Corporation tax will not be increased - tax expert
At first glance, yesterday’s events in Paris appeared ominous for Ireland. Tax harmonisation seemed to be back on the table, surely meaning a possible increase in Ireland’s low 12.5pc corporate tax rate. Had we not just resolved a dispute with the French in respect of our ability to maintain the rate?
However, what was announced yesterday relates to a bilateral agreement between France and Germany only. Both countries announced their intention to converge their respective corporate tax rates by 2013. There was no broader announcement in respect of a proposed convergence of rates across Europe, although this is clearly the desire of some countries.
Indeed the likelihood of a harmonisation of tax rates on a wider scale is remote, certainly in the short to medium term. For many EU countries, with control over foreign exchange and interest rates no longer available, tax rates remain the only instrument not under the watch of Europe. Any attempt to remove control over tax rates will meet resistance across Europe, not just in Ireland.
What is also worth noting is the ongoing trend across Europe of falling corporate tax rates. Ireland’s 12.5pc rate is no longer the lowest in Europe and many other countries are converging towards our rate. For example, Hungary, Bulgaria and Serbia, amongst others, have a 10pc corporate tax rate. The UK has recently announced plans to cut its corporate tax rate over the next 4 years.
The reality is that countries such as Germany and France now stand out from the pack as having corporate tax rates higher than 30pc. Of over 40 countries in Europe, only 4 others have similarly high rates.
If current trends continue, Ireland’s 12.5pc tax rate will no longer stand out in 5-10 years time.
Indeed this poses serious issues in terms of maintaining our rate at its current level. There may well be strong arguments to lower the rate to say 10pc in the future.
Obviously our ability and desire to make such a cut will depend on a number of factors, not least our dependence on Europe and the International Monetary Fund for funding.
In summary, corporate tax rates in many European countries are heading south. This is likely to take the focus away from Ireland’s 12.5pc rate. It is also likely to significantly reduce the risk of a convergence of rates in the future to levels approaching the current high rates in France and Germany.
One possibility is that rates do converge in the future but to a much lower level, perhaps close to our own 12.5pc rate. However, this is pure speculation and at the present time any harmonisation of tax rates remains only a remote possibility.
Peter Vale is a tax partner at Grant Thorton.