Dan White: Cyprus crisis raises tax fears again
While Cyprus hiked taxes, the UK cut their corporate rate – will last week's events conspire to put Ireland in a tricky position, asks Dan White
THE decision by Cyprus to increase its corporate tax rate and George Osborne's move to cut the British company tax rate will pile the pressure on Ireland.
Two years after we apparently succeeded in defeating efforts by the EU to scrap our 12.5 per cent company tax rate, everything is up for grabs once again.
The Irish Government and the IDA will have been nervously following last week's dramatic events in Nicosia. For this country the main cause of concern was not queues at the ATM machines or the Cypriots' seeming determination to thumb their noses at the Troika and reject the €5.8bn depositor haircut but the agreement to raise their corporate tax rate from 10 per cent to 12.5 per cent as part of the controversial bailout.
And that wasn't the only bad news on the corporate tax front for Ireland last week. On Wednesday, UK Chancellor George Osborne announced in his budget that the British corporate tax rate would fall to just 20 per cent by 2015. When higher Irish labour and other costs are factored in, this means that the UK, including Northern Ireland, will now be competitive with this country for many more multinational investment projects than was previously the case.
Already confronting the headwinds of a strong euro and a weakening eurozone economy, IDA boss Barry O'Leary and his team are going to have to work even harder to attract overseas companies to Ireland.
Meanwhile media reports in Denmark have revealed that software giant Microsoft is being pursued for up to 5.8 billion kroner (€778m) in allegedly unpaid taxes. The tax demand centres around Microsoft's 2002 acquisition of Danish software company Navision. Shortly after the acquisition Microsoft sold the ownership of Navision's financial accounting software to its own Irish subsidiary for what the Danish tax authorities now allege was an artificially low price.
These most recent developments come after last year's interrogation of US multinationals Starbucks, Amazon and Google about their tax avoidance techniques by MPs from Westminster's Public Accounts Committee. Indeed Starbucks found the experience so traumatic – not to mention bad for business – that shortly afterwards it "volunteered" to pay an extra £20m (€23.4m) to the UK taxman over the next two years.
At the same time as the PAC was putting UK-based multinationals through the wringer, France was slapping a $250m (€194m) tax demand on Amazon. Then in February of this year the UK, France and Germany persuaded the G20 group of the world's largest economies to endorse a crackdown on tax avoidance by multinationals.
However, from an Irish perspective that's just background noise. We have managed to preserve the 12.5 per cent tax rate for many years despite the best efforts of the EU and countries such as Germany and France. Why should that change now?
The Cypriot bailout should warn us against any complacency. As part of the deal the EU insisted on an increase in the Cypriot corporate tax rate from 10 per cent to 12.5 per cent, something that has gone largely unnoticed in the controversy generated by the depositor haircut.
This demonstrates clearly that our masters in Brussels are still determined to "harmonise" (or increase) the low corporate tax rates charged by countries such as Cyprus, Latvia and Ireland.
If this is in fact the case then all of the sacrifices which we made to "protect" our low company tax rate in 2010-11, including allowing the ECB to bully us into repaying more than €70bn of bank bonds, will have been in vain.
And as if this wasn't enough to be getting on with, we now have the reduction in the British corporate tax rate. Effectively we now find ourselves trapped in what amounts to a pincer movement: Brussels strong-arming bailout countries to jack up their corporate tax rates while the big boys target the multinationals – and lower their own corporate taxes at the same time.
So where do we go from here? While the 12.5 per cent tax rate may be safe for now, that could change, and very quickly. Our most obvious point of vulnerability is if the mortgage arrears crisis continues to worsen triggering the need for yet another bank recapitalisation and bailout.
Following the dramatic events of last weekend is there any doubt but that one of the conditions of any second Irish bailout would be a significant increase in our corporate tax rate? Finance Minister Michael Noonan can only hope that things aren't as bad as they appear on the mortgage front and Ireland can somehow muddle through without the need for a second bailout.
On Friday German Chancellor Angela Merkel rubbed salt into Cypriot wounds when she stated that: "It [Cyprus] must realise that its current business model is dead." While her words were no doubt true, did she have to be quite so brutal? Talk about kicking a man when he's down.
Will Kanzlerin Merkel adopt a similarly triumphalist tone about our low corporate tax rate if we have to go cap in hand to our European masters once again? We can't say that we haven't been warned.