The news that Ireland reached an agreement with the European Union and International Monetary Fund for a EUR 85 billion ($110 billion) bailout, which includes EUR 67.5 billion ($88.8 billion) in external assistance and EUR 17.5 billion ($23 billion) from the Irish government raises an important question for the pharmaceutical industry as to how fiscal policy for European Union member states may affect the environment for pharmaceutical manufacturing.

Like Greece, the bailout for Ireland is necessitated by the country’s need to cut its budget deficit to meet EU requirements that member states have a budget deficit of no more than 3% of a country’s gross domestic product. With anemic economic growth of 0.9% forecasted for Ireland in 2011 and 1.9% for 2012, according to a recent forecast by the European Commission, Ireland received an extension of one year to 2015 to meet its fiscal goals of bringing its deficit down to required levels. The bailout is a combination of bank restructuring, reorganization, fiscal policy, and structural reform. The fiscal component of the bailout has drawn criticism domestically in Ireland as well as among EU member states. Ireland has remained firm on keeping its corporate tax rate at 12.5%, which is welcomed news to the pharmaceutical industry, but is an increasingly contentious issue for Ireland domestically as the population as a whole faces tax increases and public-service cuts and for some select members of the EU Parliament, which wanted to see Ireland raise its corporate tax rate to contribute more to its portion of the bailout.

With one of the lowest corporate tax rates (second only to Bulgaria) among EU member states, the tax-advantaged status of Ireland has made it a hub for pharmaceutical research, development, and manufacturing. Government officials contend that keeping the rate of its current level is crucial to retain the country as an attractive site for foreign direct investment and that its competitiveness would be eroded if the tax were to increase. According to information from IDA Ireland, the economic development arm of Ireland, foreign direct investment in Ireland is an important part of the Irish economy with 966 overseas companies with operations in Ireland that employ 123,475 people. The life-sciences sector alone has 170 companies, employs approximately 40,000 people, and accounts for $46 billion in exports.

The lure of favorable corporate tax rates cannot be underestimated. This week GlaxoSmithKline announced it will invest EUR 500 million ($650 million) in UK-based R&D and manufacturing based on the UK government’s plan for a so-called “patent box” regime. The patent-box measure is designed to encourage investment in R&D and related manufacturing in the UK by introducing a lower corporate tax rate on profits generated from UK-owned intellectual property. According to a recent Wall Street Journal article, the corporate tax rate would be lowered from 28% to 10% for those profits derived from product launches derived from UK-based intellectual property.

The delicate balance between encouraging business investment through tax incentives and the need for finding revenue-raising vehicles is not a new dilemma for governments. But given the increasingly stringent fiscal environment, how EU countries will decide these issues will have both near-term and long-term implications for the operations of pharmaceutical and biopharmaceutical companies.