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Why Silicon Valley likes Ireland so much

Chris Ratcliffe | Bloomberg | Getty Images

When technology executives talk about the allure of opening offices in Ireland, they typically refer to the country's wealth of talent and its proximity to European customers. Some even tout the pubs.

Less frequently mentioned, at least in press releases, is the most important factor: Taxes.

Apple was all over the headlines on Tuesday after the European Commission ordered the iPhone maker to pay 13 billion euros ($14.5 billion) in back taxes to Ireland. While Apple is the biggest tech name with the longest history in Ireland, having opened up shop there in 1980, many of Silicon Valley's most notable brands now call Ireland their European home.

Google, Facebook and LinkedIn established European headquarters in Dublin, and smaller companies like Zendesk, Dropbox, HubSpot, Slack and Glassdoor have set up Irish footholds. Salesforce.com said Ireland played a "key role" in its European success upon opening a second Dublin office in 2013.

Ireland does have highly regarded engineering programs at Trinity College Dublin and University College Dublin, and there's no question that the prominence of Guinness is a draw.

But the country has one distinct advantage over its neighbors to the east, north and south. Its corporate tax rate of 12.5 percent is the lowest in Western Europe and 10 percentage points below the average in the European Union, according to KPMG.

"At the end of the day, regardless of what companies are saying, it's the taxes that have to be paid that's the driving force," said Thomas Cooke, a professor at Georgetown University's McDonough School of Business. "It's the obligation of a company to do what's in the best interest of the corporation and its shareholders."

The EC, in its charge against Apple on Tuesday, said that far from paying 12.5 percent in taxes, the company's rate in Ireland was 1 percent in 2003 and as low as 0.005 percent in 2014. The cut rate, the EC said, was the result of a special and illegal tax benefit Ireland offered to Apple and it must now be clawed back with interest on top.

The Irish government and Apple said they will appeal.

"The European Commission has launched an effort to rewrite Apple's history in Europe, ignore Ireland's tax laws and upend the international tax system in the process," Apple CEO Tim Cook wrote in an open letter response to the EC's opinion. "We now find ourselves in the unusual position of being ordered to retroactively pay additional taxes to a government that says we don't owe them any more than we've already paid."

Apple employs 6,000 people in Ireland, mostly in Cork, a city of about 120,000 residents on the southern end of the island. In opening up a data center in Dublin in June, Google said it now has 6,000 employees, including contractors, in Ireland. Microsoft has close to 2,000.

According to IDA Ireland, the country's foreign direct investment promotion agency, Ireland's software industry employs 24,000 people, includes nine of the world's top 10 tech firms and generates $17.8 billion in annual exports.

The parade of Internet companies expanding in Ireland in recent years has produced press releases with plenty of similarities.

"It's a very attractive place to work and the cost of living is very acceptable." -Marc Cabi, vice president of strategy at Zendesk

HubSpot called Dublin a "city with a lot of innovative energy," when the software company announced it was opening a European headquarters there in 2012. The company said in April it was adding another 320 employees in Dublin over the next three years.

Job search site Indeed referred to Dublin as "an incredible source of talent" upon opening its European base in 2012, and that same year Dropbox CEO Drew Houston said his company was "tapping into the large talent pool that exists there," as it declared Dublin the center of international operations.

Glassdoor announced in October that it was opening a sales and marketing office in Dublin, at which time Martin Shanahan, the CEO of IDA Ireland said, "Talent is the number one reason why companies choose to come to Ireland."

Zendesk has over 175 employees in Dublin, its biggest office outside of the U.S. The operation has significant influence within the San Francisco-based company, and in December employees in Ireland provided the muscle behind the launch of a new voice product inside Zendesk's cloud-based customer support software.

"We're able to attract a lot of good engineers either from Ireland or continental Europe that want to live there and work for a growing tech company," said Marc Cabi, Zendesk's vice president of strategy, in an interview. "It's a very attractive place to work and the cost of living is very acceptable."

In fact, according to IDA Ireland, inflation has been below the EU average since 2008 and housing prices are down 20 percent from their peak last decade.

Irish Minister for Finance Michael Noonan.
Peter Muhly | AFP| Getty Images
Irish Minister for Finance Michael Noonan.

From a tax perspective, Ireland has long been an attractive location for foreign companies, with a corporate tax rate of 12.5 percent since 2003. Apple and Microsoft were already established in Ireland by then, but for most of today's fast-growing Internet companies, the timing was perfect as it preceded the emergence of the social and mobile web.

Add to that a 25 percent tax credit that Ireland provides to offset research and development costs and it becomes a no-brainer to shift resources to Ireland.

"Companies are always looking at tax opportunities," said Cabi.

For Ireland, the long-term benefit of building a tech hub is so great that the country is now in the awkward position of rejecting a potential $14 billion payout from Apple.

Ireland Finance Minister Michael Noonan and Apple's Tim Cook are poised for a bruising battle against the rest of Europe.

"This is necessary to defend the integrity of our tax system, to provide tax certainty to business and to challenge the encroachment of EU state aid rules into the sovereign member state competence of taxation," Noonan said in a statement.