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.
Tom Healy is the director of the Nevin Economic Research Institute
Helen O’Sullivan - No
A large part of Ireland’s job creation model for many years has been built around foreign direct investment, with the 12.5 per cent corporate tax rate a solid centrepiece in that strategy. The rate has become an international FDI brand in itself; its certainty and transparency creating confidence among the world’s largest investors at a time of increasing global competition.
Ireland is first in the world for the value of investment projects according to IBM’s 2012 Global Location Trends report. The corporate tax rate was instrumental to our ranking and to the delivery of almost 13,000 new jobs that year, resulting in the highest net job creation numbers in a decade.
In brand terms it is gold and there is no country or company in the world that would interfere with or unravel a brand of such value and importance.
The value of the 12.5 per cent rate was especially critical during a recession that saw few positive pictures.
When corporate tax returns were dropping among Irish domestic companies and job losses became unavoidable, multinationals increased their corporate tax contribution to a stressed exchequer and created new jobs.
There are those who might argue that companies should make more of a contribution in Ireland. However, it is worth remembering that tax is only due in Ireland from non-Irish resident companies for activity carried out in Ireland. Ireland has no taxing power over income arising in other jurisdictions, a vital point in the current debate.
It is also important to note that out of 27 EU countries, Ireland ranks eighth when it comes to the level of corporation tax collected as a percentage of a country’s overall tax take. Germany and France rank behind us in that table, despite higher corporate tax rates.
Countries globally have recognised what we have experienced for many years – high corporation tax rates deter investment by increasingly mobile multinationals. In fact the OECD ranks corporation tax at the top of its pyramid of most damaging taxes to economic growth and the trend globally now is towards falling corporate tax rates; only five out of 34 OECD countries have increased their corporation tax rate since 2007, while half of OECD countries have reduced their rate.
We are confident in the 12.5 per cent rate but we must be absolute in our determination to protect it. Investors the world over, demand certainty in tax above all else and nothing is better at making them nervous than changing tax strategies. There are many factors that together contribute to our inward investment; however the 12.5 per cent remains the cornerstone of our offering.
Risking our tax competitiveness is a dangerous game. At a time when winning points in the international jobs game is tough, throwing away any home advantage is not an option.
Helen O’Sullivan is the president of the Irish Tax Institute