Changing our corporate rate would be economic suicide
Even the slightest increase in the corporate tax rate during this time of uncertainty could have disastrous consequences, writes Anna Scally
MOVES by the European Union to introduce a Common Consolidated Corporate Tax Base (CCCTB) and attacks by European politicians (French President Nicolas Sarkozy in particular) on Ireland's corporate tax rate have received much coverage in Ireland in the past few weeks -- and with good reason.
These are two distinct issues. Firstly, the recently published CCCTB proposals by commissioner Algirdas Semeta pose severe challenges, not just for Ireland but for many economies within the EU, at a time when every effort needs to be made to support economic growth in individual countries rather than damage them further.
Furthermore, Ireland's corporate tax rate has been a cornerstone of industrial policy since the 1950s and is a critical factor in attracting foreign direct investment (FDI) to Ireland. Currently, more than 240,000 jobs are supported by FDI companies located here, 100,000 in US multinationals alone. That countries in the EU would try to use our corporate tax regime as a bargaining chip in renegotiations on the terms of the EU financial support package for Ireland is taking advantage of a country on its 'economic knees' and does not reflect well on member states.
Taoiseach Enda Kenny has been very strong on the issue that our corporate tax rate is not up for discussion and this is to be welcomed. As has become clear in the past few weeks, while our headline corporate tax rate of 12.5 per cent is lower than many other countries, our effective tax rate is not the most competitive across the union. Indeed, according to information published by the equivalent of the French IDA, certain companies can enjoy an effective tax rate of eight per cent, compared with that country's headline rate of 33 per cent.
Certain parties have argued that a modest increase in our corporation tax rate might not be that harmful. Anecdotal evidence and research suggests otherwise. Firstly, foreign investors crave certainty.
For more than 50 years, Ireland has afforded the certainty of low corporate tax rates to foreign investors. In return, they have chosen to invest in this country. That has led to significant benefit for both Ireland and Europe.
Any change in that policy would have significant consequences. In addition, according to the OECD, a one per cent increase in the rate of corporation tax results in a 3.7 per cent drop in FDI. In an Irish context, the correlation is likely to be significantly greater and, for example, a 2.5 per cent increase in our rate could result in a drop in foreign direct investment of more than 10 per cent, with a resulting detrimental impact on jobs, tax receipts and our economy.
Throughout the world, governments realise the importance of having low corporate tax rates in order to stimulate economic investment. Earlier this week, the British government confirmed it would reduce corporate tax rates by five per cent between now and 2014. A consultation document was also issued on the proposed introduction of a 12.5 per cent tax rate in Northern Ireland. Ireland must stand firm on the issue of our rate. It would be economic suicide to do otherwise.
On the CCCTB proposals, while our Government has indicated that it will constructively engage in the discussions on this matter, serious concerns do exist that CCCTB is introducing tax harmonisation by the 'back door'.
The stated objective of introducing these proposals is to reduce the compliance or administrative cost of dealing with corporate tax matters across the union.
While this might be a desirable objective, there is no agreement on whether this would actually be the case. Indeed, one recent study indicates that the introduction of CCCTB could result in a 13 per cent increase in compliance costs. Much more seriously, however, a number of studies show that certain member states stand to lose investment, jobs and GDP if these proposals are introduced.
According to the Commission's own analysis, GDP in 22 of the 27 member states would fall if CCCTB were to be introduced. At a time of great economic uncertainty across the union, introducing CCCTB would be a gamble too far. From an Irish perspective, a GDP decline of three per cent is unthinkable, yet this is what the Commission's research suggests could happen to Ireland.
At a national and EU economic level, these proposals are very difficult to justify. From an Ireland economic perspective, they are likely to introduce an increased tax burden on Irish-based companies exporting into the European market. This will have a detrimental impact on the economy's ability to recover, which has implications for the wider EU.
Under a CCCTB regime, companies would calculate their profit base in a standardised manner, which would then be consolidated and allocated to participating countries according to a formula. The formula proposed would see profits allocated based on sales, payroll and assets.
The proposed calculation model is heavily weighted in favour of larger central states with large domestic consumption. It's very clear that larger states with larger populations will enjoy larger sales and thus be entitled to a larger share of taxes. This will be to the economic detriment of peripheral economies such as Ireland's.
It would also increase uncertainty and be an increased tax burden for investors from outside of Europe, which could drive investment to countries outside the EU area such as Switzerland, Singapore and other Asian states with whom the EU competes for global foreign direct investment. Again, this would have serious consequences for the longer-term economic health of Europe.
At a time of great uncertainty, Ireland must remain firm. Our corporate tax rate is not for changing. There are sound economic reasons why this must be the case. In relation to CCCTB, we must remain vigilant and engaged in any discussions that take place. However, any introduction of these proposals would be a huge gamble by the EU, which could prove very costly, impacting on jobs, investment and economic growth across the European Union.
Anna Scally is head of the American Chamber of Commerce Ireland Tax Group and Tax Partner in KPMG
Sunday Indo Business