Taxing corporates

Ever since the roof fell on the Irish economy and the EU/IMF bailout was agreed or imposed, there  has been much talk of Irish corporation tax. It appears in particular that many of Ireland’s European partners have either assumed or demanded that Ireland’s corporation tax rate of 12.5 per cent (for trading income) must be increased so that it is in line with or closer to the rate levied in the larger EU countries. It has even been reported that French President Nicolas Sarkozy went into a ‘fit of rage’ when it became clear that Ireland would not willingly adjust its tax rate.

In the meantime the Irish political establishment and Irish business groups have emphasised the vital importance of low Irish corporation tax, and the damage that would be inflicted on the Irish economy if this were adjusted or if it were to be included in plans for EU-wide tax harmonisation. But there are some dissenting voices: for example, this article in the Irish Left Review argues that raising the rate from 12.5 per cent to, say, 17.5 per cent would have the effect of increasing tax revenues while also sorting out some political issues.

So what are we to make of all this? Is this a question of fiscal policy, or international relations, or investment policy, or social equity, or industrial innovation, or what? Is it as vital to Ireland’s interests as is routinely claimed? Is it (or should it be) any of our European partners’ business?

As these questions perhaps demonstrate, there are many different issues wrapped up in all of this. The two key ones however relate, firstly, to the needs of Ireland (and any other country contemplating their tax framework) at this stage of its development, and secondly to the nature and potential of European cooperation or integration.

Regarding the first, Ireland’s corporation tax framework is, contrary to some commentators’ assumptions, not new. It may have been rationalised more recently, but the low corporate tax model goes back to the 1950s, and it has been the foundation of Ireland’s inward investment strategy for a very long time. As a small peripheral country on the edge of Europe Ireland needs to have in place special incentives to make investment a good proposition. As Ireland moved away from low cost manufacturing, and in particular therefore as the country needed to persuade companies to locate higher cost activities there (as in R&D), a low corporation tax alone was not necessarily enough, but it did not cease to be important. I can speak from my own personal experience, as during the past 10 years I was able on several occasions to join the state agencies in persuading potential industrial investors to choose Ireland. Typically these would also be considering other locations that were as attractive or more so, and almost every time low corporation tax was one of the deciding factors, and sometimes was the only one. Those who argue for higher corporation tax often suggest that few multinationals would leave because of a higher rate, and they are probably right; but the key point is that far fewer would invest in future than would otherwise be possible. Those amongst our European partners who argue for a ‘level playing field’ forget the advantages that they have over Ireland; with a harmonised tax rate, it would not be a level playing field. They also assume that corporates now being (unfairly in their view) attracted to Ireland might otherwise go to, say, France. That also is far from clear. They would probably go to Asia.

It may be worth adding, while I am on the subject and as I have moved to Aberdeen, that in my view all the above arguments apply strongly to Scotland.

As for the issue of European cooperation, there is an urgent need for a greater degree of discussion about what kind of EU project is now capable of attracting more widespread popular support among the member states. The existing project has stalled, and this can be seen in referendum votes, national elections and other processes. The EU leadership needs to engage with the wider European population much more actively on this. In such a debate it can also be determined what harmonisation initiatives and proposals are workable.   Fits of rage by individual leaders are not a useful part of that process.

I am a strong supporter of the European Union. But it has work to do in re-energising the whole idea. Corporation tax harmonisation should not be a priority right now.

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Tags: corporation tax, European Union, Ireland, Scotland

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