Kenny is right to dig in his heels on corporation tax

 

OPINION:EU Commission proposals on corporation tax tear up global tax principles and would be hugely damaging to Ireland, writes FEARGAL O'ROURKE

NEW DAWN, new day, new Government but Enda Kenny is singing the same old story on corporation tax – and he’s right. There is some confusion over exactly what battle we are fighting and indeed in some small pockets, there are questions as to whether we are pursuing the right course of action. However, if we are to continue over 50 years of tax policy designed to help attract the current and future leading global companies to invest in Ireland, then we have no choice but to do this.

Essentially Kenny and Michael Noonan are now fighting a war on two fronts. There is the political fight against the Franco-German alliance of Sarkozy and Merkel. By all diplomatic accounts this is a good old toe to toe “frank” debate (translation: there’s a lot of shouting). The issue here is the 12.5 per cent rate of Irish corporation tax.

Sarkozy and Merkel don’t like it because it doesn’t fit their idea of a “normal” tax rate; they don’t like it because they perceive it is predatory and diverts tax from their coffers; and most of all they don’t like it because they see it is hugely successful at attracting Foreign Direct Investment (FDI) to this country.

Their domestic concerns are as much at the heart of this. Merkel is a very astute politician but her recently reported comment in Hamburg during German elections that the Irish corporation tax rate was a key reason for the Irish banking crisis is frankly risible.

However, are they not being reasonable in looking for a “temporary” increase in the rate or alternatively a gesture in this area? Surely that won’t cause too much difficulty? Firstly nobody believes in temporary taxes. Income tax was brought in as a temporary tax by Pitt the Younger in 1799 to fund the Napoleonic wars and the world is littered with other such examples.

Secondly, Ireland is a small, open economy and places significant dependence on attracting FDI both for the investment which it brings and the spin-off impact on local businesses. The thing which such potential investors crave most is certainty. Ever since Ruairí Quinn and the rainbow coalition introduced the 12.5 per cent rate of corporation tax, it has become part of Ireland’s offering to attract FDI.

There is nothing sacred about the figure of 12.5 per cent itself. Insiders involved in the process at the time indicate that the band being considered was in the 10 per cent to 15 per cent spectrum and the 12.5 per cent (or 1/8 in fractional terms) was selected almost for its “handiness”. However, over the 14 years since its announcement it has become a brand in its own right. Altering this rate – either up or down – immediately removes the certainty which is a central part of its attractiveness.

This may seem alarmist but one US west coast company I met this week which is close to making a decision on Ireland was clear any adjustment to the rate was likely to tip the investment decision to Singapore. The revenue impact may be minimal but the impact on investor confidence would be massive.

The message would be loud and clear – planning a long-term investment in Ireland would be uncertain given that we have shown no ability to determine and protect our rate of corporation tax. The recent unexpected introduction of a Puerto Rican excise tax regime, reversing decades of previous policy, has had a massive negative effect on the investment climate there.

Thirdly, and most importantly, the 12.5 per cent rate of tax works for Ireland and is a key element to try to drive the economy forward. Studies by the Organisation for Economic Co-operation and Development have shown that a one percentage point increase in corporation tax can lead to a 3.7 per cent fall in FDI. It would make no economic sense to change the one major part of the tax system that actually is a force for investment.

Kenny recognises the importance of maintaining the rate and even if he were to waver (and there is absolutely no indication this is being contemplated), the domestic difficulties in selling this politically and in the wider business community would be immense.

The second battle the Government is facing is with the EU technocrats who are advancing the concept of a Common Consolidated Corporate Tax Base (CCCTB) and this reached a new level with the commission’s adoption earlier this week of a proposal for an EU-wide system.

In essence, global principles would broadly hold that the profits of an enterprise can be attributed to where the risks, functions and activities are located. Therefore, companies which operate from here and sell into Europe pay their corporation tax in Ireland.

The common tax base proposal seeks to tear up these principles and, broadly speaking, allocate profits by reference to where sales are made, where its assets are located and where its people are based. Clearly the sales criteria will have the impact of taking tax revenues currently paid by such companies to Ireland and reallocating them to various other European countries.

The net impact is that one critical element of Ireland’s offering to FDI would be removed and clearly there is absolutely no upside for Ireland in supporting this and quite a bit of downside. The rate of tax becomes absolutely irrelevant under CCCTB since the profits to which such a rate would be applied have disappeared. Agreeing to CCCTB is not an option under any circumstances.

What happens now is that the proposal will go through lengthy technical and political analysis and generate much debate before it ever reaches the EU’s council of finance ministers (Ecofin) for decision. There are significant questions which have not been answered in the proposals to date. There is also the question of companies being allowed to opt in or out. If that is the case, will the EU collect lower tax revenues as companies will go for the system which gives them the lower tax bill?

However, there is no doubt the ball is in and the game is on in relation to this proposal.

Perhaps there is some light at the end of the tunnel. Following the recent euro zone summit, a late night comment by Herman Van Rompuy, the president of the European Council, that Ireland only had to promise “constructive engagement on tax co-ordination” rather than move on the rate or the base, did not seem to pick up too much attention. A couple of sources have indicated this was a personal initiative by the president. Constructive engagement would seem a far cry from active endorsement and may be a way in which Ireland can achieve its aim of reducing the debt burden costs while not sacrificing any principles on corporation tax.

What Kenny needs now is some political and business cover to explore what might be on offer here. Corporation tax is a highly charged political issue and, as a new Taoiseach, he might be worried that any deal done which is less than clear cut runs the risk of significant political and business attack.

He needs the opposition and business leaders to give him that latitude, while acknowledging the core principles around the rate and the base will be protected. On an issue as important as this, Kenny shouldn’t have to look over his shoulder.


Feargal O’Rourke is head of tax and legal services at PricewaterhouseCoopers

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