Our company tax is low -- but rivals have their own perks
Recent suggestions by the German authorities that financial support for our beleaguered economy might be forthcoming from them is, of course, welcome.
Slightly less so is the suggestion that support might be contingent on Ireland revising its corporation tax rules, and our 12.5pc rate in particular.
Only two EU countries, Bulgaria and Cyprus, have lower rates of corporation tax than Ireland.
The bigger EU countries, such as Germany, Italy, and the UK, all have much higher rates -- generally up around 30pc.
On the face of it then, Irish companies get off lightly. So do the Germans have a point? Is our low tax rate unfairly competitive against our EU neighbours and friends?
Fair tax system
I don't think so. There are two components to a fair tax system -- the rate, certainly, but also how much actually gets taxed in the first place.
To get to the real picture, you have to look at the actual amount of tax collected in terms of the income of the country as a whole.
In Ireland, with our rate of 12.5pc, corporation tax collected amounts to 3.8pc of GDP. In Germany, the rate is just short of 30pc.
Therefore, you'd expect the tax collected to amount to something close to 10pc of German GDP. But it doesn't -- it amounts to only 1.4pc.
Admittedly, I'm quoting two-year-old figures here, but they are from the most reliable up-to-date source, the EU statistics which deal with 2006.
Germany, with its colossal landmass and population relative to Ireland, and its natural resources and industrial base, only collects five times more corporation tax than Ireland, even though its tax rate is almost three times the Irish rate.
The EU statistics also show that even though we have the third-lowest tax rate, Irish companies are in the top 10 of EU companies when it comes to contributing to the Exchequer -- we're ranked eighth.
And German companies? Well, they're last on the list -- 27th out of 27.
Why the big difference? It's all about the local rules. When working out their taxes, companies across Europe start out with a set of accounts. These accounts are, by and large, put together using the same, or very similar, rules and concepts.
Then, the local tax authorities get to work making adjustments to the profit figure in the accounts to come up with the taxable profit.
They may grant allowances for capital investment -- factories, machinery and the like.
Profits
They can choose to ignore some profits which arise between companies in common ownership. They can give credit for some taxes paid abroad, and not for others.
The tax gets charged on the profit figure in the accounts after all these adjustments and reliefs. And in many European countries, the adjustments and reliefs are far more generous than in Ireland.
Since we introduced the 12.5pc rate of corporation tax, most tax reliefs for companies have been eliminated.
For every €1 a company spends on a computer, for instance, it gets a 1.5c reduction in its tax bill.
Even the new tax incentives for companies investing in energy efficient equipment only provide a reduction of 12.5c in corporation tax for every euro spent.
While we have a nominal corporation tax rate of 12.5pc, the actual effective rate of corporation tax in this country is closer to 16pc.
Allowances
Few or no allowances means that every cent a company earns gets taxed. And there are special rules which ensure that investment income and rental income get taxed more severely than profits from trading or manufacturing.
The "low" rate of Irish corporation tax is an irritant to our EU neighbours because of its marketability.
Our tax system does exactly what it says on the tin. There are no grounds for complaints on the basis of unfair competition from anyone, least of all Germany.
This certainty about how companies will be treated is one of the reasons why so many multinational companies have located in Ireland. It's not just about the low rate.
We are in difficult times at present, and taxes will increase. But whatever else we do, we must not dispense with the certainty of the system. It's one of our greatest assets.
Brian Keegan is director of taxation with the Institute of Chartered Accountants in Ireland
- Brian Keegan
