In the context of Ireland’s banking and fiscal crisis and the impending bailout by the EU and IMF, the finance ministers of Austria and France have suggested that the bailout should be made conditional on Ireland raising its 12.5% corporation tax rate. This would help squeeze Ireland’s budget deficit and resolve what has long been a bone of contention between Ireland and its European partners.
The Irish government has been quick to rule out any such move and most commentators (in Ireland) tend to support this on the basis that such a move would make Ireland “less competitive” and would lead to foreign multinationals leaving the country. Although these comments make a lot of sense, they do miss a more important point – in the short term, raising Ireland’s corporation tax rate is unlikely to have strong positive effect on the corporate tax take from foreign operations.
We must realise that Ireland’s 12.5% corporation tax rate is only one aspect of Ireland’s constellation of incentives to attract foreign direct investments. Other important pillars include, amongst others, recent legislation for holding companies, taxation of patent royalties, double taxation agreements and the (US) legislation for cost sharing arrangements.
All these elements together have made Ireland an attractive location for foreign “headquarters”, notably for “managing” intellectual property (IP). In addition to their traditional involvement in manufacturing and services operations, many multinationals such as Pfizer and Google have established separate headquarter subsidiaries in Ireland for the management of IP and other intra-firm financial services. The US parents have licensed large shares of their IP to holding companies in Ireland. Although, in some cases, the royalty income is again re-allocated to genuine tax havens such as Bermuda, the Irish subsidiaries do pay 12.5% over some of the profits. Because we are talking about billions of royalty income, this is a substantial source of revenue for a small country like Ireland. One example of such carefully designed corporate structures was recently outlined in the context of Google.
It is not difficult to imagine what would happen were Ireland to raise its corporation tax rate to the level of its European counterparts. Because most of the manufacturing, and even services, operations are relatively inert in the short term, the corporation tax take from such operations would rise. However, the situation is different in relation to holding companies involved in IP management and other intra-firm financial services. In reaction to a hike in corporation tax rate, IP can relatively simply be relocated to other jurisdictions using buy-in payments. This would result in a serious loss of corporation tax revenues from foreign companies in the short term. Thus, in the short term, raising Ireland’s corporation tax rate is unlikely to have strong positive effect on the corporate tax take from foreign operations and is unlikely to help squeeze Ireland’s budget deficit. This point has been missed in most of the current commentary on corporation tax. Raising the corporation tax rate would, of course, also affect the indigenous sector. I am in no position to estimate the effect of this on the corporate tax take, but, given the embattled state of this element of the Irish economy and the limited profit margins, I expect that this will not have a strong positive effect on the tax take either, while many indigenous companies will simply call it a day – a double whammy.
So, this does not appear the right moment to raise the corporation tax rate. This is not to say that Ireland should not raise its corporation tax rate at some stage – quite the contrary, in fact. The low level of corporation tax rate has done wonders for Ireland’s economic development. But we had reached a threshold level that would have allowed us to divert to a more sustainable economic development trajectory, both from an economic and social point of view. If we want to develop a sustainable economy we will need to adopt a strategy that will eventually involve a proper level of taxation. Very few equitable societies are built on a low taxation model. In the short term, it would clearly be counter productive to touch the corporation tax rate. But I don’t buy this idea that, even in the long term, Ireland can only be competitive on the basis of a low level of corporation tax, or other taxes for that matter. What is so special about Ireland?
Chris van Egeraat
November 22, 2010 at 10:26 am
I understand your arguments Chris,
However in effect what is implied through the Corporation tax arguments is that our competitive advantage is NOT that we have an educated workforce, nor that they are highly skiled, adaptable or competitive only that we will do it cheaper and are prepared to, in effect, bribe foreign companies to come here and pay little in compensation for the skills we have already provided (or help us to train their future employess) not to mention development grants, tax-amnesties and other sweetners.
The problem is that other countries can beat us in the ‘race to the bottom’ (think Dell to Poland)due to our small size and higher cost of living due to our remoteness.
Furthermore fighting to keep a much lower corporation tax effectively signals that we do not value issues such as social justice, polluter pays and workers rights. All we are doing is supporting entities which are already involved in exploiting workforces in other jurisdictions to manipulate their intra-company balance sheets to short-change those workers who do not enjoy the limited workers rights here. (Dell would not have got away so lightly in Germany which is a much better model of a well-managed economy than the free-market US)
So yes the corporation tax debate misses the piont(s) but I would contend the points at issue are ones of contributing a fair share of the supporting costs of the society in which your company is located.
Dave Walker
November 22, 2010 at 12:04 pm
iP education, creation and protection, as well as exploitation, especially through licensing, should be the bedrock of the Irish economy.
November 22, 2010 at 12:11 pm
Dave
I think the original point is well made: That the issue of the headline rate of corporation tax is not the only consideration particularly where IP is concerned. Ireland has a flat rate of corporation tax with additionally a set of other schemes to incentivise IP management, R&D etc. It is comparatively simple and transparent.
Other jurisdictions have higher headline rates but cut special deals at national and federal level so that the actual tax rate for some corporations or operators in certain sectors in those jurisdictions may be lower. There is a low degree of transparency in this case.
At the same time countries such as Belgium, Holland and Luxembourg offer significant tax reductions for R&D and IP functions. Ireland is by no means at the bottom in this highly competitive sector in Europe.
All these issues must be borne in mind when comparing national corporate tax rates.
November 23, 2010 at 10:20 am
This is from the Guardian, from our ‘friends’ across the water
http://www.guardian.co.uk/commentisfree/2010/nov/22/no-bailout-for-ireland
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