Business World

Wednesday 18 January 2017

Let's keep 12.5 per cent tax rate and quit the euro

Published 11/12/2011 | 05:00

AS FRANCE and Germany prepare for another crack at our 12.5 per cent corporate tax, it is becoming increasingly clear that continued membership of the eurozone will require us to surrender our low company tax. But would such a trade-off be good value for Ireland Inc?

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We are all familiar with the headline numbers. IDA-supported companies employ 139,000 people and support another 100,000 jobs. They also contribute about a third of all corporation paid by Irish-based companies. With the Department of Finance forecasting corporation tax receipts of €3.73bn for 2011, that translates into a contribution of at least €1.24bn from the multinationals this year.

Meanwhile, both the present Government and its predecessor have stressed the benefits that we have derived from membership of the single currency -- pointing out that if it weren't for the almost €150bn of emergency "short-term" funding, which the ECB and our own Central Bank (now effectively the ECB's Irish subsidiary) had lent to them, the Irish-owned banks would have gone bust long ago. So, almost a quarter of a million jobs and €1.24bn of tax revenues on one side of the scales as against the survival of virtually the entire Irish banking system on the other side, represents not so much a choice between good and bad as one between bad and absolutely awful. Of course the Irish Government would dearly love not to have to make such a choice. In fairness to Enda Kenny, who has done Trojan work defending our 12.5 per cent company tax rate since becoming Taoiseach nine months ago, it appeared as if the threat had disappeared when -- after the last EU deal but one in July -- he proclaimed that the row with other European countries, particularly France, about our company tax rate was "over".

The respite lasted all of four months. The first sign that our company tax rate was back on the table came on December 1 when, in his Toulon speech outlining his proposals for "solving" the eurozone crisis, French president Nicolas Sarkozy called for an end to "unfair" tax competition.

Any hopes that this was merely Sarkozy stirring things up were dashed when on Wednesday Germany and France submitted a joint letter to EU Council president Herman Van Rompuy calling for progress towards the creation of a common corporate tax base to be speeded up. While a common corporate tax base, which would see company profits taxed where sales took place (in mainland European countries such as Germany and France, rather than in the country where the goods or services were actually produced) wouldn't formally end Ireland's 12.5 per cent corporate tax rate, it would amount to pretty much the same thing.

So what would the effective ending of the 12.5 per cent company tax rate mean for Ireland?

While most of the focus has been on the jobs created and tax paid by the multinationals, their impact on the Irish economy goes much deeper. According to research by Forfas, foreign owned-companies spent €19bn on Irish labour, raw materials and services in 2009. With exports having since recovered strongly, it is likely that the 2010 figure, which is due to be published shortly, will show a further increase.

That's the equivalent of over 15 per cent of the total value of our economic output as measured by GNP.

The much-touted "benefits" of our membership of the euro pale by comparison. Apart from the fact that it was membership of the euro which made possible a near-seven-fold increase in Irish bank lending between 1997 and 2007 and got us into our current mess in the first place, the crumbs currently falling from the Franco-German table seem very meagre. What seems to be currently on offer is some reduction in the €30.7bn cost of the IOUs or promissory notes that the Irish Government has pledged to inject into Anglo in annual tranches stretching out to 2025.

However, with no-one seriously expecting this amount to be paid in full, any concessions on the promissory notes will amount to little more than previously eaten bread.

Meanwhile, there seems to be no hint of a write-down of the €70bn the Irish banks borrowed from the ECB when it forced them to repay their senior bondholders at par. All of which means that if it comes down to a choice between keeping the 12.5 per cent tax rate and staying in the euro, the answer is a no-brainer.

Keep our low tax regime and leave the euro.

Sunday Indo Business

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