Ireland's Corporation Tax Regime Under Scrutiny (Again)

Nat O'Connor: It is reported that the Government is considering an early move to close down the 'Double Irish' tax avoidance method permitted by Irish tax law. (Link: Irish Times)

Global pressure is mounting, including from Brussels' investigation into Apple, the US Congress continuing to be concerned about US companies not paying pay at home, and the OECD working on a framework for a new multinational agreement on Corporation Tax.

There appears to be a choice. The Government might "secure better international terms for phasing out such mechanisms by moving early" but IBEC's CEO argues that "a “majority” of businesses here would prefer it if the Government awaited actual action at global level before any Irish move."

Reporting, Arthur Beesley concludes that "The irony, indeed, is that there is no apparent threat to the 12.5 per cent rate itself." But there is no irony. The issue of Ireland's corporation tax regime has always been about the rules, not the rate. In TASC's report, Tax Injustice, the Double Irish tax avoidance method is explained (from page 16).

The likely medium-term outcome of an international agreement on corporation tax is that Ireland will need to change part of our industrial strategy. Currently, we take a little corporation tax from a lot of companies - some of which are based in Ireland because our tax rules allow them to lower the amount of tax they pay globally. In future, to keep up corporation tax revenues, Ireland may need to take more tax from fewer companies. In other words, the pressure to change the 12.5% rate will come from within Ireland to maintain our level of tax take from corporations.

Bearing in mind that the large majority of companies (mostly SMEs) don't pay significant levels of corporation tax, the tax bill will probably land with the bigger companies - some of which are globally mobile, but others of which are embedded in Ireland's economy. The larger companies are also likely to be the most influential in the business lobby group IBEC's push against changing the rules - as they would be in the Government's sights to pay more tax. Although a 'majority' of them might oppose changes now, they are a minority of all companies and employers in Ireland.

Another possible future is that the global rules are tightened (with or without Ireland's co-operation) but the Government decides not to seek more tax from profitable companies here. That would mean a further erosion of Ireland's tax base, which at three-quarters of the EU average is already among the lowest in Europe. Such erosion would mean weaker public services, low levels of social transfers, and even weaker public investment: a recipe for further economic stagnation and hardship.

In all likelihood, three of the largest economies in the world are likely to press for significant change (i.e. the USA, France and Germany). Although this might happen slowly rather than overnight, Ireland will inevitably be carried along by whatever new consensus emerges. So there is a good argument for moving early. What kind of 'better international terms' might Ireland get? Maybe some commitments from large multi-nationals with significant state contracts to stay based in Ireland. Maybe some concession on our legacy bank debt from the EU. But if Ireland is dragged along reluctantly along with other countries that facilitate tax avoidance (like the Netherlands and Luxemburg), this will neither help our reputation nor give us any bargaining power. However, those countries have more alternative strengths in their domestic economies compared to Ireland and can maybe better afford to wait and see.

The Government's consultation on this ends on 22 July. Whatever way this issue turns out, it is likely that international moves to limit companies ability to locate in Ireland to avoid taxation will lead to some companies leaving - although it remains to be seen what that will mean in terms of jobs. Even if this is just a risk, not a certainty, there there is a need to boost all the other reasons why Ireland is competitive, including English language fluency, membership of the Euro zone, an ICT-literate young workforce, and so on. Public services like education, as well as public investment in broadband, the energy grid, re-training schemes and even the Youth Guarantee are all ways for the Government to boost Ireland's attractiveness for business.

But this all costs money... which brings us back to the question of how we get our tax system to add up to provide an adequate level of revenue, including from corporate taxes.

Dr Nat O'Connor     @natpolicy

Nat O’Connor is a member of the Institute for Research in Social Sciences (IRiSS) and a Lecturer of Public Policy and Public Management in the School of Criminology, Politics and Social Policy at Ulster University.

Previously Director of TASC, Nat also led the research team in Dublin’s Homeless Agency.

Nat holds a PhD in Political Science from Trinity College Dublin (2008) and an MA in Political Science and Social Policy form the University of Dundee (1998). Nat’s primary research interest is in how research-informed public policy can achieve social justice and human wellbeing. Nat’s work has focused on economic inequality, housing and homelessness, democratic accountability and public policy analysis. His PhD focused on public access to information as part of democratic policy making.