Common EU corporation tax base would hurt Irish economy
Wednesday October 24 2007
A common EU method for calculating corporation tax, as proposed by the EU Tax Commissioner, would damage the Irish economy and bring little benefit to the EU itself, according to research from the Netherlands.
The creation of a "common consolidated corporation tax base" (CCTB) might even increase tax competition between countries hunting for foreign investment, rather than reducing it as Commissioner Laszlo Kovacs hopes, researcher Albert van der Horst told the ESRI/FFS pre-Budget conference yesterday.
The favoured proposal is one where cross-border companies can choose whether to pay profits tax in one country, or divide the tax liability among those where they do business, according to an official formula.
Mr Van der Horst said this gave multi-nationals an incentive to shift activity from one country to another, to minimise their tax bills.
"Even though real economic activity can be shifted less easily to other member states than paper profits, its economic impact is larger."
This kind of tax avoidance would reduce overall economic welfare in the EU.
Governments, which would still have control of tax rates, would probably cut rates to encourage firms to locate activities in their own countries. The Irish government has opposed the creation of a CCTB partly because it believes these problems would inevitably lead to demands for a single EU tax rate on profits.
Mr van der Horst's calculations at the Netherlands Bureau for Economic Policy Analysis show that Ireland would lose 0.46pc of GDP if tax rates were harmonised at 33pc, making it the biggest loser in the EU. But if the new rate were 20pc, only Germany and the Netherlands would gain and most countries would lose more than Ireland, making it an unlikely outcome.
Mr van der Horst described the Kovacs plan to consolidate the base, but leave tax rates to governments, as running with the hare and hunting with the hounds. "It is unlikely to boost welfare in the EU," he said.
Prof Frank Barry of UCD said economic models did not capture the evidence that different tax systems may benefit both rich, high-tax countries and poorer -- or smaller -- low-tax ones.
"The big central states are able to raise more in profits taxes because of their inherent advantages.
"It is also the case that US tax law allows firms reduce the tax bill for their operations in a country like Germany by making use of low-tax jurisdictions like Ireland," he said.
- Brendan Keenan
