In his opinion piece in yesterday’s Irish Times (March 15 2011) Fintan O’Toole makes a contribution to the corporation tax debate. He argues that the debate with our European partners focuses on the wrong issue, and that the tax rate of individual countries, such as Ireland, is not the problem. “Ireland has to stop making a fetish of the 12.5 per cent rate … no one actually believes that a rise of a couple of percentage points in our 12.5% corporation tax would create any serious problem for transnational companies operating here”. The real problem, in his view, lies in the fact that transnational companies have other ways to lower their global tax liabilities. Therefore, “everyone [in Europe] has to pay attention to the real issue – the need for co-ordinated global action to create justice in corporate taxation”.

Fintan appears to miss the point that this is exactly what is being discussed in Europe at the moment. The debate has moved from Ireland’s 12.5 per cent corporation tax rate, to a common consolidated corporate tax base (CCCTB). Through the creation of complex corporate structures, and facilitated by national and international corporate and fiscal legislation, transnational companies are able to allocate large shares of their profits to countries with low corporation tax rates such as Ireland. Large amounts of value and profits created in European countries are being attributed to Irish holding companies. European countries such as France and Germany therefore lose revenues. The idea of the CCCTB is not to harmonise the tax rates, but to establish (new) common rules for allocating profits to the correct jurisdictions.

The Irish government is, of course, also opposing this type of move. Its opposition is not because, as has been suggested, this is “tax harmonisation by the back door”, but because a CCCTB is potentially far more damaging to the attractiveness of Ireland as an investment location than a rise in the corporate tax rate would be. The CCCTB would remove one of the main incentives for many international financial services and intellectual property management companies locating their companies in Ireland.

Opposition may be futile, though. Ireland has the right to veto the CCCTB but this may not be enough to stop the process. Some European partners are already talking about a “coalition of the willing” that may adopt a CCCTB which would apply to this group of countries alone. It is unclear to me how this would work, but I can imagine that this will end in a situation where corporations will simply be forced to pay taxes over the profits allocated according to the rules of these countries, whether they have an operation in Ireland or not.

Ireland’s opposition to a CCCTB is also difficult to defend. The CCCTB addresses a situation which tolerates corporations not paying their fair share of tax on a global basis and which is unfair to the European partners. At some point, Ireland will have to agree to a CCCTB and, as I have argued previously, adopt a higher level of corporate taxation. However, this is clearly not the moment to start disturbing the foundations of the only remaining competitive sector of the Irish economy. Furthermore, if that moment arrives, such steps need to be part of a medium-term and clear transition process. Regarding to the tax rate, Fintan talks too casually about “the rise of a couple of percentage points in our 12.5% corporation tax”. Transnational companies prefer to plan their returns on investment and they base their investment decisions on medium-term prospects. To my mind, any ad-hoc change to the tax rate would have a signalling effect, indicating that this tax rate is not untouchable anymore and would therefore create uncertainty which would be damaging to Ireland’s prospect of attracting foreign direct investment, regardless of the actual size of any tax increase.

Chris van Egeraat