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
Ireland after NAMA 
March 16, 2011 at 3:06 pm
You have detailed an accurate assessment of the current situation. I have for some time noted in comments in the Irish Times and US newspapers that the Irish corporate tax rate would come under severe attack and that US and international pressure was building to eliminate the advantage which Ireland currently enjoys. Irish politicians of the former government seemed too preoccupied with the economic crisis to tune in and it is unclear to me how the new administration views the matter.
The advantages of the current situation for US companies, also under scrutiny from the US government under the specific direction of President Obama, will likely disappear, as will those corporations from the Irish scene, when the tax advantage is no longer a factor. Result, more Irish unemployment on the horizon.
August 23, 2012 at 11:00 am
I agree that with the above comments that a move towards the CCCTB will adversely effect Ireland’ tax base. However this said, Ireland has bolstered its fiscal policy on an inequitable model for far too long.
The scale of holding companies who avail of Ireland’s (and the OECD) preferential tax regime is embarrassing and completely incoherent with government policy commitments The Irish fiscal environment supports and defends the same tax practices that reduces developing countries tax base annually, by levels that exceed the global aid budget.
Unfortunately there will be a fall in the Irish tax base but there may also be a rise in the tax base for less developing countries, and more importantly a rise in tax justice.
Ireland’s self proclamation as a country who has the best interests of all developing countries at heart is in stark contrast to what the Irish fiscal models encourage.
It is time that countries reap the fair reward from MNC’s operating in their country. This is a necessary shift if nation states are to reclaim the power balance from MNC’s.