Probing tax policy

 

The European Commission has begun an informal, preliminary inquiry to establish whether Ireland, Luxembourg and the Netherlands may be in breach of state-aid rules in their efforts to attract foreign direct investment. The move is scarcely surprising, given the international controversy generated by revelations in recent months that some US multinationals - including Apple, Google and Starbucks – had paid minimal tax on their overseas earnings. In May, a US Senate committee claimed Apple’s low Irish tax rate reflected a special deal with the Irish authorities, while a committee member described Ireland as a tax haven. Both allegations have been strenuously rejected by Government Ministers, and denied by the Industrial Development Authority.

Ireland has, over four decades, had many dealings with the European Commission, on the EU’s state-aid rules. Since 1956, a low tax rate has remained a cornerstone of industrial development policy, subject to periodic adjustments. In 1981, the tax exemption was replaced by a 10 per cent tax on manufacturing and more recently by a 12.5 per cent corporate tax rate for all trading companies in Ireland. All the changes made have been negotiated with, and accepted by, the European Commission.

State-aid rules are designed to check unfair and anti-competitive practices developing in the single market. The commission will examine how tax law is applied to multinationals in the three countries under scrutiny. And that will include establishing whether Ireland did agree a special tax deal with Apple.

The commission’s preliminary inquiry may lead to a more formal investigation. But either way, and given the mounting global pressure for action against large-scale tax avoidance, whereby multinational companies minimise their corporate tax bill, the Government needs to recognise the major change in public attitudes. And that may well require a major reassessment of industrial strategy, with its excessive reliance on a low tax rate as the sweetener to attract foreign direct investment.

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