Our 12.5% corporate tax rate mantra is sounding increasingly hollow

State better off using yield from higher rate to enhance other business incentives

Tánaiste Leo Varadkar’s idea of a two-track regime, where only companies with turnover above €750 million move to a higher corporate tax rate, has gone down like a lead balloon. Photograph: Gareth Chaney/Collins

Tánaiste Leo Varadkar’s idea of a two-track regime, where only companies with turnover above €750 million move to a higher corporate tax rate, has gone down like a lead balloon. Photograph: Gareth Chaney/Collins

 

Everyone is tiptoeing very carefully around the thorny subject of corporation tax right now. Well, everyone except for Leo Varadkar.

The Tánaiste has floated a proposal that appears, on first sight, to be both impractical and unnecessary. Without, it appears, any discussion in Cabinet, he has raised the notion of a two-track regime, almost all companies (anyone with turnover below €750 million) staying on the 12.5 per cent rate and any companies above that moving to a new, higher rate – most likely 15 per cent.

Apart from the difficulty of getting EU sanction for such an arrangement and the risk of encouraging tax avoidance by those approaching the cutoff, there appears to be no demand for it. Irish business has long become reconciled to the notion that corporation tax is going to rise under the OECD process.

But they do have other concerns. There has been a clamour for the reform of the EIIS scheme for investment in early-stage companies, currently seen as overly bureaucratic and miserly. And entrepreneurs have also been actively lobbying for a number of years for a more generous capital gains tax regime for business owners selling their business.

Both are issues on which Varadkar has promised action. But with Covid debt likely making tight budget arithmetic the norm over the next few years, it would seem to make sense for the State to take the modest extra funds a higher corporation tax rate would yield and use them then to deliver enhancements to business elsewhere.

Touchy subject

For the Republic it is a touchy subject. The cornerstone of our highly successful foreign direct investment offering, it is to some outside observers just one more element of what they see as a tax haven structure.

With change afoot under the OECD discussions to reform corporate taxation worldwide, Ireland’s current caution is understandable. Far too much is at stake to sign up to a carelessly worded and incomplete document.

Our adherence to the 12.5 per cent corporation tax rate over recent years has been on the basis of the need for certainty in our dealings with inward investors and our own indigenous businesses. However, in recent weeks it has come across more as clinging to a rock in a storm, rather than using it to build a firm foundation.

In short, the rate has become a mantra rather than a realistic reassurance for business.

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