Other nations were hurt by our low corporation tax rate -- ESRI
IRELAND'S low corporation tax has been good for this country but has probably robbed other countries of significant tax revenue, the Economic and Social Research Institute (ESRI) said in a report on corporation tax published yesterday.
"The effects on tax revenue were likely to be quite noticeable in some key countries affected by the Irish tax change," the Government-funded think tank concluded in a report on the effects of corporation tax, which was reduced to 12.5pc for most businesses and financial services companies from 1994.
The conclusion will probably make life harder for the Government, which has waged a campaign against French attempts to force the State to raise tax rates closer to European norms.
A spokesman for the Department of Finance said last night that the ESRI report illustrated the importance of Ireland's corporation tax rate to the Irish economy and added that the Government had always pointed to OECD research, which illustrates the importance of low corporate tax rates in all countries.
While most people assume that our low corporation tax helped to create the boom, the economists at the ESRI wanted to study the precise effects, noting that low taxes in the 1980s did very little to revive the economy, which remained moribund until the mid-1990s.
In a detailed study, the report says that the Exchequer made around €2bn in 2005 alone because foreign companies with operations here transferred around €6.3bn to Ireland through transfer pricing -- the process which allows companies to avoid tax by selling goods and services within large multi-nationals.
The loss to other countries was "spread over quite a number of other countries" so it made no sense for any country to copy Ireland's low rates, the think tank added.
In a sign of how important low corporation tax was to Ireland's economic boom, the ESRI calculated that the 12.5pc tax rate added 3.7 percentage points to gross national product in the same year.
In 2002, corporation tax paid by the foreign-owned multinational sector in 2002 corresponded to 56pc of total corporation tax revenue and 9pc of total tax revenue in that year, it added.
Low corporation tax was good for business and financial services but bad for the domestic manufacturing sector, which had to hike wages as income taxes rose to help the Exchequer cope with the loss of corporation tax.
Foreign-owned companies also sent profits home. By 2005, almost 90pc of all profits made in Ireland in the manufacturing sector were repatriated abroad. This translated into over 15pc of GDP in that year.
"The loss of competitiveness adversely affected the manufacturing sector, resulting in a loss in output of 2.3pc and a loss of employment in that sector of 4.4pc," the report said.
While this reduction in output and employment in the manufacturing sector was far outweighed by the rise in activity in the business and financial services sector, these results indicate the existence of a potential "crowding out" effect in the manufacturing sector.
The effects on business and the financial services sector were much more positive, it concluded.
"By 2005, the level of exports and output from the sector were substantially higher than they would have been in the absence of any change in the corporation tax rate. The reduction in the tax rate made Ireland a more attractive location for high profit companies, as evidenced by the increase in the profit rate in the sector," it added.