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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12 Comments on “Taxing corporates”

  1. Vincent Says:

    Are we not asking the wrong question with the corp’tax. Rather that sweeten the bowl with lower rates for outsiders. Why not have a EU rate that will have developmental potential. But one with a time limit so that there is not aid dependency like with the farmers.
    I feel that Ireland has been piggish on this matter. Especially so, during the 99-07 period. And I query the true value in cash terms and any other terms you might mention.
    Definitely there was a case before GATT castrated the border controls of the EEC/EU. But now, what Ireland are doing is little more than piracy from friends. And as much as it’s helpful to draw in investment which will provide employment. The Accountancy and Actuarial games with friends taxation systems that investment is very cheap.
    Further, I doubt very much if what was made in Ireland was subject to no tax would matter to the rest of Europe if the same system didn’t provide B&B for a companies entire EU income.

    • jfryar Says:

      For me the issue isn’t economic but political. The idea of a harmonized tax rate scares me- the inability of nations to determine their own tax rates scares seems like a loss of soverignty too far.

      The row over Ireland’s corporate tax rate seems to be more about the political desires and aspirations of France and Germany than about competition or inward investment into the EU.

      • Vincent Says:

        Except we are in a Union, something that implies the term mutual. And the entire place cannot always exist of an Aid package. At some point the Reformation has to hit home and it has to dawn on someone that every single pfennig we received from the CAP went to build up huge holdings in food companies which provide ZERO income to the Irish State. Or anyone else beyond a couple of dozen players on huge stipends.

  2. Michael Says:

    I do think companies could leave if there is a change in our corporation tax scheme. I have heard anecdotal evidence of CEOs and board members of Irish based multinationals asking FCOs to draw up contingency plans to depart in the event of significant tax changes. This matter is being watched closely in MNC board rooms.

  3. Evert Bopp Says:

    While the relatively low corporation tax is indeed vital to the Irish economy it’s also a bit of a curse. If the only reason why the majority of FDI into Ireland is made is because of the low tax then that’s a famning verdict. It basically says that all the so-called “smart economy”, infra-structure and all other investment can be nullified by something that is no more than a discount. We’re obviously not the best but just the cheapest.
    Ireland should as soon as possible, while we still have time, find other ways to compete on the international market.
    What also needs to be done is to put more emphasis on the development of companies with their roots/origin in Ireland. These types of companies are less likely to “up sticks” and move to the next low-cost country when costs in Ireland increase.

  4. Niall Says:

    I can remember 10% corporation tax rate in the 1980s. It was raised to 12.5% without disastrous consequences for the economy. I think we should consider a modest increase in corporation tax perhaps with an exemption for new investments for 5 years. This should be worthwhile if we can then renegotiate a significant reduction in debt repayments with ECB & IMF.
    Multinationals come and go for many reasons – corporation tax rates being one of them – but it was not enough to keep Dell here, for example.

    • I don’t think the corporation tax rate has much of an impact on company retention, but it is critical to recruitment. If we had had a rate of 15% Google, for example, would not have come. I was marginally involved and I know this.

      • Niall Says:

        So should we lower the rate?

        • Not sure if your question is tongue in cheek, Niall, but no, lowering the rate is not necessary. It is a well understood rate globally, and maintaining it is fine.

          • Niall Says:

            Semi tongue in cheek… but if 12.5% is fine would raising it to 13% be a significant factor for incoming investors?

            I agree absoluletly with your wider point about the need for (re?)engaging the European public with the EU

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