We are at another watershed moment for the Irish economy
With the corporate tax joyride ending, we need new ways to drive up our wealth
TK Whitaker: advocated the dismantlement of protectionism, to be replaced by the opening of the Irish economy to international trade and foreign investment. Photograph: Tommy Collins/The Irish Times
“It would be unrealistic... to rely on a policy of protection similar to that which applied over the last 25 years.” Those were the introductory words of the 1958 blueprint for the regeneration of Ireland, Economic Development, penned by arguably the best public servant in the history of the State, TK Whitaker.
He advocated the dismantlement of protectionism first introduced by the 1932 Fianna Fáil administration, to be replaced by the opening of the Irish economy to international trade and foreign investment.
We are today at another watershed moment for the Irish economy. It now would be unrealistic, in the light of imminent changes to the global tax labyrinth, to rely on a policy of tax enticement similar to that which has applied over the past 25 years.
The 1997 Taxes and Consolidated Acts laid the foundation to reduce corporate tax rates from 36 per cent down to 12.5 per cent. By 2003, Ireland had emerged as one of the world’s lowest corporate tax environments. Concerns for the sustainability of the tax-driven Irish economy were raised by the IMF delegation in 2008.
In 2015, the EU forced the closure of the “double Irish” base erosion and profit shifting (BEPS) mechanism. Ireland responded with revised BEPS structures, which were then countered in 2018 by EU proposals for a digital services tax and other measures. Now in 2021 the Biden administration’s stated determination to drive to a common global tax rate unambiguously warns that the end of the Irish tax joyride is well in sight.
The IFSC is the centrepiece of the Irish tax economy. It has almost become a ward-state, with virtual assets and highly confidential arrangements regulated by the Central Bank of Ireland but otherwise often secret to oversight by other agencies of the State.
While these concordats may have ultimately benefited the State as taxable income, albeit as mechanisms to avoid tax otherwise arising in other jurisdictions, it should be unsurprising that the EU is increasing its scrutiny. The City of London may have lost some short-term business as a result of Brexit, but may well ultimately benefit, as regulatory oversight by the EU and Westminster begin to diverge in fiscal flexibility and tolerance.
If international tax arrangements and rates move towards harmony and at a higher rate than currently applies in Ireland, then surely Ireland would benefit from a higher rate than 12.5 per cent and thus increase the national tax take to the exchequer?
In principle, yes, but in practice the footprint of taxable activity by Ireland would likely reduce, potentially drastically. Tax differentiation may no longer be a motivation to invest and maintain corporate assets and activities in Ireland. If digital taxes are applied in each country in which sales actually occur, rather than their taxable revenues being funnelled via Ireland, then our tax reach would reduce.
If the fiscal foundation of the State may soon no longer be tax enticement, then how should our national economic strategy evolve? Our natural physical resources are essentially limited to our agriculture and food sectors, and to renewable energy. Agri-food requires investment to transition to carbon neutrality. Renewable energy likewise requires strategic investment so as to become a national competence, in part to feed the plethora of cloud computing centres allured here.
In the past, our base of talent has been promoted as a further major reason for the success of the Irish economy. The Irish Universities Association reported last September that Ireland has become the EU’s most highly educated state, having 46 per cent of 25-64 year olds with a third-level education. Nevertheless, multilingual fluency remains a national deficiency. Ireland has no university in the global top 100 rankings. The UK has eight in the top 50, and 18 in the top 100. State investment in education needs to become sufficiently strategic to drive both accessibility but also world-class quality.
Ireland has no top-ranking school for business and executive education, but instead motley university schools, the Institute of Public Administration and the Irish Management Institute. Given Irish successes on the global stage in the private sector, it is surely surprising that Ireland has no world-class centre to groom its rising business leaders. Furthermore, a pool of international students graduating from a recognised top school would augment Ireland’s global soft power.
Ireland, fortunately, has a cohort of successful innovators and entrepreneurs. Nevertheless, the pandemic has dispirited many business owners and damaged countless SMEs. A re-scripted State policy could nurture the sector into a critical foundation for the economy. Numerous interventions are possible: promoting risk and venture capital as nationally critical asset classes; revising public procurement policy towards innovation; taxation policies to proactively encourage entrepreneurship; and a cultural transition to business audacity with governance integrity.
TK Whitaker laid a new bedrock upon which multiple generations have prospered. Future generations will no doubt reflect on how well we collectively emerged from a global pandemic, confronted the challenges of climate change, and evolved the economy to a truly sustainable foundation.