Tuesday 25 October 2016

Chancellor's bid to cut company rate should be a wake-up call to Ireland Inc

Published 04/07/2016 | 02:30

UK Chancellor George Osborne. Photo: GETTY
UK Chancellor George Osborne. Photo: GETTY

The ill winds of Brexit continue to blow hard and fast across the Irish Sea. Ireland's 12.5pc corporation tax rate was already under severe pressure from its European partners and American cousins long before the seismic decision by Britain to leave the European Union.

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Yesterday, British Chancellor George Osborne upped the ante when he told the 'Financial Times' that he wants to set the lowest corporation tax rate of any major economy to help steer Britain out of a widely anticipated recession and to send a signal to investors that Britain is 'open for business'.

Mr Osborne, who has yet to decide which prospective Tory leader to back in that party's post-Brexit convulsions, wants to reduce Britain's corporation tax rate (which stood at 30pc in 2008) from its current 20pc to 15pc.

Such a reduction would bring it perilously close to Ireland, which relies on our much-maligned 12.5pc corporation tax rate to attract foreign direct investment (FDI) from bluechip multinationals including Apple, Google and Facebook.

These foreign companies, which also include some of the world's leading pharma operations, perform a unique and vital function in the Irish economic ecosystem.

They employ under 10pc of the workforce but account for a lion's share of our corporation tax take.

Our 12.5pc rate matters.

Earlier this year, the ESRI warned that raising our corporation tax rate to 15pc between 2004 and 2012 could have significantly derailed FDI flows into Ireland.

The ESRI said a 22.5pc rate would have reduced the number of multinationals locating here by half.

Mr Osborne's announcement was a bold if not entirely unexpected move. He had previously stated that he wanted to reduce the UK's corporation tax rate from 20pc to 17pc by 2020.

However, Brexit has led to consideration of more radical rates by the UK.

We should not panic.


This is because it remains to be seen how much of a boon a 15pc tax rate would provide to the UK economy in a post-Brexit landscape - or a threat to its closest neighbour Ireland - if Britain was denied access, in whole or in part, to Europe's much-prized single market.

And it remains to be seen what agreements will be reached between Britain and the EU in the years ahead.

However, Mr Osborne's desire to move quickly on a corporation tax rate cut should serve as a wake-up call to Ireland Inc.

It should also sound a warning bell to our European partners, who want to harmonise tax amid fears of a strategic race to the bottom.

Much of Ireland's economic toolkit, including autonomy in relation to future tax strategy, is fettered by its EU membership.

Our 12.5pc corporation tax rate is a crucial lever in the economy, but for how much longer?

The Government clings to the mantra that Ireland has one of the most competitive, consistent and transparent tax regimes in the world.

And privately it holds that Ireland's 12.5pc tax rate is a red-line issue.

However, we cannot ignore the fact that Ireland has suffered reputational damage over its low-tax economy, which is the subject of an imminent ruling by the European Commission as it investigates two advance pricing arrangements (APAs) issued by Ireland in favour of Apple in 1991 and 2007.

The Commission is expected to find against Ireland.

This will add further pressure to existing vulnerabilities, including an unstable minority Government.

At best, Mr Osborne's threat will compel the Irish Government to reinforce Ireland's attractiveness in the forthcoming budget.

The worst? It doesn't bear thinking about.

Dearbhail McDonald is Group Business Editor

Irish Independent

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