will have difficulty attracting FDI because of the higher risk associated with an investment in that particular country, which would require a higher yield in order to make the project profitable. Although this seems plausible and intuitive, researchers such as Edwards (1990) have shown a strong positive relationship between weak currencies (mainly due to the associated competitiveness advantage and high export potential) and others among whom Sader (1991), have found an insignificant correlation. Trade balance. Another important element regarding FDI is the trade balance of a country defined as net exports over GDP. The reasoning behind this argument is that a country which has shown to have consecutive trade surpluses has a stable and growing economy with a high export potential (Torissi, 1985). The dispute over the role of trade deficit/surplus goes on in the academic world having researchers supporting the stances that trade balance is significant or is totally irrelevant to the FDI activity of a country. Growth. The second to last determinant which I will cover is the growth of the host economy as measured by its GDP growth rate. Although this argument is related to the one discussed in the preceding paragraph, it is researched as a separate factor. The theory behind is that an active and growing economy will provide more opportunities for revenue maximization. Although this seems to be the case, such a relationship has not been always found by researchers. For example, Tsai (1994) obtained a weak link in the period of interest Corporate tax. The last determinant used in the analyses of Chakrabarti, which is also the main focus of this paper, is the corporate tax rate. Even though most of the academic papers discussed have observed a negative effect of tax on FDI, there were still some researchers whose results depict the tax rate as an insignificant contributor. The paper continues with a section devoted 6

7 to the different measures and definitions of corporate tax, and the existing tax differentials within EU member states. 3. CORPORATE TAX RATE 3.1 Measures There are a number of tax definitions which are used in academic papers and applied in official FDI reports by political and economic authorities. I will focus on three of those definitions as outlined by Benassy et al. (2005). The easiest and readily available one is the statutory rate measure. This tax measure is the most common one found in tax laws and government papers. However, it can turn out to be misleading since it can be offset by a broader definition of taxable income (Devereux and Griffith, 2003). Another way to measure the tax burden is by using the apparent tax definition. It uses the ratio of observed receipt to observed taxable income. Although it looks straightforward and efficient at first glance, this measure entails two drawbacks which might distort the real magnitude of the tax burden. The first one lies in the way the measure is calculated multinationals appear to be more heavily taxed ex post than ex ante according to the host country s tax regulation (Hines and Rice, 1994). Furthermore, apparent taxes tend to be cyclical in nature which raises the issue of endogeneity to FDI inflows (Nicodeme, 2001). Due to the shortcomings of these two methods, a third one has established itself as a more reliable and true indicator of the tax burden the effective average tax rate (EATR). The EATR measure has been introduced by Devereux and Griffith as a continuation and improvement of the effective marginal tax rate (EMTR). Their basic approach in constructing the EMTR is to consider a hypothetical incremental investment located in a specific country, which can be undertaken either by a company resident of the same country or of another country. According to their definition, EMTR is the proportionate difference between the cost of capital and the required post tax real rate of return. The EATR upgrades the EMTR methodology by taking into account not only the burden on the last capital unit invested, but the whole tax burden associated with the project (Becker, 2007). A different formulation provided by Elschner and Vanborren (2009) for EATR is: the proportionate difference of the net present value of a profitable investment project in the absence of tax and the net present value of the same investment in the presence of tax. It is important to stress that the EATR as such is a forward looking modeling technique. 3.2 Differentials within the EU As mentioned in the introduction of this paper, the EU member states approach very differently the matter of corporate taxation. Some of them depend quite heavily on a high corporate tax rate as a major source of government revenue. Others consider it better to keep the corporate 7

8 tax rates low and thus stimulate the business climate and promote growth through FDI. For example, the numerical values for 2007 for the lowest and highest EATRs in the EU are 8.8% in Bulgaria and 35.5% in Germany (Elschner and Vanborren, 2009). A broader picture of the variability of the tax levels is presented in Figure 1 in the last section of the paper. One of the main reasons which shape this diverse tax level picture is the differing size and economic stage of development of the member states. One can distinguish between old (EU15) and new EU member states (EU+12, i.e. after the enlargement in 2004). The EU15 countries exhibit a higher EATR of 26.3% on average compared to a 17.4% EATR for the EU+12 member states. The following section presents a comprehensive economic picture of Ireland and Bulgaria, and juxtaposes their parameters to these of the EU THE CASES OF IRELAND AND BULGARIA. COMPARISON In order to draw a complete economic landscape of Ireland and Bulgaria, I will use the FDI determinants outlined in Section 2.3. Given the different economic stages of development of the two countries, I will use different time spans to conduct a better comparison. The time span of interest for Ireland covers the years between 1987 and In many research papers, this period is referred to as the time when Ireland experienced its own tiger phenomenon the Celtic tiger era named after its Asian predecessors (Breathnach, 1998). In this period, Ireland was transformed from one of the EU s poorest countries into the Union s economic miracle; Ireland per capita GDP in 1987 was 63% that of the EU s average and reached 97% of the EU s average in 1996 (Breathnach, 1998). Many researchers attribute Ireland s economic success to the huge amounts of inward FDI during that period. The time of interest for Bulgaria is from 1998 till I am excluding the years immediately following the collapse of the communist regime in Bulgaria in 1989 because this was unstable time with uncertainty and major economic and social restructuring. In contrast, I will concentrate on the more stable late 1990s and the first decade of the new millennium. However, before I start the description of the two economies, I will provide graphically data for the inward FDI flows (as percentage of the country s GDP) using the corresponding years of interest per country (the numerical values, taken from the UNCTAD database, can be found in Table 1 in the last section). As can be seen from Figure 2, both Ireland and Bulgaria s GDPs are comprised to a greater extent of FDI when compared to the EU15 s average. 4.1 Market size Figure 3 in the last section shows the GDP numbers for Ireland and Bulgaria for their respective periods of interest, and the EU15 average is again used as a benchmark and tool for 8

9 comparison. The data does not present either country as a fortunate FDI destination due to their low GDP numbers. Nevertheless, multinationals (and especially US companies in the case of Ireland) saw future potential for these two countries. 4.2 Labor cost In order to calculate the labor costs, I will use the OECD Unit Labor Costs (ULC) indicator. According to the OECD definition, ULCs measure the average cost of labor per unit of output and are calculated as the ratio of total labor costs to real output. More specifically, I will use the annual labor compensation per employee ($US PPP adjusted) as ULC measure. Figure 4 summarizes the data obtained from the OECD database and is clear evidence that Ireland does not have a competitive advantage over EU15 countries and that Bulgaria does have such an advantage (it is important to note that the available data does not spread over the entire period of interest which results in missing values). Even in 2008, the year when Bulgaria had the highest annual compensation per employee of $10, 507, it was still lagging more than 4 times behind the EU15 average. According to the most supported theory, Bulgaria with its lower labor cost should be perceived as a favorable FDI destination. 4.3 Openness to trade and trade barriers In order to make the analysis of this paper more concise, I will combine two of the FDI determinants as discussed by Chakrabarti (2001) and present their effect altogether. The reason for doing so lies in the fact that the openness to trade and the trade barriers are closely related. For example, if a country faces trade restrictions, its openness to trade is directly affected. Although the economy has become increasingly global and free trade is encouraged by many government and non government organizations, trade barriers or more generally trade obstacles continue to exist in some cases. As members of the World Trade Organization (WTO), Ireland (since 1995) and Bulgaria (since 1996) are subject to certain privileges and responsibilities among which is the commitment to open their home market to the rest of the WTO members. From the country specific data of the WTO website, it can be seen that Ireland and Bulgaria have seriously embraced the free trade idea and have been involved as respondents, i.e. another member government believed that they were violating an agreement or a commitment made in the WTO, 3 and 0 times respectively. Although Ireland is included with its 3 dispute cases in the black list, it should not be seen as a major infringement since 2 out of the 3 cases have already been settled. Moreover, the situation of Ireland and Bulgaria does not differ greatly from that of the EU15 where these countries were involved between 0 and 4 times in WTO disputes with an average of 1.67 disputes. To sum up, both countries offer barrier free trade opportunities to the rest of the WTO members but do not 9

10 stand out from the sample as such opportunities appear to be the common practice among all EU15 countries. However, both Ireland and Bulgaria exhibit higher openness to trade (measured by the ratio of exports and imports to GDP) juxtaposed to the EU15 average. Figure 5 was built using data from UNCTAD and depicts both Ireland and Bulgaria as countries who managed to not only follow the trend by the EU15 member states but to also surpass it. 4.4 Trade balance In order to conduct a more meaningful analysis over the trade balance of Ireland and Bulgaria, I will divide the EU15 sample into two judging whether the country had a trade deficit or trade surplus over the years Because each of the EU15 countries tends to keep its trade position (deficit or surplus) during these years, such a division presents reliable benchmarks. Moreover, I find this a better practice because if I were to just take the average of all EU15 countries, the values will almost cancel out due to their positive and negative signs, and would yield an average close to 0. So, using the UNCTAD data and defining trade balance as net exports over GDP, I have come up with two sub sets, namely countries with trade deficit and countries with trade surplus. The first one includes the following countries: France, Greece, Spain, Portugal, UK, Austria and Luxembourg. The second is comprised of Belgium, Denmark, Netherlands, Germany, Ireland, Italy, Finland and Sweden. Bulgaria with its trade deficit is compared to the first sub set of countries while Ireland, a trade surplus country, is referred to the second sub set. As can be seen from Figure 6, Ireland greatly surpasses the other EU15 surplus countries and proves its export potential. According to Figure 7, Bulgaria exhibits a very high trade deficit which also greatly deviates from the EU15 deficit average, and can be seen as an indicator of a troubled economy. However, it is important to remember that Bulgaria was on its expanding path at this time so such trade deficit is arguably a necessary and even a positive stage of development. 4.5 Exchange rate This subsection examines how strong the currencies of Bulgaria and Ireland were as perceived on the money market, which reflects to some extent on the country s ability to attract FDI. Between 1987 and 1999, the Irish pound exhibited a stable moving path against the US dollar (Figure 8) which trend was later continued by the euro currency. Since January 1, 1999 the Irish pound (IEP) was irrevocably fixed to the euro and in 2002 the withdrawal of the Irish pound notes and coins began (Central Bank of Ireland). Bulgaria cannot boast with such a strong currency on its own and this is the reason why the Bulgarian National Bank decided to peg the Bulgarian lev (BGL) to the Deutsche mark after the fall of communism in However, as the Deutsche mark was replaced with the euro, the Bulgarian lev 10

11 was effectively pegged to the euro ever since its introduction in 1999 at lev = 1 euro (Bulgarian National Bank, 1999). It is important to note that up to June 1999, Bulgaria was using the BGL as its currency and since July 1999 it was replaced with the BGN at a conversation rate of BGL = 1 BGN. The exchange rate course against the USD can be seen in Figures 9 and 10 where it is also shown that the euro pegged exchange rate regime served Bulgaria well by stabilizing its currency and experiencing appreciation against the USD. Given the time horizon of interest for each country and the data from the Central Bank of Ireland and the Bulgarian National Bank, I consider the Irish (and later European) and Bulgarian currencies to be safe from any abnormal exchange rate risks or subject to speculative attacks. 4.6 GDP growth Both Ireland and Bulgaria experienced positive growth rates during the selected periods of time with the exception of 2009 for Bulgaria when the global financial crisis hit worldwide. Figure 11 draws the exact course of movements of Ireland and Bulgaria, and comes as proof of the substantial growth paths of the two countries compared to the EU15 average (UNCTAD). Such positive course of the two economies is believed (by the majority of the research outcomes) to encourage FDI inflows and signal to international investors that the economic situation holds optimistic prospects for the future as well. 4.7 Corporate Taxation The FDI determinant of primary interest of this paper is the corporate tax level as measured by the EATR. Figures 12 and 13 graphically represent the tax situations of Ireland and Bulgaria compared to that of the EU15 for their respective time periods. It is important to note that the values used for Ireland are not the inbound EATRs (which are directly associated with FDI activity) but the domestic EATRs. Since the EATR is a relatively new tax measure (introduced in 1999 and further developed in 2003), it is difficult to publicly find such information for the pre 1998 period regarding Ireland. The matter is further complicated when bilateral trade agreements and double taxation treaties (used in the inbound EATR computations) are introduced. Another aspect worth mentioning is the fact that while Ireland relied on a flat taxation scheme of 10% between 1987 and 2002, Bulgaria and its government undertook an aggressive tax lowering policy in the early 1990s (starting from a statutory tax level of 40%) and gradually moved also to a flat tax rate of 10% in Because the EATR and inbound EATR values make use of the statutory tax rates, their levels follow similar dynamics. However, an interesting phenomenon is the higher EATR for inbound investment compared to the EATR for domestic investment. This tendency holds true for the entire sample period for both Ireland and Bulgaria. A logical question is then why would countries which boast to 11

12 offer FDI friendly conditions to international investors allow inbound projects to have higher tax levy? The reason for these intuitively nonsensical results lies in the field of international taxation. Many cross border projects fall under double taxation rights between the home and host country (Sauvant et al, 2009). However, such double taxation practices discourage foreign investors and result in disadvantageous case scenarios for both the home and host countries. Policy agents realize this possible pitfall and try to correct for it by engaging in double taxation treaties (DTT). Most if not all of those treaties are based on papers by the OECD and UN which outline the rules and regulation for taxing income and capital. For example, OECD Model Tax Convention framework or the United Nations Model Double Taxation Convention between Developed and Developing Countries serve the role of aligning cross country tax jurisdiction. Apart from these frameworks, the specific level of taxation is agreed upon on a case by case basis between the involved countries. This is exactly the reason why even though Ireland and Bulgaria as countries offering arguably the lowest EATRs in EU, face increased tax burden on their FDI investments after engaging in such DTT with countries with higher taxation levels. 4.8 Other factors The analysis in the preceding subsections does not point out to a very conclusive answer if Bulgaria can/is experiencing a similar low taxation FDI boosted economic stage as Ireland did more than a decade ago. The reason for this is that inward FDI flows towards Ireland and Bulgaria differ in nature and are affected by a broader set of factors which were not covered in this research human capital, institutional development, corruption, etc. In particular, as stated by Murphy (1997) the role of Ireland s low corporate tax regime (and the opportunities it presents to foreign firms to manipulate transfer prices in their own interests) was rejected as the main driver of FDI because this regime has been in place since 1981, and therefore, cannot, of itself, explain the growth surge in FDI towards Ireland. Moreover, the case of Ireland has its own special traits which are hard to be transferred to another case scenario. For example, Murphy (1997) suggests that a better descriptive name for the economic surge of Ireland at that time would be the US high tech tiger with the Celtic face. Apart from those specific aspects, other determinants for Ireland s economic surge are the rapid development of human capital (more people in the labor force, better educated), the successful IDA (Industrial Development Agency responsible for attracting foreign direct investment) policy changes in the late 1980s, the advanced information technology and telecommunications infrastructure, and EU funding. It is interesting to mention that Breathnach (1998) points out to the possibility that some East European countries might create competing reservoirs of skilled but much 12

13 cheaper labor which combined with their EU accession (which for Bulgaria was not a fact at the time of Breathnach s publication) might become the next tiger in the European economy. 5. CONCLUSION AND FURTHER RESEARCH The paper s main goal is to familiarize the reader with the complexity of the universe of FDI determinants and the peculiarities between FDI and tax rates on a country specific level. On one hand, the theory of FDI determinants is inconclusive and controversial on the particular effects of each of the determinants (as mentioned in Section 2.3) and the magnitude of their impact. On the other hand, the empirical part conducted in Section 4 fails to provide a much more definitive picture of which factors drive FDI activity referring in particular to Ireland and Bulgaria. As can be seen from the somewhat differing economic environments in the two countries, making comparisons and drawing conclusions about FDI and the case of Bulgaria as a follow up of that of Ireland, is more challenging than expected. Although the research encompasses the FDI determinants as used by Chakrabarti (2001), other factors not taken into account such as political risk, institutional setting, inflation rates and distance between home and host country, also play roles in the FDI world dynamics. Possible improvement points of my research are extending the sample period and/or taking additional determining factors. Another possible direction is to look more specifically at a chosen country and observe in greater detail its bilateral investment treaties and DTTs with other countries. 13

14 6. REFERENCES Aliber, R. (1970). A Theory of Direct Foreign Investment, the International Corporation: A Symposium. Cambridge: MIT Press: Becker, J. and Fuest, C. (2007). Tax Competition and Firm Mobility: An Assessment of Empirical Findings, Intereconomics 42, 122. Benassy, A., Fontagne, L. and Lahreche, A. (2005). How does FDI React to Corporate Taxation?, International Tax and Public Finance 12, Breathnach, P. (1998). Exploring the 'Celtic Tiger' Phenomenon: Causes and Consequences of Ireland's Economic Miracle, European Urban and Regional Studies : 305. Bulgarian National Bank. (1999). Press Release of 6 January Bulgarian National Bank. (1999). Monthly Exchange Rates of the Lev against the US Dollar. Central Bank of Ireland, Banknotes and coins. Accessed on : Chakrabarti, A. (2001). The Determinants of Foreign Direct Investment: Sensitivity Analyses of Crosscountry Regressions, Kyklos 54, Devereux, M. and Griffith, R. (2003). Evaluating Tax Policy for Location Decisions, International Tax and Public Finance, 2003, 10, Devereux, M., Griffith, R. and Klemm, A. (2002). Corporate Income Tax Reforms and International Tax Competition, Economic Policy 35, pp Edwards, S. (1990). Capital Flows, Foreign Direct Investment, and Debt Equity Swaps in Developing Countries, National Bureau of Economic Research (Cambridge, M. A.), Working Paper No Elschner, C. and Vanborren, W. (2009). Corporate Effective Tax Rates in an Enlarged European Union, Taxation Papers (European Commission). European Commission Taxation and Customs Union (2011). Taxation Trends in the European Union. Eurostat (2007). European Union Foreign Direct Investment Yearbook 2007 Data , European Communities. Hines, J. and Rice, E. (1994). Fiscal Paradise: Foreign Tax Heavens and American Business, Quarterly Journal of Economics 109(1), Mankiw, N. (2010). Macroeconomics 7ed., p.20, Worth Publishers. Murphy, A. (1997). The Celtic Tiger the Great Misnomer. Dublin: MMI Stockbrokers. Nicodeme, G. (2001). Computing Effective Corporate Tax Rates: Comparisons and Results, Economic Papers

15 OECD. Unit Labour Costs Annual Indicators: Labour Compensation per Employee/Hour ($US PPP adjusted). Accessed on : Owen, R. (1982). Inter industry Determinants of Foreign Direct Investments: A Canadian Perspective, New Theories of Multinational Enterprise. London: Croom Helm. Sader, F. (1993). Privatization and Foreign Investment in the Developing World, World Bank Working Paper No Sauvant, K and Sachs, L. (2009). The Effect of Treaties on Foreign Direct Investment: Bilateral Investment Treaties, Double Taxation Treaties, and Investment Flows, Oxford University Press. Tsai, P. (1994). Determinants of Foreign Direct Investment and Its Impact on Economic Growth, Journal of Economic Development 19: UNCTAD. Inward and outward foreign direct investment stock, annual, , United Nations Conference on Trade and Development, Accessed on : UNCTAD. Inward and outward foreign direct investment flows, annual, , United Nations Conference on Trade and Development, Accessed on : UNCTAD. Nominal and Real GDP, total and per capita, annual, , United Nations Conference on Trade and Development, Accessed on : UNCTAD. Real GDP Growth Rates, Total and per capita, , United Nations Conference on Trade and Development, Accessed on : UNCTAD. Values and Shares of Merchandise Exports and Imports, annual, , United Nations Conference on Trade and Development, Accessed on : United Nations (2011). Country Fact Sheet: Bulgaria. World Investment Report WTO. Disputes by Country/Territory. Accessed on : 15

16 7. FIGURES AND TABLES Figure 1 Statutory corporate tax rates and EATR in %, 2007 Source: ZEW Figure 2 FDI inflows as % of GDP, ,00% FDI as % of GDP 30,00% 25,00% 20,00% 15,00% 10,00% Ireland Bulgaria EU15 average 5,00% 0,00% Source: UNCTAD 16

17 Figure 3 Total GDP, ,00 Total GDP , , , ,00 EU15 Ireland Bulgaria ,00 0, Source: UNCTAD Figure 4 Annual Labor Compensation per Employee ($US PPP adjusted), Annual Labor Compensation per Employee EU15 Ireland Bulgaria Source: OECD 17

18 Figure 5 Openness to trade, ,00% Openness to trade 120,00% 100,00% 80,00% 60,00% EU 15 Ireland Bulgaria 40,00% 20,00% 0,00% Source: UNCTAD Figure 6 Ireland and EU15 surplus countries, ,00% Ireland and EU15 surplus Countries 30,00% 25,00% 20,00% 15,00% 10,00% Ireland EU15 average trade surplus 5,00% 0,00% ,00% Source: UNCTAD 18

19 Figure 7 Bulgaria and EU15 deficit countries, Bulgaria and EU15 deficit Countries 0,00% ,00% 10,00% 15,00% 20,00% Bulgaria EU15 average trade deficit 25,00% 30,00% 35,00% Source: UNCTAD Figure 8 IEP vs. USD exchange rate, Source: Central Bank of Ireland 19

20 Figure 9 BGL vs. USD exchange rate, ,00 BGL/USD 1850, , , ,00 BGN/USD 1650, ,00 Source: Bulgarian National Bank Figure 10 BGN vs. USD exchange rate, ,50000 BGN/USD 2, , ,00000 BGN/USD 0, , Source: Bulgarian National Bank 20

21 Figure 11 GDP growth rates, GDP growth 12,00% 10,00% 8,00% 6,00% 4,00% 2,00% 0,00% ,00% ,00% 6,00% 8,00% EU15 Average Ireland Bulgaria Source: UNCTAD Figure 12 Ireland and EU15 Domestic EATRs, ,0% Domestic EATRs 30,0% 25,0% 20,0% 15,0% Ireland EU15 Average 10,0% 5,0% 0,0% Source: Devereux, M. et al (2002), IFS 21

22 Figure 13 Bulgaria and EU15 Inbound EATRs, Inbound EATRs 40,00% 35,00% 30,00% 25,00% 20,00% 15,00% 10,00% 5,00% 0,00% Bulgaria EU15 Average Source: ZEW 22

23 Table 1 FDI inflows as % of GDP, Year Ireland (%) Bulgaria (%) EU Average (%) Source: UNCTAD 23

24 Table 2 Ireland Corporate Taxation, Year Statutory tax rate (%) EATR domestic investment (%) EATR inbound investment (%) Source: ZEW, IFS, University of Toronto s International Tax program, Finance Canada, International Bureau of Fiscal Documentation, PricewaterhouseCoopers, the Bureau of Tax Policy Research at the University of Michigan, KPMG Table 3 Bulgaria Corporate Taxation, Year Statutory Tax Rate (%) EATR domestic investment (%) EATR inbound investment (%) Source: ZEW, University of Toronto s International Tax program, Finance Canada, International Bureau of Fiscal Documentation, PricewaterhouseCoopers, the Bureau of Tax Policy Research at the University of Michigan, KPMG 24