State must react to global focus on corporation tax
“The nation state is too small to do the big things and too big to do the small things.” This observation, first made in the 1990s, succinctly captures how both centripetal and centrifugal forces are simultaneously at work in the world.
On the one hand, power is being devolved downwards as pressure builds for governments to bring decision-making closer to citizens. The clearest measure of this is the many peoples who have sought and achieved statehood around the world; the number of states has multiplied fourfold since the middle of the last century. With secessionist drives ongoing in many places across the world, the fragmentation process is far from over.
At the same time, other traditional functions of the nation state are being pushed upwards to regional or global level because states acting alone cannot effectively deal with some challenges – climate change is one very obvious example.
Another issue rising up the global governance agenda rapidly is how multinational companies’ profits are taxed. That is happening not just because multinationals’ corporate finance departments do what accountants exist to do – minimise tax liabilities – but because they are doing it more aggressively and with a widening range of methods. As a result, the available evidence suggests, there is a growing loss of revenues for many governments. That this is happening in an age of austerity is giving added urgency to stopping it.
In Ireland, pressure to change the corporation tax regimes is usually identified as coming from Europe, as some EU member states have long believed (not entirely without justification) that the low headline tax rate here is undercutting theirs and giving US companies an unfair advantage when competing in the single market.
But it is no longer only high-taxing continentals who want change. Last summer the leaders of the G20 group of the world’s largest economies commissioned the Organisation for Economic Co-operation and Development to provide suggestions on how to stop or slow down corporation tax base erosion and the shifting of company profits from one jurisdiction to another in order to avoid tax. That the G20 – the most important global governance forum on economic issues – commissioned such a report is, in itself, a significant indicator of the degree to which pressure is rising for action to address the problem.
The OECD report, which was published this week, will feed into its “comprehensive action plan” to be finalised by the middle of this year (the speed with which the OECD is acting is yet another indication of the accelerated sense of urgency given to the issue).
As yesterday’s expansion announcement by eBay demonstrated yet again, Ireland has been among the most successful economies in positioning itself as a hub for globalised businesses. Indeed, it has been so successful that it is hard to overstate the importance of the sector in terms of jobs, exports and wealth created.
But while multinationals carry out a great deal of real economic activity here, there is also no doubt that some are channelling revenues through Ireland as a means of avoiding tax in the countries where the revenues are generated (figures on American companies’ activities around the world, published by the US commerce department, show that profits per employee in Ireland by some sectors are off the chart compared with those in most other jurisdictions around the world).
Although the exchequer gains some additional tax revenues as a result, the downside is that Ireland is increasingly pointed to as being complicit in large-scale (legal) tax avoidance. This can only weaken the defence of the low headline corporation tax rate, which is a vital and legitimate tool in attracting investment in the first place. And given the way the global debate is going, whatever additional taxes the exchequer earns will dry up anyway when a more effective international regime is in place.
It is in Ireland’s interests to wean itself off dependence on unsustainable tax revenues and avoid damaging the case for maintaining the low corporation tax rate. As such, everything that can be done – domestically and in co-operation with other countries – should be done to narrow the scope for international corporation tax avoidance.