by Mark Lonergan
There has been uniform acceptance among advisers and policy-makers that Ireland’s low corporate tax (CT) rates have been a major stimulus to industrial investment since the 1950s and a cornerstone of the Celtic Tiger. 580 US multinationals located in Ireland and close on 100,000 Irish people are employed in Ireland by these firms. However, this corporate fiscal landscape may be about to change as there are rumblings that President Obama and his new régime are not best pleased with the existing tax regime. Given that Obama has adopted a hugely ambitious public-spending programme, he clearly needs to generate as much tax revenue as possible. Robert Shaplo (an adviser to Obama ) in particular has recently commented on Ireland’s over reliance on foreign investment. While the US cannot compel Ireland to increase its corporate tax rate, the US government could in practice – by closing of tax deferral loopholes - make the 12.5% corporate tax rate null and void.
Hot on the heels of the US scrutiny, there have been discussions in the media over the past few weeks that the new rules introduced by the European Commission mean that the Commission will exercise an oversight over the national budget of member states in the future. This oversight could conceivably be the death of Ireland’s 12.5% rate, as the Commission would seek to level the playing field. The Irish policy-maker faced with possible attack on two fronts could be forgiven for alluding to Claudius in Hamlet: “When sorrows come they come not in single spies but in battalions”.
In light of the possible changes in American tax law and changes to the EU Commission rules, it is apposite to consider if the CT rate is too low. Such an examination is necessary as the recent Commission on Taxation report were exempted by the terms of reference from even considering the CT rate.
A quick comparison with other countries would suggest that the rate is too low. The UK rate is 28%, the German rate is 30% and the US rate is 39.5%.
On the face of it, 12.5% is too low; it is an artificial state aid to the corporate sector. It strikes at the equality of the tax system, particularly since personal tax-payers are now paying effective tax rates of up to 55%.
We currently have in effect a third-world corporate-tax level. The idea was (or should have been) to entice Foreign Direct Investment (FDI) with tax breaks and then gradually raise corporation tax so that they would pull their weight. Essentially what we have got is a form of American imperialism. They essentially take our resources, our labour, our land and infrastructure and send it back to their own country. Granted these companies give a small fraction back in the form of wages and 12.5% profit. These multinational companies (MNCs), as recent job losses in particular at Pfizer and Dell have shown, are completely footloose: ready to leave as soon as we become expendable.
The low-company-tax régime can be seen as part of a conservative low-public-service ideology – a “race to the bottom” by nation states to attract FDI at any cost. The result is we have an extraordinarily low ratio of tax to GDP compared with other EU countries. Many MNCs could afford to pay a higher rate without much effort and are located here for reasons which are much more complex than our attractive CT rates. The few that would pullout because of the rate rise would pull out anyway.
The IDA and Forfás have to say a low CT rate is essential. It is part of the raft of incentives for location in Ireland but if the low nominal rate is the overriding reason for locating in Ireland we are in trouble.
In my experience with Finance Directors of MNCs, there have been varied responses when I have broached the question of the low tax-rate. Many say they are judged by their parent companies on their pre-tax not post-tax profits anyway; others say that their MNC tax-planning is so complex that they do not require a low rate in Ireland.
Ireland in 2010 needs to invest in public services particularly in health and education to build a healthy indigenous knowledge-based economy in line with the Scandinavian model. The raising of the CT rate to an 18–20 per cent rate would have little impact on employment; it would still be low in comparison with other EU states. A one-off change in CT is needed to redress the current fiscal gap. The present fiscal deficit is alarming. Approximately € 10 billion of the 2007 Tax take was property-related in terms of VAT, Capital Gains Tax and stamp duties. Revenue from these taxes is unlikely to pick up soon.
This fiscal gap highlights the need for a clear need for a more sustainable source of Revenue for Government rather than increased Governmental borrowing.
Raising the CT rate would also end the resentment from other European states, particularly Germany and the UK, at our low rate.
The choices are – do we stick with the 12.5% race-to-the-bottom rate or have we national confidence that we are sufficiently vibrant, young, educated and attuned to the needs of foreign companies to to raise the CT rate to 20%. The result would be a more broadly-based and fairer tax system and increased tax revenue for public services.
Mark Lonergan is a Chartered Accountant working with MNCs