NO FEATURE of Irish industrial development policy has proved so successful for so long as the low rate of tax on corporate profits. What began in the mid-1950s as a tax exemption on export sales profits, which was designed to encourage foreign direct investment in Ireland, has become a cornerstone of economic progress. For decades this low-tax regime has given Ireland a competitive edge in the battle to lure mobile multinational companies. But at no time has the incentive – a 12.5 per cent rate on corporate profits – faced a greater international challenge than today.
That challenge was presented most directly and most publicly last month by French president Nicolas Sarkozy in the aftermath of difficult negotiations on the terms of Ireland’s European Union-International Monetary Fund bailout. He said that while he deeply respected “the independence of our Irish friends”, nevertheless they could not continue to ask for help while retaining a corporate tax that is half that of other countries. The French president’s remarks reflect a widely held view among other European heads of government about Ireland’s corporate tax rate, at a time when the European Commission is studying the introduction of tax harmonisation via a common consolidated corporation tax base.
However, detailed comparison between corporate tax rates in different countries presents – according to a recent World Bank-PricewaterhouseCoopers report – a very different picture to that painted by Mr Sarkozy. It found that in most countries two rates of corporation tax applied: one the nominal or headline rate, the other – a more meaningful measure – the effective or actual tax rate paid by companies, net of the various tax write-offs they were allowed. The differential between the nominal and the actual corporate tax rates are substantial, not least in the case of France. There, a headline rate of 34 per cent becomes an effective rate of just 8 per cent, lower than that of Ireland.
The suggestion by some European leaders that Ireland as a beneficiary of the EU-IMF bailout should raise its corporate tax rate to boost tax revenue makes no sense. To increase the 12.5 per cent rate would prove counter-productive for many reasons; not least because it would not raise tax revenue, and would greatly add to the State’s economic difficulties at a critical time. And, undoubtedly, a less attractive corporate tax regime here would see the departure of some multinationals to other locations – though not necessarily France or Germany.