Corporation tax: unravelling the myths

Pressure from most of Europe comes at a time when Ireland is particularly vulnerable, writes COLM KEENA,Public Affairs Correspondent

BERLIN AND Paris have been making noises about Ireland’s corporation tax rate, complaining that it is far below the European norm.

In a way they are voicing the same message as IDA Ireland, which lists the corporation tax rates of other jurisdictions on its website in an effort to attract increased multinational investment here. While the Irish rate is 12.5 per cent, the website shows that the German, French and UK rates all hover at about 30 per cent.

However, figures contained in a World Bank-PricewaterhouseCoopers report, Paying Taxes 2011, tell a different story. The report shows the actual rate of tax paid by companies in the countries mentioned above is far below the nominal rates in those countries.

In Germany the actual rate paid is 22.9 per cent and in the UK it is 23.2 per cent. President Nicolas Sarkozy has made clear his dislike of Ireland’s low corporation tax rate but his country’s effective tax rate for corporates is an amazingly low 8.2 per cent – below the Irish level. Earlier this month, an unnamed Irish official said that “based on our information, 25 per cent of all French companies did not pay any corporate tax in 2009”.

The Irish effective tax rate, at 11.9 per cent, is very close to its actual rate. This reflects Ireland’s desire to make its corporate tax regime as simple as possible, again so as to attract foreign direct investment. We do not have the range of write-offs other countries do.

Nevertheless there is no doubting that Ireland’s low corporation tax regime is under threat from Europe. The attack is coming on two fronts.

France and Germany want to see Ireland increase its rate. At a time when they are being asked to stump up money to assist Ireland and other peripheral member states, there is an understandable feeling that Ireland should raise more tax.

Secondly, the European Commission, as part of its drive to make Europe more attractive for business, is investigating the possibility of a common consolidated corporation tax base. The idea involves common rules for what can and cannot be written off for tax reasons.

It would also include an ability for companies to write off losses in one country against profits in another. A multinational would come up with a figure for its profits from its activities in the member states. A formula would then be used to apportion this profit among the member states, which could tax it at whatever rate they chose.

The latter part of the idea, the apportionment, would attempt to distribute the profits on the basis of the substance of the company’s activities in the various jurisdictions, using criteria such as sales, location of capital and location of employees.

So Microsoft, which currently records a huge proportion of its European profits in an Irish subsidiary, could end up paying much less tax here and a lot more in Germany, France and the UK, thereby upping its overall bill. A German multinational, on the other hand, might find that its overall tax bill was reduced.

The net effect of the measure, if it were to become obligatory, would be to undermine the Irish low corporation tax regime. It is for this reason that the Irish Government is so concerned about it.

A key element of the proposal is whether it will be optional. Commission spokeswoman Emer Traynor says the latest draft of the proposal will be published by the end of March.

“I can tell you categorically that optionality will be part of the proposal,” she says.

It is for this reason, Ms Traynor adds, that the commission rejected the findings of a report from Ernst Young commissioned by the Irish Government which found the system would increase costs and damage employment. That report was based on the system not being optional, she said.

Danny McCoy, of the employers’ group Ibec, says the confederation believes the system will not work, not least because of the disputes it will create between different national treasuries as they fight over their respective shares of a multinational’s tax payment.

However, Ibec is part of a 38-member group called Business Europe and only it and the Confederation of British Industry are against the measure.

Both McCoy and Joe Tynan, a tax partner with PricewaterhouseCoopers in Dublin, believe mainland European opposition to Ireland’s low corporation tax rate is based on a misconception.

“If you think about it, you don’t see very many French or German companies running large-scale operations out of Ireland,” says Tynan. “The companies you see here are US companies using Ireland as a gateway. If we push up the rate, I think the investment will go to Switzerland, not to France or Germany.”

Both Tynan and McCoy say that forcing up Ireland’s tax rate will simply drive US investment out of the EU. Multinationals can sell into the EU from jurisdictions outside it. The result will be a net loss to the EU.

Tynan says the European argument, that our tax take is too small and so we should increase our corporation tax rate, is likewise misconceived. The low rate is a cornerstone of Ireland’s industrial policy and tampering with it will affect the economy’s performance. Even a small increase in the rate would do huge damage as Ireland’s message has always been that the rate will not be increased.

The pressure on Ireland’s corporation tax rate comes at a time when we are particularly exposed, given our dependence on financial aid from Europe.

“If we need debt forgiveness then we are in a very vulnerable position,” says EU expert Prof Brigid Laffan of UCD. “We are in the most vulnerable position that we have ever been in in the EU.”

Nevertheless, she adds, we can refuse and the Baltic States and the UK are potential allies. Tynan’s guess is that ultimately Ireland will retain its rate.