Brendan Keenan: Two certainties: death and EU tax plans
As debt/tax row intensifies, the choice facing Ireland may not be as simple as a 'No' to corporation tax change versus a 'Non' to lower interest rates
FOR a practitioner of calculated, cynical "realpolitik," it's not really a difficult choice -- whether to continue paying 6 per cent plus on the bailout borrowings, or agree to increase corporation tax in return for a reduction of, at most, 1.5 percentage points on the rate.
Debt, after all, is just a promise. A new corporate tax regime is for ever. Indeed, if Enda Kenny shares the widespread view that some restructuring of Ireland's national debt is inevitable, then the answer seems obvious. Stick with the low corporation tax.
The purpose of any ultimate debt renegotiation would be to reduce the interest burden to something which is affordable. In which case, it hardly matters what rate is paid on the bailout now. The lenders will carry the cost in the end, through a bigger loss on their loans.
Perhaps Mr Kenny is not that cynical. Maybe he really does intend making every effort to ensure that Ireland does not welch on any of its debts. In which case, one commends him for his courage, if nothing else.
In any event, the choice may not be as simple as a "No" to corporation tax change versus a "Non" to lower interest rates.
It has certainly been complicated by the re-appearance of the Commission's plans for a single way of calculating corporation tax across the EU; known for short (ha!) as the CCCTB. There was never much enthusiasm for this outside the harmonisers of the Berlaymont, but the Irish row has given the idea a new lease of life.
It does present an alternative to having to agree to increase the 12.5 per cent rate of corporation tax, since countries would continue to fix the rate themselves. But European law would decide how profits were calculated and, critically, how much tax a cross-border company would pay in each of the member states in which it did business.
Ireland's main argument against a higher rate is that the actual percentage of tax paid here is often higher than in countries with lower headline rates, because of less generous reliefs. But everyone knows this is not what it's all about.
What it is about was revealed by German Finance Minister Wolfgang Schaeuble, when he said US Treasury Secretary Tim Geithner had told him of frustration in Washington at the volume of American business activity that takes advantage of the Irish tax regime.
I have no doubt, from the evidence of Congressional hearings and White House statements, that this is true. The arrival of the US service companies, and the migration of European investment funds to Dublin, has changed the nature and scale of the use of Irish corporate taxes. The recent switching of registrations, and little else, by UK companies makes things worse.
What matters to companies is how much they pay, and what matters to governments is how much they get. The rich countries are correct when they say that tax competition reduces their revenues. Multi-nationals are paying Irish tax on profits that were actually earned elsewhere, usually in rich Europe.
Poor member states are entitled to respond that the chance to get richer by using their competitive advantages is what the EU is supposed to be about. The studies of CCCTB find, not surprisingly, that countries like Poland, Czech Republic and Slovakia would lose most revenue, while France and Sweden would gain most.
Ireland would lose most of all. It may not be poor, but neither is it rich, now that our delusions have been exposed.
More to the point, what success it has enjoyed -- or will in future -- depends on selling into the rich markets of Europe. A common tax base means more of the tax revenues from those sales would go to the governments of the rich markets.
But Mr Kenny must calculate the odds that it might never happen. The Germans do not like one of the 'Cs' in the title -- allowing profits to be "consolidated", so that gains and losses in different countries can be added together.
The eastern countries do not like the idea. Ultimately, the French (and some others) may not like having to eliminate some of their myriad reliefs.
How tempting it must be for Mr Kenny to offer support for an unconsolidated common tax base -- subject to agreement on detail -- while sticking with the 12.5 per cent rate. It might be enough to achieve the lower interest rate (which they do want to concede) and, more importantly, settle the row and allow everyone to move on to the bigger questions of the banking system and the whole new regime for the euro area.
Of course, if the new system did come into force, there could be significant loss of both revenues and investment. But if ever there was a time to apply Keynes' observation that in the long run we are all dead, this surely is it.
Sunday Indo Business