Irish Corporation Tax: Running out of Road in a Zero Sum Game ?

The Irish economic model is premised on the ability to attract an out-sized share of Foreign Direct Investment, particularly from the US, and has been for decades. As a result, we have a vibrant multinational sector that directly or indirectly supports hundreds of thousands of jobs. There are many factors at play, but there can be little doubt that our tax regime is the key driver.

Across the political spectrum, there is near unanimous agreement that the 12.5% corporation tax rate, in place since 1998, can’t be touched. It simply isn’t seen as a policy variable. Any suggestions that this may be otherwise are quickly silenced. Moreover, protecting Ireland’s right to set its own rate has long been a diplomatic priority at EU level.

Our European neighbours have long resented the fact that Ireland has been so successful in attracting foreign investment with its ultra-competitive corporate tax rate. They felt aggrieved when at the same time that they were channeling billions of euros worth of structural funds into the country, and more recently when they were called on to bail the country out in 2010.

The French were always among the most vocal critics, but more recent detractors come from closer to home, in Britain and Northern Ireland. It can hardly be a surprise that the Obama administration has turned the magnifying glass on the leakage of corporate taxes from the US. He campaigned on the issue in 2008, as did John Kerry in 2004.

Unlike many other countries, Ireland has few exemptions or derogations, so that very nearly 12.5% of all profits generated in Ireland accrue to the state in tax revenue. The recent controversy, however, centres on those profits which are not generated in Ireland, but channeled through Ireland to benefit from the fact that they are not subject to Irish tax.

Some of the faux outrage at the testimony of Apple CEO Tim Cook to the US Senate recently was a little tough to take: there is nothing new about this phenomenon, and anyone who knows anything about the Irish economy knows that it has been going on for years in one form or another.

One only has to look at the super-sized profits generated by a well-known soft drinks manufacturer going back many years. With no disrespect to the many people who work hard for the company in Ireland, but much of these profits were artificial, based on inflated royalties paid by one part of the company to another for use of the famous recipe – or so-called intellectual property rights. This is known as ‘transfer pricing’, a practice used and often abused – albeit usually within the law – by big business to locate as much of their profits as possible in the most attractive tax regime possible.

Certainly, Ireland has benefitted: generating billions in tax revenue that would not otherwise have been collected and thousands of jobs that would not otherwise have been created. But at what cost? In this game, for every winner there has to be a loser… and a small player can only keep winning in a zero-sum game for so long.

Ultimately, Ireland is not the sole aggressive competitor when it comes to corporation tax, and not even the most egregious. Neither can Ireland solve the problem by acting unilaterally – firms would just move, or move their profits, to the next most attractive tax regime. It is only through concerted action at a global level that the problem can be addressed.

That tax figured so highly on the UK’s G8 agenda is testament to the issue’s salience. It remains to be seen whether a concrete deal will take shape, and what this would mean for Ireland. What is needed is a level playing field so that countries can agree on what can be taxed where, and then set their own tax rates. In Europe, this concept was at the core of the controversial – in Ireland – proposal for a Common Consolidated Corporate Tax Base (CCCTB). This, or something like it, may yet be revisited at European, or even global level.

The multinational sector has been one of Ireland’s great strengths, but it hides some important weaknesses. Firstly, the economy as a whole, and tens of thousands of employees, are at the mercy of investment decisions made elsewhere. Secondly, while some of the most innovative, high-tech companies have located significant operations in Ireland, the extent to which cutting-edge Research & Development takes place in the country is much more limited. Thirdly, inter-linkages between the domestic and multinational sectors have not developed as they might have. Fourthly, indigenous industry has not sufficiently benefitted from the economic ecosystem generated to sustain the multinational sector in that few Irish firms have managed to scale up to compete globally.

It is important that Ireland remains a competitive location for FDI, but equally important that we support and encourage indigenous industry and entrepreneurship. We have so much to offer as a country; it would be a pity for our perceived Unique Selling Point to be the fact that we allow multinational corporations to avoid paying their fair share.

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