Corporate tax calculations


Opinions differ on what tax rates Ireland’s corporate sector actually pay. The nominal or headline rate is 12.5 per cent, but what is the effective rate – which companies finally pay? Experts disagree. A study by James Stewart, associate professor in finance at Trinity College Dublin, suggests that in 2011 the subsidiaries of US multinationals in Ireland paid an effective tax rate of 2.2 per cent. Last week Taoiseach, Enda Kenny cited a report by consultants PwC and the World Bank, which placed Ireland’s effective corporate rate at 11.9 per cent.

In any global study of corporate tax rates the method of assessment matters. The PwC report, which the Government has used to rebut criticism of Ireland’s low tax rate, was based on a hypothetical Irish company that sold ceramic flowerpots, and had no imports or exports. The company was not – unlike the subsidiaries of multinationals in Ireland – in a position to use legal tax avoidance measures to minimise its tax bill. Since last May the Government has faced growing international pressure to change Ireland’s low corporate tax regime. Then, Apple’s chief executive, Tim Cook told a US Senate sub-committee that the company had paid minimal tax (2 per cent) on its foreign earnings in 2012. Apple had used aggressive tax planning to cut its tax bill. For this, Ireland was accused of being a tax haven, a claim the Government rejected as wholly unjustified. And the OECD has said Ireland meets none of the criteria of a tax haven.

Corporation tax matters. It accounts for over 10 per cent of annual tax revenue. But the subsidiaries of some multinationals have paid little. In 2012, Google’s operation in Ireland recorded revenues of €15.5 billon, on which it paid Irish corporation tax of €17 million. Google has, however, located its European base in Dublin, where it employs more than 2,000 people who do pay taxes on their earnings and their spending. Foreign direct investment has resulted in over 1,000 international companies locating here, which employ several hundred thousand people, directly and indirectly.

The Government has sought to deflect criticism of the country’s low corporate tax regime and to repair the reputational damage Ireland has suffered by insisting that it fully complies with accounting rules and international laws, and supports efforts by the OECD and others to develop a new international tax code. This is expected to result in much greater transparency, which will oblige companies that operate across borders to report in each country on their income, taxes and business activities. The Government, with its international tax charter document last October, where it pledged to play fair while ensuring the tax rate remains competitive, has taken the first stop in defining its position in the unfolding global tax debate. Further, and bolder, steps, are needed.