Ireland has been subject to a great deal of international criticism about its corporate tax regime. While Irish people might feel defensive about this, there are grounds for at least some of this criticism. Ireland’s low-tax regime has forced other countries to reduce their corporate taxes, leading to a “race to the bottom” in corporate tax payments.
As a result, the after-tax profits of large corporations rise, global revenue from corporate taxes falls, and global inequality increases. However, this may be about to change; proposals from the OECD and the EU, and an outcry from civil society opposition, may have forced the debate to a tipping point at which national and international tax policies switch from reducing tax payments on multinationals, to insisting on more equitable tax contributions.
Given Ireland’s dependence on foreign direct investment from multinational corporations attracted here by low rates of corporation tax, the possibility of this switch intensifies the need for an open debate on how we tax multinational enterprises and the alternatives for Ireland to the industrial policies that have been followed for well over half a century. The outcome of the Apple tax case, and the €13 billion refund of taxes that should have been paid, gives these questions even greater urgency.
Clearly our tax policy has been successful in encouraging multinationals, including Apple, to set up operations in Ireland though it can be argued that they come to Ireland because of a range of other factors including skilled workers, a good education system, political stability, an effective legal system, and because we remain in the European Union.
And we must ask why successive Irish governments have relied so heavily on tax competitiveness to attract investment and have resisted all attempts to get Ireland to change its corporate tax regime, when these other features of our economy and society are available?
Among the key issues to be addressed in the context of the international tipping point away from low or no tax for multinationals are: whether Ireland can reduce its dependence on multinationals as the cornerstone for industrial development; how multinationals have exploited Ireland’s changes in tax rules to continue to pay rates of tax of well below 12.5 per cent; and whether a more active industrial policy, not dependent on low corporate tax, might help increase indigenous enterprise.
The tax-based industrial policy pursued since the late 50s has been detrimental to sustainable development
Ireland’s success in encouraging multinational inflows has not translated into sustainable development. Multinationals in Ireland – including Apple – are controlled from abroad, producing goods and services designed abroad, for markets outside Ireland. This is encouraged by the Irish tax regime. The EU and the OECD are working to reduce tax competition for foreign direct investment. At the same time, key competitors like the UK and the US are joining the race to the bottom in corporate taxes. Both these developments demand consideration in Ireland of an alternative to a tax-based industrial policy.
Success for Irish-owned firms has included the emergence of Irish multinationals with an Irish base and subsidiaries abroad. However, these are in areas like food, unrelated to the activities of foreign-owned multinationals located in Ireland. The potential of foreign-owned multinationals in Ireland to generate local development has not been realised.
There have been mistakes in supporting the development of indigenous enterprises – in both policy and its implementation – across the traditional manufacturing sectors, such as furniture and engineering, and in more advanced sectors, including information and communications technology.
Industrial policies – or the omission of a policy direction altogether – have resulted in decline where growth might have been possible. In telecommunications, for example, the sale of the State-owned company resulted in the demise of Ireland as a global centre for software supply.
New analysis brought together by think tank TASC shows that the competition between states to attract multinationals, in particular by reducing effective tax rates, is harmful. It has engendered a downward spiral, and while Ireland has been praised for its success as a first-mover in attracting multinationals, it has also been accused of initiating and sustaining this “tax war”, among sovereign states.
This has had both national and international consequences: increasing inequality as the after-tax profits of rich companies grow, and the tax revenue from these profits decline; increasing inefficiency as companies set up operations based on low taxes rather than where production or service provision is best suited; unfair competition with indigenous companies that pay taxes where they are located and international companies which can “profit-transfer” within their group structures to low-tax locations. Local industry loses out also from a lack of government focus and support as it is perceived to be of lesser importance to the foreign-owned multinationals.
With international pressure growing to address its “beggar my neighbour” tax policies, Ireland is going to have to change its approach to taxing major corporations.
It is time to acknowledge that the tax-based industrial policy pursued since the late 50s is no longer fit for purpose. It has been detrimental to sustainable development where a more nuanced, strategic policy, focused on specific sectors and sub-sectors, is essential. Ireland needs a more substantial focus with improved State backing on Irish-owned firms and indigenous industry.
David Jacobson is emeritus professor of economics at DCU and editor of Upsetting The Apple Cart – Tax-Based Industrial Policy for Ireland and Europe, published by TASC and FEPS (the Federation for European Progressive Studies).