A 'bail-in' is what we really need
Let's squeeze multinationals for more tax -- but not that hard, writes Nick Webb
Published 12/12/2010 | 05:00
BILL Gates or Mark Zuckenberg seem nice enough chaps. But perhaps making the Microsoft and Facebook billionaires even richer at the expense of the Irish taxpayer is questionable during the economic crisis?
Ireland's 12.5 per cent corporate tax rate is the "sacred cow" of the economy. Conventional wisdom suggests that it can't be touched or even looked at sideways. All of the multinationals would pull out in a shot, there'd be no foreign direct investment and an export-led recovery would stall. The country would resemble Stalingrad on a cold winter morning
Groupthink like this needs to be challenged. Last week, it was. Michael Smurfit may now be sunning himself in semi-retirement down in Monaco but he remains one of the most original thinkers in Irish business. Smurfit suggested that the 12.5 per cent corporate tax rate could be increased to 15 per cent with certain conditions.
Smurfit's point that the rate should be examined is not a bad one. It's not because we've gone all lefty, it's just because there isn't anywhere else to turn. Could the rate be increased for a defined period? Maybe four years. It could then be brought back down to 12.5 per cent or lower. About €2bn might be raised on a conservative estimate. It would also widen the tax base -- one of the fatal flaws of our economic model.
The size of the increase is key. A jump of 5 per cent or more would be lunatic. Suggesting such a move would qualify you for the Sinn Fein finance think-tank or some loony left policy committee. Too much tax is kryptonite to economic growth.
The four-year time scale would provide some visibility for corporates. Multinationals and other big businesses would need something in return. Not a few photocalls with the minister but something tangible. Something with a wow factor. Perhaps we could commit to a far lower rate of corporate tax for businesses creating a certain number of jobs which kicks in after four years, much higher R&D grants or really slashing employer taxes. Or what about paying ridiculously high rates of interest on corporate deposits. A little less than the 5.8 per cent the IMF/EU charges.
Education should be turned inside out. Mandatory Leaving Cert Irish could be replaced by sciences or computing. Red tape and some of the more ridiculous regulatory burdens need a visit from Freddie Krueger. Wages and business-related costs, such as legal, accountancy, waste and energy, will need pummelling. There's a Nobel prize in economics to be won by the person who can come up with a system to increase taxes on business but also to stimulate growth.
With the Government's four-year plan to cut the budget deficit based on wildly optimistic figures for growth, it is increasingly possible that we won't meet EU targets. Where else can the Government turn to make up the shortfall? Recently the FT's authoritative 'Short View' column suggested it was highly likely that Ireland's businesses could end up taking some of the slack.
By the end of November, some €3.7bn in corporate taxes was sloshed into the Exchequer -- well above the €3.16bn forecast for the whole year. The tax take is a splodge of domestic and multinationals paying a variety of different rates, rather than just the 12.5 per cent. It also includes taxes on non-trading income as well as a muddle of allowances.
But some of the multi-nationals have a far lower rate. An investigative series by Businessweek magazine revealed how Google and Forest Laboratories were paying an effective tax rate of just 2.4 per cent in Ireland, through clever and legal moves which involved shuffling patents and royalty payments through various other low-tax regimes. Money was just funnelled through Ireland rather than actually being earned here.
But would it be completely bonkers? We've heard all the arguments from multinationals about how direct foreign investment would dry up or less "embedded" companies would up sticks and move to lower-cost locations. Having a finite term on this tax increase would cause them to look closely at numbers.
A decision to exit wouldn't be quite so clear cut. A firm generating €100m in profits would see the tax bill jump by €10m over four years. Would it be worth moving for that? How much would relocating to Singapore or Poland actually cost.
It's been a good week for luring US multinationals to these shores. Citi announced 250 jobs, with Facebook another 100 -- and tax wasn't the only reason Facebook expanded here.
"This is not a very popular thing to say, but we've seen time and time again that we can go in and have conversations with the Irish Government to solve problems... there's often more bureaucracy in other countries," said Facebook's Irish operations chief Colm Long, who also praised Ireland's immigration policies.
Clearly, Ireland has a lot of things going for it. Keeping tax rates low is a principle that is central to any recovery -- but for a limited period big business could chip in more to keep things that way. Consider it a short-term bail-in.