We are not the only nation where corporation tax rates are under international attack, but the end game draws near, writes Mark Keenan
WITH Google and Facebook contesting a UK parlia-mentary grilling on their use of Ireland to circumvent tax payments on British earnings, the role of our low corporation tax (CT) rate is again in the international spotlight.
A decision is expected within months on whether Britain will give Northern Ireland a CT rate to compete with ours. In the US, where a senate sub-committee on the tech sector recently labelled us a "tax haven", the re-elected Obama administration is pushing ahead with reforms designed to rein back FDI income lost to low CT countries like Ireland.
In Europe, France and Germany are turning the screw by pushing ahead with their own corporate tax harmonisation agreement .
Ireland's Corporation Tax regime is being surrounded on all fronts as we teeter towards the end game in the fight to maintain our much criticised 12.5pc rate.
Thus far, the Government has made no cohesive arguments in favour of protecting our CT rate other than citing FDI job protection. Many believe it's a deliberate "lie low" policy of non-provocation.
But while playing dead might have worked this past decade, the time to circle the wagons in earnest around our 12.5pc may already be upon us. But experts like Brian Keegan of Chartered Accountants Ireland believe there are stronger and more cohesive arguments to be made in its defence other than a weak-kneed plea for jobs – apparently at everyone else's expense.
Here are 10 rock-solid arguments from CAI, the IDA and elsewhere that the Taoiseach and his Cabinet should utilise in our last stand for our 12.5pc CT rate:
1. Because your "headline" rate is nonsense
Assessing a country's corporate tax contributions by its "headline" rate (ours is 12.5pc) is akin to judging someone's earnings based on gross income only.
In contrast, if we look at the "effective" corporation tax rate – what corporations really pay once reliefs, exemptions and favourable treatments are taken into account – then Ireland's rate stands at 11.9pc (Institute of International and European Affairs).
Overseas companies also pay PRSI at 10.75pc in Ireland – high by European standards but not classified as a "tax." And because the regimes of other EU nations are less straightforward with more wiggle room, it emerges that the average "effective" EU CT rate is just 12.6pc (IIEA).
France's "effective" rate of CT is just 8.2pc after all its exemptions, subsidies and incentives are taken into account – making it one of the lowest corporate tax takers in the EU.
Consider that CT comprises 10pc of Ireland's total national tax take compared to just 2pc in France and Germany.
2. Because the USA is also different
The other big critic of Ireland's corporate tax rate is the United States. Its "headline" CT rate of 39.2pc makes it the world's biggest taxer of corporations bar none. Were this true, then Ireland could argue that the onus should be on the USA, as the "unique case," to lower its rate rather than expect others step up.
But if the USA really was the world's most tax expensive regime, then no companies would locate there. The US tax system is markedly different from most others in the world – it doesn't have VAT for example and when exemptions and loopholes are whittled out, the US actually takes in less CT than most countries. CNN recently reported corporate tax as a percentage of US GDP at just 1.7pc in 2009 compared with a 2.8pc global average.
3. Because Ireland is (apparently) a sovereign nation
The United States was founded on the claim: "No taxes without representation," which observes the sovereign right of citizens of any country to determine its own tax regime through elected government. Tampering with our tax regime is akin to threatening our sovereignty.
If interference with our sovereignty is expected, then let's channel the argument on CT down this far more emotive route.
"Member States, especially those within the eurozone, need to retain their tax sovereignty as an important lever of fiscal control," says Brian Keegan of CAI. We in Ireland can already show what happens when our mechanisms for fiscal control are removed by the EU.
4. Because one-size-fits-all tax regimes don't work
It's a long-standing global trend that smaller countries have lower headline CT rates. Smaller economies of scale in the eyes of multinational companies mean small countries have to go that extra mile to compete with bigger countries for FDI.
This is borne out in Europe where the low CT countries are Macedonia, Serbia, Cyprus, Bosnia, Serbia, Montenegro, Lithuania, Latvia and Ireland, and globally where those states with the smallest CT rates (zero) of all are also the tiniest – eg: Bermuda and the Caymans.
Brian Keegan adds: "In democracies, tax systems have evolved to reflect demographics, geography, legal structures and resources available to their governments. In reality, these factors may influence the shape of successful tax systems far more than political philosophies."
5. Because the international trend is to cut CT not to increase it
A recent PCW report showed 133 cuts in national corporation tax rates globally in the past six years. Britain recently scaled down from 26pc to 24pc and is heading for 23pc with a pledge to be the lowest CT state of the G7 countries. Earlier this year, Japan, which was previously the country with the world's highest headline CT rate, lowered its rate below that of the USA.
6. Because better in Bandon than Bangalore
If increased CT rates drive an FDI company out of this country, it won't necessarily relocate to France or Germany, where the cost bases are high. It's far more likely that they'll head out of the EU altogether, to a developing country where conditions are fast improving for FDI. Non-EU eastern European states hover at around 10pc, the same as India's rate.
7. Because Ireland also does its bit for FDI
The IDA says FDI companies have created 100,000 jobs in Ireland, but roughly the same number of jobs have also been created by Irish companies in other economies around the world.
8. Because you'll have to bully Latvia next
Supposing Germany and France did succeed in hiking Ireland's headline CT rate? What now happens to fellow EU members Hungary and Cyprus with their 10pc rates? Or Latvia and Lithuania (both 15pc) and then Romania (16pc)?
Does the Franco-German CT steamroller keep snuffing the corporation tax regimes of all lower CT EU member states until they finally match the Franco-German norm?
9. Because, like France, we'll find other ways. . .
As France shows, there's more than one way to skin a cat when it comes to incentives for FDI. In the event of CT being forced up, Ireland could, just like France, invent myriad ways of providing benefits. We could allow them to write off absolutely everything – electricity, rates, landscaping, coffee, underpants. . . whatever you like.
We could even "pay" them for "research" services to the Irish State. There's no end to the nonsense we could make up with creative state accounting. We've already proved this with NAMA.
10. Because you'll be sorry. . .
In an increasingly hardball game, Germany and France have proven adept at exploiting our fiscal difficulties in order to force our hand on CT. In contrast, having received massive debt write-downs, Greece has proved that hardball has its benefits.
Ireland's ace in the hardball hole is its debt obligations to the French and German banks. Reduced FDI income resulting from higher CT could mean we can't cough up, hitting French and German banks, and then their taxpayers who would inevitably have to fork out big bailout dosh. Checkmate?