Can we change our corporate tax rate?
Two experts set out the arguments for and against
Tom Healy - Yes
What is the actual level of tax paid by corporations that operate in Ireland? According to the latest European Commission data on taxation trends, the total of corporate taxes as a percentage of GDP in 2011 was 2.4 per cent in the Republic of Ireland compared with an EU27 average of 2.6 per cent. In 2011 taxes on corporations’ incomes amounted to 8.3 per cent of total taxes in Ireland compared with an average of 6.6 per cent across the EU. On the face of it, corporations in Ireland are paying their way no more nor less than in most other European countries. However, the unique nature of economic activity in Ireland must be considered.
With the growth of a large exporting multinational sector since the 1960s, a large amount of profit is generated, or “booked”, in Ireland because of relatively favourable tax conditions among other factors. In 2012 a provisional estimate of total corporate tax received by the Exchequer is €4.2 billion.
Taxes paid by corporations are calculated on the basis of a headline rate of 12.5 per cent, with many adjustments for relief on capital allowances, research and development and other allowable expenses. At the very most, the effective rate of tax in 2012 was probably somewhere around 9 per cent, on average, given a provisional estimated corporate profit tax base of €46.6 billion in that year.
Based on previous years’ data this is likely to be similar to net taxable profits as measured by Revenue when it reports for 2012. Estimates for previous years suggest an average effective corporate tax rate of 12.7 per cent in 2007 falling to 7.4 per cent in 2011 before rising to 9 per cent in 2012. For a European perspective, using the latest Eurostat data for 2011 on corporations’ net operating surplus it is estimated that Ireland is 18th out of 22 EU states.
At 8 per cent in 2011, which is slightly above the estimate based on CSO national accounts data, Ireland is below most other EU states; for example the UK (22 per cent), Luxembourg (20.5 per cent), Germany (16.4 per cent) and the Netherlands (12.8 per cent). These comparisons do not account for corporate contributions to social security, which are higher in most countries apart from the UK.
In its two most recent quarterly economic observers, the Nevin Economic Research Institute has suggested that reforms to corporation tax reliefs and provisions for carryover of losses could raise an additional €250 million in 2014. That sum would represent an increase in the effective rate by 1 per cent.
This measure is unlikely to deter existing or future foreign direct investment. One way to ensure a very modest contribution from the corporate sector would be to impose a minimum payable amount in the case of each corporation reporting a profit. In the long run, Ireland’s reputation, North or South, will not be built on low corporate tax.