Raising corporate tax would derail investment, study finds

Even a modest rise in Ireland’s 12.5 per cent corporation tax rate could seriously undermine the flow of foreign direct investment (FDI) here, a study by the Economic and Social Research Institute (ESRI) has revealed.

As a policy experiment, the ESRI simulated how FDI flows into Ireland would have changed under alternative tax rates between 2004 and 2012.

If the rate had been 15 per cent over the period, the number of new foreign firms locating here would have been 22 per cent lower, the study estimated.

A rate of 22.5 per cent, which still undercuts rates in Germany and France, would have reduced the number of multinationals locating here by 50 per cent.

The study was conducted on behalf of the Government's influential Tax Strategy Group, an inter-departmental group that prepares policy options for the Cabinet ahead of the budget each year.

The group's papers from Budget 2016 were published on Friday by the Department of Finance. A 12-page paper on corporate tax issues said the State's headline rate was "akin to a brand" for Ireland Inc and essential to securing mobile investment in an increasingly competitive environment.

It noted that while corporation tax, the fourth-largest tax heading, netted the exchequer €4.6 billion in 2014, the lion’s share was paid by a relatively small cohort of foreign-owned companies.

A surge in corporate tax receipts last year has been linked to a move by Apple to shift some of its Intellectual Property (IP) rights here in wake of global moves to clamp down on multinational tax avoidance under the OECD's Base Erosion and Profit Shifting (Beps) initiative.

The paper said the OECD’s conclusions, which essentially seek to tax corporate profits in the jurisdictions in which they arise, presented a “significant opportunity” for Ireland.

While there is evidence of “spill-over benefits” to domestic firms, foreign-dominated sectors had lower output and employment multipliers relative to domestically dominated sectors, the paper said, underscoring the importance of the indigenous sector for employment growth.Multinationals have a lower employment footprint , accounting for just 8 per cent of the Irish workforce.