Companies upset over tax increase rumours

RECENT reports of Government discussions taking place which could result in the tax afforded to manufacturing increasing from 10 per cent to 12.5 per cent are causing considerable disquiet within the multinational sector. The increases may appear relatively small to an outside observer. However, what must be remembered is that each percentage point increase in the effective corporation tax rate paid represents a 10 per cent increase in the total tax bill of that particular manufacturing company. Therefore, it now seems individual companies could be facing a potential increase in tax liability of 25 per, cent.

The potential effect of this on the future development of any one of a number of sectors should not be underestimated. The pharmaceutical sector, given its long investment cycle times, is particularly sensitive to such policy changes and is a good indicator of longer term effects. When multinational companies set their strategic plans for the future, they take very close account of global trends.

According to Mr Kieran McGowan, chief executive of IDA Ireland, in a paper he gave on foreign direct investment, Ireland would have secured very little of the investment it did between 1980 and 1995 without the 10 per cent tax regime. Also, according to him, there has been a convergence in effective tax rates between Ireland and its competitor countries. Nominal tax rates have tended to fall in European competitors from around 45 per cent or 50 per cent down to between 33 per cent and 35 per cent, while at the same time Ireland's rate has actually increased from 0 per cent to 10 per cent, halving our differential competitive advantage.

Mr McGowan also noted that the market share in mobile investment projects had also halved over the 1980s. At the beginning of that decade, Ireland was attracting about 80 per cent of available projects. This had fallen off to 41 per cent by the end of the decade, reflecting an international intensification in the competition for inwards investment.

Any increase in corporation tax rates will further diminish Ireland's attractiveness to mobile investment. This will result in what is often referred to as negative buoyancy of tax revenue - a reduction in tax paid due to lower profits as a result of lost investment.

Ireland is facing significant competition from other investment locations both inside and outside the European Union. Outside the European Union, the most aggressive competition comes from Pacific Rim countries such as Singapore. These countries are offering extremely attractive investment packages for potential investors. This includes an effective 0 per cent tax rate combined with extraordinary levels of investment in the area of research and development and educational support.

Closer to home investors often find that effective corporation tax rates are less than nominal rates which appear on offer. Hence investors could be considering investment locations in continental Europe such as the Netherlands with the advantages that such locations offer combined with tax rates close to or lower than the rate on offer in Ireland. This represents a significant threat to future inwards investment. Non EU states such as Switzerland are also offering tax holidays or tax breaks where rates close to 0 per cent are available to investors.

The competitive pressures of globalisation, reduction in trade barriers and continuing pressure, on costs mean the pharmaceuticals sector, among others, is currently going through a period of merger and acquisition activity which has resulted in significant rationalisation. To date Ireland has benefited from this process, given its attraction. It is important that this trend is not reversed. Tax changes in Puerto Rico, for example, have led to a major rationalisation of the pharmaceutical sector there.

In summary, it is vital that the 10 per cent manufacturing tax rate is extended and that an announcement along these lines is made soon. Otherwise investment and reinvestment decisions will not favour Ireland.