'Firms won't flee' small rise in corporate tax rate
US banking giant claims investment won’t be hurt as multinationals have other reasons to stay
Published 22/03/2011 | 07:40
IRELAND could raise its 12.5pc corporation tax rate by a "moderate" amount and not hurt multinational investment here, the largest bank in the US has claimed.
If Ireland raised the rate by a small amount, it could also lead to a reduction in interest on the country’s €85bn bailout package, Bank of America Merrill Lynch claimed in a note.
The bank, the result of a merger at the height of the financial crisis, said simply saying multinational investment would flee from Ireland because of any change was “premature”.
“In the short run, a moderate increase in the corporate tax rate can have the advantage of increasing tax revenue,” its analysts said.
“In 2010, revenue from corporate taxation was €4.2bn [2pc of GDP]. An increase in the corporate tax rate from 12.5pc to 20pc [still below the average of the eurozone top statutory rate equal to 26pc] would allow the Government to raise an additional €2.5bn in revenue,” it explained.
The bank admitted its analysis showed more negative results when assessed over a longer period. But it maintained there were a host of reasons for multinationals to locate in overseas locations, not just tax.
“Firms care about the entire tax burden, not only the corporate tax rate. Ireland’s implicit tax rates on corporate and labour income [ie, the tax rate that firms end up paying after accounting for tax credits and deductions] are among the lowest in Europe and firms pay very low social security contributions,” it pointed out.
“A modest increase in the corporate tax rate would not erode Ireland’s favourable tax environment. Second, a friendly business environment and a well-functioning judicial system count too: the cost of doing business is among the lowest in the entire world.
“The labour market is far more competitive in Ireland than in many neighbouring countries and wages in Ireland fell substantially in 2008-2010. Also, the level of human capital and skills offered by the labour force in a particular country are not always easy to find in another.”
The bank added: “Relocation is expensive for firms that invest heavily in immobile assets. Hence, such companies are less likely to relocate in the short run. Also, real estate prices have collapsed in Ireland in the past two years, which means it is relatively cheap for a firm with plans to expand operations to buy a new facility.”
The bank said perception about Ireland’s position was the key factor in the debate.
“In our view, the highest risk would not come from a moderate increase in the very low tax rate per se, but from the perception that a tax hike today is only the first of a series of rises and that increases will happen not only to the corporate tax rate but also to labour taxes.”
The bank said Ireland needed to explain whatever decisions it took to outside investors. If the Government explained it had to raise the 12.5pc rate to lower its interest costs, investors were likely to understand this and Ireland should be able to “limit” the fallout, the bank claimed.