Corporation Tax and the EFSF

There has been a lot of discussion over the past few days about the implications of Commissioner Rehn’s comments about Ireland not being a low tax country in the future. While the comments didn’t explicitly mention the 12.5% corporate tax rate, many have inferred from the comments that the removal of that rate would be part of the price of an EFSF bailout for Ireland.

Two points on this issue seem worth discussing. The first is: What would be the effect of an increase in the corporation tax rate? The take from this tax this year is projected to be €3.2 billion (actually it’s running ahead of target but let’s stick with the original projection.) A purely mechanical extrapolation would see an increase from 12.5% to 15% raise an additional €640 million in revenue while keeping Ireland’s corporation tax rate low by European standards.

Of course, that assumes no negative effects on declared profits. So the €640 million figure may be too high. That said, I don’t think there’s reason to think that 12.5% is a magic Laffer-curve point whereby revenues decline when the tax rate is raised.

Over the longer-term, however, there may be more serious repercussions from a decision to raise the 12.5% rate. Even a small increase would represent a significant departure in policy from the line-in-the-sand approach that has been taken up to now. The real risk may be to that those considering future FDI projects in Ireland (or perhaps making decisions about whether to keep current operations here or consider further investments in them) see an increase to 15% as potentially being the first of a number of increases. Rhetoric about how we’d never change the rate again would not be too credible. On balance, I think the arguments for keeping the rate as it is win out.

The second point worth discussing is whether indeed access to the EFSF bailout would require changing the corporate tax rate. As I understand it from the facility’s framework agreement, the dispensing of funds from the facility does not require each Euro-area parliament to approve. Instead, agreement on a plan must be reached with the Eurogroup of finance ministers.

I’m not prone to anti-European conspiracy theories, so the idea that the Eurogroup finance ministers will be happy to hike Ireland’s corporate tax rate substantially, even if it would have negative effects on our economy and possibly lead to sovereign default, doesn’t strike me as correct. More generally, my sense of IMF-style rescue packages is that the package negotiations usually feature lots of nasty options but that the government can pick which areas it wishes to prioritise for protection. So (and these could be famous last words) I don’t think access the EFSF funds would imply changing the corporate tax rate.

73 replies on “Corporation Tax and the EFSF”

@Karl Whelan

Good to see all ‘sacred cows’ at the table.

We retain sovereignty over our tax system – in the worst case scenario of failure of political system to act appropriately (whatever that is) any EFSF/IMF directives to alter corporate tax rates would have no validity, and can be safely ignored – so this spin needs to be buried, and has been clarified by Commissioner G.-Quinn, senior civil servant in the Commission (who is Irish), Barros in Limerick some time back, and Commissioner Olli Rehn made no mention of Irish Corporation Tax rates. I agree with Commissioner Rehn that Ireland needs to become a ‘normal’ tax state in a European Context, and I would welcome EU level services. At EU level we can certainly expect a good few digs from EU politicians, but this is politics at EU level – and we are well able to play that game: certainly there would be pressure from other states – but we simply say NO.

‘On balance, I think the arguments for keeping the rate as it is win out.’

I agree: that said, I see no problems with discussing ALL areas related to taxation – as you note, short term financial gain [less than a billion on 15%] almost certainly has long term consequences – particularly as the present Cabinet, and all who have served in Cabinet since 2000/2002 – have no real claim to credibility … as they remain in abject denial of collective cabinet responsibility. The serfs want all of them out ….. for good.

That said, a gesture of solidarity with their Irish host – perhaps a once off levy, might be worth a little discussion or negotiation … and a little verbal and international support for their generous host,

Finally, Patricia the Sovereign in exile (whatever the comatose state of paddythesovereign on life-support in dublin) remains sovereign in ALL TAX MATTERS – period.

minor point: present plan to downsize up to 2014, without stimulus and growth, leads to collapse and bail-out, imho …

I’m not accusing you of joining the chorus that loves to demonise the IMF, but, rather than ‘nasty options’, I would prefer ‘potentially necessary, but politically unpalatable, options’. There should be enough evidence that the IMF has learned from previous errors. It is having a ‘good crisis’ and is led by a French socialist, DSK, who is contemplating a run at the French presidency in 2012.

If the IMF were to get involved (which I would very much welcome given the dysfunctionality of the political classes and the serious failures of governance), I expect they would be interested in why Irish price levels remain significantly, and stubbornly, above the EZ average and how the ‘low tax/high point of use charges’ model might be recast to remedy this. And I agree that they would be unlikley to focus on the corporate tax rate since the MNC export performance is the only flicker of light in the gloom.

@Karl
Perhaps you are right about accessing EFSF funds not implying a change to our corporate tax rate.

But the German policy-making classes seem to feel that our corporate tax rate means that they are losing income. Not only that, they have had to bail-out at least one bank because of what German opinion feels is sharp practice (of the sort that is not tolerated in Germany) by IFSC subsidiaries of German banks.

Couple that with the reported comments of a German Ambassador about salary scales of the Irish governing classes and other people in the “state class” – the result of which is a volatile cocktail.

In addition, a recent French Government exercise of looking forward also targetted a European wide corporate tax rate.

Given the bad government that we have experienced here over the past 10 years, can we assume that our governing classes are up to dealing with this kind of pressure – which would, IMO, exist even if we did not have to bail out the banks and borrow so much?

How are the governing classes going to present the case when they have already admitted that they did not take being members of the €urozone seriously eg. NESC Press Release
“In the past decade, Ireland’s approach to fiscal policy, prices, costs and financial regulation were not sufficiently adapted to the disciplines of a single currency” http://www.nesc.ie/dynamic/docs/The%20euro%20MEDIA%20RELEASE%20from%20NESC.pdf

Bones of an argument in favour of keeping the freedom to set our own tax rates and the tax base – for everything, not just corporation tax lie in the federalist drives of those still driving the European project.

If the federalised US can live with different tax structures and rates in its Member States (coupled with Federal taxes), why cannot EU apply the same kind of thinking/practice for its Member States that have opted into the €urozone?

The same may also be true of other federalised states eg. Canada, Australia.

How many allies can be mustered in the €urozone (among EU 27) to suport this line?

Political exonomy rules….

@All

From Michael Hennigan on previous thread – context …

US data shows that the combined net profit of US corporations in Ireland doubled between 1999 and 2002 from $13.4 billion to $26.8 billion and was $48 billion in Ireland in 2005, compared with $37.01 billion in the UK and $74.06 billion in the Netherlands. US companies in Germany made net profits of $11.22 billion in 2005; French affiliates reported income of $9.52 billion and Italian operations made $8.58 billion.

http://www.finfacts.ie/irishfinancenews/article_1015201.shtml

I think the statement from the secretary general brings some clarity to the situation. Was Ollie kite flying?

“Catherine Day, the Irishwoman who has been secretary general since 2005 of the European Commission, said the EU authorities have no powers to compel any member state to change tax policy but said the Government would still have to win approval from Brussels for its budget plan.

“Every country can decide its own tax policy, but that is not the end of the story,” she said at a briefing for Irish journalists.

“So if Ireland decides it wants to keep a low corporation tax, it has to deal with the deficit in some other way and we will be saying: ‘Okay, that’s your choice. If you don’t deal with it that way, how are you going to do it?’”

Karl,

Excellent point. In all of the media talk about the 12.5% no one had mentioned that Corporation Tax represents “only” approximately €3bn.

Does anyone know what the contribution of Multinationals to Income tax is?

Mark

@podubhlain,

I think Ms. Day is merely confirming the fact that the Government still retains the power to decide on the mix of revenue-raising/expenditure-cutting measures required to meet the aggregate adjustment set by the Commission. When protection is sought from the EFSF (I think we’re gone well beyond if at this stage) – the situation Prof. Whelan is considering – I think all bets will be off.

While it may not trigger any specific EFSF clause, the more general issue is that one thing the EC looks at in deciding whether a corporate tax rate is distortionary is the gap between individual and corporate tax rates. This is already high for Ireland and any income tax increase will of course make it worse. This is another reason to be looking at widening the base and at non-tax sources of revenue. Any chance the e-voting machines could be adapted as water meters?

@Paul Hunt
I think her statement is very clear -if we don’t change Corporation Tax then we will have to find it elsewhere, unlike Ollie’s ambiguous statement. If they hold the gun to our head in the event of a bailout it could trigger May type crisis were we to do as David suggest- say no.
BTW “Fitch Ratings lowered the country’s rating to A+ from AA- with a negative outlook today, citing the banking rescue.” Not much reaction to this-yet.

@ Karl

per DoD’s point – relatively sure that corporation tax as a % of GDP in this country is far higher than most other EU countries. Therefore any attempt to raise corporation tax could not be justified from the point of view that “it doesn’t raise enough revenue”.

12.5% rate should be open to review; is it possibly to measure it for elasticity i.e what affect raising it or lowering has?

If cost is the only reason why MNC locate here; then how do we reconcile this with the high costs of the economy i.e. why are they still here?

KW – your the first I’ve heard say the the EFSF and IMF would offer a list of options to cut defict if we ask for help – what therefore is different in this than our present course (choseing from a list of options)? What interest rates would we pay on these bailouts 3%?

I agree with the conclusion of the post , but under what circumstances would we want EFSF money?

Wolfgana Münchau argues that the EFSF would charge nearly 8%:
http://www.ft.com/cms/s/0/081efd02-c9b1-11df-b3d6-00144feab49a.html

Things would have to go very badly in the next 3 months for this to be attractive. It seems the EFSF is more of a comfort blanket for the bond markets than anything else.

Hopefully, the debate is academic.

“Over the longer-term, however, there may be more serious repercussions from a decision to raise the 12.5% rate.”
Time for a new equivalence theory?

Not that I disagree with you; I think it is already too late, though. The risk that a future administration will have to raise corporate taxes is high. Anyone who is risk-averse about a tax position for FDI must already be reconsidering it. This is another danger about the excessive build-up in the national debt – it will have to be paid for in the future and any and all avenues of taxation are a risk.

Companies like when their employees are low-taxed, particularly if they are employee intensive. It means they have to pay them less. We need to attract companies that are labour intensive in their products (whether they be goods or services). For those companies, low personal taxation is a boon, but low corporate taxation may not be as effectively they are siting cost centres rather than profit centres. In recent years all the focus has been on being attractive to profit centres with little or nothing done to address the issues of cost centres – personal taxation, living costs, ‘company’ costs (pension and health insurance for example).

This is more a question of political legitimacy than it is economics. €50bn of taxpayers money has been guaranteed for private banks. The budget deficit is now 32 percent of GDP. To reduce this deficit the government are cutting public expenditure and raising taxes. Thus – the taxpayer is being hit twice. Both will affect wage earners and ordinary consumers. People will rationally ask themselves – what contribution are the wealthy making? That is, what is the corporate contribution in the crisis?

There is simply no political legitimacy in trying to shift the entire burden of adjustment on to taxpayers without asking the corporate sector to increase their contribution. Last week in the Irish Times there were four articles highlighting the danger of increasing the corporate tax rate. One article stated ‘there is no public support for this policy’. In an article on the same page a UCD report on why people voted YES to Lisbon was covered. It showed less than 1% voted YES to save our corporate tax rate. It is the establishment that view our corporate tax rate as untouchable not the people.

I don’t think there can be any such thing as an untouchable tax given our situation. There does tend to be a fixation on the 12.5% rate. I, like Karl don’t think think you would see a huge outflow of business if the rate was increased but the question needs to be asked if that is the message that we want to send out. I have always advocated that we should not be held to ransom by the MNC’s when it came to the tax rate so I don’t buy into all the fear mongering about what would happen if it was increased to 15%. Question would be, is it worth it?
By the way, Italy have in the past few months talked about introducing tough new CFC legislation that will have serious implications for Italian companies located here from next year but that has slipped under the radar. There are ways for Europe to target Ireland’s corporation tax policy without going after the 12.5% rate directly.

What are our competitor countries charging in corporation tax? Other European countries and the US?

If a 2.5 % increase in our corporation tax can raise up to 600m without scaring the horses it has to be on the table.

@Enda
“I , like Karl don’t think think you would see a huge outflow of business if the rate was increased but the question needs to be asked if that is the message that we want to send out.”

We most definitely want to send out the message- no change.The Americans are the ones we need to appease as witnessed by the American/Irish Chamber reaction to the initial comments by Ollie. The pharma sector have plants all over the world where they can shift production and the IT and IP sectors can move at the drop of a hat. 100,000 jobs need to be safeguarded. Any increase would send the wrong signal and kill FDI projects in the pipeline.

@Pod

I agree to an extent. However, there are Countries around the world offering 0% rates and others offering lower than 12.5%.

@Edda F

“However, there are Countries around the world offering 0% rates and others offering lower than 12.5%.”

Even though we are a little island sitting in the Atlantic we have many attractions over those countries, such as language, EU membership, Euro, tax treaties etc. We also have a good track record of stability with the Americans. Its more we need and not contemplating anything that could or would scare the horses.

Danny

one of the features of low taxation is fiscal vulnerability to even small shocks that affect the tax base. Ireland has te lowest corp. tax rate in the OECD at 12.5%. Iceland is next lowest at 15%, neither n advert for stability or low taxation.

Table II.1 here

http://www.oecd.org/document/60/0,3343,en_2649_34533_1942460_1_1_1_1,00.html#cci

A recurring theme here is the supposed absolute mobility of FDI and all capital, based on tax levels. Not true, otherwise all capital would flow to the zero-tax jurisdictions, of which there are many.

In fact, the biggest receipient of FDI is the US, which has an all-in rate of 39.21%.

The corp. tax rate here could be raised to 19% and still be the joint-lowest in the Euro Area, which is the key to FDI (as it is based on size of market, and per capita income growth -UNCTAD). That would be 52% rise.

@Pod

And it is for those reasons that raising the tax rate would not lead to the economic armageddan that people talk about. Not saying we should do it but if we are going to put pensions and social welfare on the table, corporation tax has to be there too.

The importance of signals has been echoed throughout the post and comments, but the argument so far is one sided. Is it not possible to send two signals..? For example 1: Ireland needs to marginally increase all taxes this coming financial year to secure the normal operating of the state, an increase of 2.5 basic points will apply to the corporation tax rate; 2: Ireland remains committed to being a competitive low-tax economy.

At 15% Ireland maintains its advantages over substitutable locations. MNC’s didn’t flee when their trading costs here increased over the late 90s and 00s, they didn’t flee when our rate increased from 10%. The question of location will remain a strategic one based on many real factors, not just apparent signals. The fact that trading costs are currently on the decrease in Ireland suggests a lower sensitivity to tax-prices than might have been the case 5 years ago.

There is no easy or precise way of measuring MNCs’ elasticity here as we have had very little variation in the rate; however we can analytically examine the main determinants of their elasticity: the number of available substitutes, the costs of their factors of production, etc. An objective appraisal of these would suggest that an increase to 15% is viable; and indeed could have some positive benefits to Ireland’s business reputation – especially as these rates come under increasing European, and international, scrutiny.

There are myriad reasons why 7 out of the top 10 pharma and med device companies are in Ireland, and not in Bulgaria (with a 10% rate of tax). These are the strengths that Ireland needs to signal now, not the modus operandi of continually relying on ‘loss-leader’ taxes to secure investment. The fact that this marginal increase in the rate could generate over €2bn in four years means that we cannot ignore it.

The signal Ireland needs to send is: we want you to stay but we need you to pay. In a globally competitive world MNC’s exist by virtue of their ability to think objectively and plan strategically – i believe in doing so they will come to the view that Ireland remains an attractive location to do business both now and in the longer term.

Is it not the case that only policy target that we have is the budget deficit in 2014? If so, the only question that matters is whether or not the elasticity of the budget deficit relative to the corporate tax rate is positive or negative? In other words, for a given change in that rate, is the sum of the reulting change in corporate taxes, employment taxes, indirect taxes and govenment spending, positive or negative?
So, if we put the corporate tax rate up, will the budget deficit rise or fall? Only question that matters if you ask me. And if that deficit falls, then up the rate goes. Until we hit the peak of the Laffer curve (likely to be quadratic of course).
All you economists out there: positive or negative? Up or down?

One should not underestimate the degree of hostility and resentment in other EU states towards not just Ireland’s corporation but the raft of other reliefs aimed at MNCs. Alastair Darling was very far from impressed when UK company HQs began relocating to Dublin (IFSC). The status of Ireland as a tax haven for MNCs is reinforced in various reports from the US Bureau of Economic Analysis. An accountancy firm I deal with in Italy lost 60% of its clients to Dublin shortly after the euro. These were small companies not MNCs and CT in Italy is 35% which is pretty much the EU norm.

Rather than complain indignantly about EU interference over CT – glad to have the ECB interfere in the bond auctions at the moment – the hard fact is that successive Irish governments should have planned for the day when EU partners would call in this chit and demand that Ireland operate within a band of EU CT rates, as opposed to being a refusenik.

One must also remember that during the Celtic Tiger bubble many Irish politicians and policy fabricators were ramming the seemingly ingenious almost divine, economic skills and business acumen of the Irish down the throats of other EU governments. Much of the Irish hubris was reported in the foreign media. Now that the farce has been exposed, and the Irish body politic with its fantasy knowledge economy, has disgraced itself in Europe, I would not expect too much sympathy for hoarse bleating about the sacrosanct status of Irish CT. The intervention of the EU/IMF in Spring 2011 could be the revolution that Ireland never had. It’s time for radical change. Welcome it.

Europe has a lot to answer for in this crisis too. The Euro has been improperly designed. There is a need to ensure that it does not diffuse from high productivity regions to low productivity regions. Low interest rates and lack of political oversight at European level allowed too much of it into our economy.
Ireland is a victim of a design flaw in the Euro.
The mistake needs to be paid for at a central level and countries allowed to move on.
We should have less contrition here. This was only partially our fault. Most of it should be put down to flaws with the new currency – which can either be fixed or abandoned. Eu decide!

For this crisis in the €urozone to be solved, countries like Ireland need to cut their deficits to within EU Stability and Growth Pact limits. In order for Ireland to do that we need strong economic growth over the next few years. In order for that we need to attract investment. For us to attract investment we need to keep our corporation tax rate low so that we continue to get American and Asian multinationals setting up here.

Ireland’s 12.5% corporation tax rate is probably the first thing any board of a multinational thinks of when they’re considering Ireland as a location for investment. It has become a hugely beneficial selling-point for the IDA over the last few years and it has compensated for our competitive deficiencies like poor broadband access and high local-authority rates. Our commitment to keep it at this rate regardless of whether FF, FG or Labour are in power also gives the investment climate stability which encourages further investment.

Moreover, Ireland’s corporate tax rate is one of the fairest, straight-forward and transparent regimes in the world. You earn 10 million in profit, you pay 1.25 million in taxes. Contrast this to the published 25-35% tax rates in Continental Europe which is watered down by all sorts of distortionary special concessions to industries. These warp the competition in the market place and are economically inefficient.

Ollie Rehn is playing silly politics with this. How does he expect Ireland to put its fiscal house in order when billions in corporate tax revenues and associated PAYE, PRSI and VAT receipts depart these shores when MNCs flee our higher tax rates?

@simpleton: good idea. decision should be based on such analysis. the unfortunate reality is that there are few, if any, economists in the dept. of finance that could actually estimate this ratio. Yet they are the only people with the figures to do accurately.

Ron Davis (UCD) posting here previously suggested that given the structure and type of MNCs here employment is less of a sensitivity. In this case income tax receipts (and welfare payment) might not be expected to change greatly; VAT may decrease slightly but no more than unit I would think. This would suggest a positive revenue elasticity.

Based on this, an increase in corporation rates would be likely to increase government revenue, other things being equal.

@Cathal
“Ireland’s 12.5% corporation tax rate is probably the first thing any board of a multinational thinks of when they’re considering Ireland as a location for investment.”
Agree. Frankly, I am dismayed at the number of people prepared to tinker with the only economic policy we have got right and of which some neighbours are envious. They are scaring the horses – the bond yield is widening again to 6.48% 10yr.

The EC is also critical of tax competition from Switzerland.

At present, companies in Lucerne for example, pay an average 23% combined local, cantonal and federal taxes on their profits depending. In two years time the burden will be reduced to 15%.

Adjacent canton Zug is well established as a location for the European headquarters of international firms, while Schwyz, Nidwalden and Obwalden also offer better incentives.

A KPMG study shows that global corporate tax rates were reduced by 7% between 1999 and 2009 with EU countries slashing their tax by 12% on average and Switzerland by 6%. Guernsey and the Isle of Man top the table with zero taxes on company profits. The British islands are followed by Montenegro (9%), and a group of countries – Bulgaria, Cyprus, Serbia, Albania and Bosnia & Herzegovina – on 10%.

In the canton Zug, about 30 minutes drive from Zurich, the corporate tax is about 16% but can fall as low as 9.5% for companies that do most of their business outside Switzerland.

Such a location may not suit big manufacturers.

There are 3 key tax factors in the attraction of Ireland for multinationals.

1) There is no tax on patent income
2) the corporate tax rate of 12.5%
3) R&D tax credits — it’s a while since I worked in MNCs but my hunch is that ‘R&D’ would be broadly defined and with capital allowances, the effective tax rate would be in single digits for big firms.

Microsoft operates 2 tax haven companies in Ireland.

Income from patents parked in Ireland is routed through Flat Island; licensing fees from 20 or more EMEA countries are routed through Round Island One.

As Round Island One paid over $300 million in Irish taxes in 2004, it is possible that half the corporate taxes paid by US MNCs are from the tax haven activities.

The tax haven income may well be worth up to $2m in taxes paid in Ireland – – 40% of total MNC tax paid.

As regards the zero tax on patent income, given that there is now an R&D tax credit, I don’t know what is the justification for it.

Irish residents are also tax exempt on patent income – – it is hardly the key motivator for innovation.

Intel CEO Paul Ottilini said in July in Aspen, Colorado that a new semiconductor factory at world scale built from scratch would cost about $4.5bn – – in the United States.

He said: “it costs $1bn more to build, equip and operate a semiconductor manufacturing facility in the US. Ninety percent of the cost difference is the result of tax and incentive policies.”

He said in Aspen: “At Intel, we generate 75% of our revenue and much of our profit abroad. The US tax treatment of that income makes it extremely expensive to repatriate that profit and invest here.”

Obama said this week that he is open to cutting the headline tax rate of 35% if it would be revenue neutral — eliminating various breaks.

FDI investment in Ireland has plateaued and while the country has been run in an appalling manner for decades, the positive aspect is the parallel MNC world.

As I have said before, without FDI, think of Albania or a big Sceilig Mhichíl theme park for American tourists.

We have had some new small scale projects in the past year and employment in the sector is back to 1998 levels.

We are not likely to be very attractive to emerging economy MNCc – – so we should keep the Yanks tuned up.

Ex-Intel boss Craig Barratt said Ireland is over-reliant on FDI. However, behind all the spin about developing the indigenous sector and advice from chairborne experts to put Mandarin on the curriculum, in the medium term Ireland has nothing else to rely on but the MNCs.

I reported earlier on Finfacts that Irish goods exports to China in H1 2010 were 1.9% of the total and only 6% of that 1.9% were from indigenous firms.

In the bubble years as the Irish became the second biggest investors in commercial property across Europe, policymakers didn’t give a damn about how new markets would be developed.

The reality now is that it takes years of perseverance, as long as key variables are positive, to develop new export markets.

@Cathal
I actually think we’re too nice to be part of the EU. What other country in the world would dream of reducing its attractiveness to outside investors just to appease a Eurocrat!
Let’s just accept the national narrative snd sell our body parts on eBay – after all we are feckless and dont deserve them anyway!

@ Eureka

I actually think we’re too nice to be part of the EU.

Apart from our reliance on US FDI, we should also appreciate who butters our bread in Europe.

Amazingly, we have 2 more years before becoming a contributor to the EU budget.

More than €40bn in foreign aid in 40 years; what would the agriculture sector look like.

As we showed in the first Lisbon Treaty referendum, eaten bread is soon forgotten.

Besides the ECB is currently propping up the Irish banking sector.

@Michael Hennigan

“As I have said before, without FDI, think of Albania or a big Sceilig Mhichíl theme park for American tourists.”

Won’t work- airfares are through the roof to US with all the consolidation and schedule cutting and this is winter fares. Plus the exchange rate will kill it a bit more. Lets stick with FDI – we need the GDP growth.

Thanks Michael Burke.

Looking at the OECD figures the vast majority of EU countries and the US have corporation tax rates way over 20%. And as other comments above suggest, it is not just the rate of tax that attracts FDI. Sure we all used to boast about our wonderful skilled workforce, Euro area, English speaking climate.

Would a rise of 2 to 4% scare the horses? I don’t think so.

@Michael Hennigan
Thanks for the stats. 40bn in 40 years – really puts the bailout into perspective!
One thing being grateful, another thing copping all the blame for what was a collective mistake. Think we need to be alot more assertive here.
We need more bread!

Michael Hennigan is correct in emphaising the essential role played by the FDI sector in the economy. It’s good to see this blog paying a bit more attention to this.

He also provides important context in relation how the FDI model that has evolved here functions.

The key point is that it does not make much sense to discuss low levels of corporation tax in isolation from the tax strategies employed by multinationals in servicing the EMEA region. It must be related to the rate of return on investment: this is around 24% in the case of US companies in Ireland, despite being a high cost location.

It is necessary to be aware that it is not just a low rate of tax that is being threatened, but the actual FDI model that has evolved here.

@Danny Haskins:

I agree. As a matter of fact, Ireland’s nearest tax neighbours (EU and €) are Cyprus (10%), Slovakia (19%), Greece (25%), Austria (25%), and the Netherlands (25.5%). The average rate of the remaining (EU and €) countries is 28.5%.

These figures alone would suggest that Ireland could price somewhere between 12.5% and 19% — there is no tax competition in that bracket. Furthermore, if you accept that Ireland has comparative advantages over Slovakia and Greece then a rate of up to 25% becomes viable. Not that I’m advocating that. What I advocate is looking at the rate and our competition, and strategically considering our position.

Note: Canary Islands (4%)

@Michael Hennigan:

Quick question: why do you think Microsoft are operating their 2 tax haven companies in Ireland and not the Canary Islands or Cyprus?

@ Peter
If only life were that simple. Don’t forget how that we have so many disadvantages as an economy (peripheral location, credibility issue, high cost of electricity etc.) that we just can’t afford to mess with this.
I’m Irish but at that tax rate, if I were a pharma company I’d invest in Slovakia – simple as.!

People need to stop fixating on the rate. As other people have pointed out, there is more to the Irish tax system that attracts foreign companies than the 12.5% headline rate.

There was some discussion about this in another thread . I do not think there is any evidence that the EU Commission wants impose changes to the 12.5% tax rate. However a new push for a CCCTB is likely, and along with various national CFC legislation initiatives, could impact how MNCs apportion profits across the EU countries where they generate revenue, and this could have a significant impact on the amount of tax subject to the 12.5% tax rate.

Der Spiegel have interesting article on the new kinder gentler IMF, which as was pointed out above, is now run by a French socialist. I think it makes a lot of sense that any future bailout for Ireland would be done by the IMF rather than the EFSF. Fundamentally it would be a mechanism that allowed countries with money (the Asian countries with large reserves) to lend to countries without it (e.g. Ireland). This could be seen as part of a larger global rebalancing that needs to happen. Trying to sort out everything by having Euro countries lend to other Euro countries seems less effective since there isn’t new money coming into the area as a whole. China buying Irish/Greek debt could keep the Euro high against the RMB. Everyone’s a winner!!! (well, except for the Germans, but hey – you can’t have everything).

Of course the EU could always force harmonisation of the corporation tax rates, and wrongfoot us at the same time, by adopting a 12.5% (or less) tax rate for those willing. Since we obviously feel – with good reason I believe – that 12.5 % is beneficial – one would imagine the EU as a whole would also benefit. Why not? Afraid to trigger a race to the bottom?

@Eureka

I guess the question then is at what rate would you decide to leave? Taxes are a much smaller cost for companies than you are crediting; our labour, rent, and transport costs are falling here and have been for the past 20months or more.

I agree with Enda F to some extent also — the tax rate may be important for attracting business but its not the only factor taken into consideration when you’re up and running.

The hypothetical 15% rate is competitive and consistent with our enterprise-investment friendly model. Better still it could raise €2bn in much needed stabilising revenue over the next four years.

@KarlW: I agree that 15% (for instance) wouldn’t push us over the top of a laffer curve, but how does that work when combined with wages and non-pay costs? That savings might be a break-even that stops companies from moving, but could tilt the table in favour of other locations… sane/insane?

At 15% the extra revenue created would hardly be worth it – would it?
1.5 billion of what we generate every year will be paying debts. In real terms that makes a country less rather than more competitive. With tolls, fuel taxes, energy costs all set to rise we need every incentive we can find.
Gotta be careful with the signal this would send out to potential investors too.
They’ll see a potential upward trend in this.
I don’t think we can touch this

Apologies in advance for asking perhaps an ignorant question here… If the Celtic tiger started in the 1990’s when according to the OECD data the corp tax rate was never below 28% (which it was in 1999) in Ireland, and only hit 12.5% in 2003, is there not other reasons why FDI started earlier that the 12.5% rate in Ireland?

Also this suggests hig FDI as % of GDP in 1990’s in Ireland..http://www.oecd.org/dataoecd/24/37/2956446.pdf

Make no mistake, the 12.5% + the R&D tax credits are the reason the majority of Pharma MNCs are here. We compete not with other EU countries for FDI but with the likes of Singapore, Switzerland and Puerto Rico in terms of tax and with China/India in terms of overall cost. Our labour costs are now a disadvantage so the tax is key to MNC investing. Thats why they are closing pharma plants all over the US over the last 5 years.

@ Michael H

‘However, behind all the spin about developing the indigenous sector and advice from chairborne experts to put Mandarin on the curriculum, in the medium term Ireland has nothing else to rely on but the MNCs.’

Fair enough. What exactly can we rely on them for ? Not jobs anyway, as you have so often pointed out. Our PhDs are packing their suitcases. Something is very badly wrong.

Regarding multinationals we’re hanging in there by a thread.
They are mobile – look at intel’s investments and the noises they’ve been making.
Alot of production lines in pharma coming to an end soon.
These guys will leave in a jot.
Raising this tax rate is economic suicide

Looking at the issue from the USA.

Reiterating what Eureka has said raising the corporation tax rate would be economic suicide.

The low corporate tax rate is one of the key things Ireland has to offer right now. Bill Clinton said last week that the variables which made Ireland a success up to 2000 are still largely in place, which is true. In the investment world perception is reality. Ireland is viewed currently as being unfortunate economically but with good investment criteria, low taxation, easy profit repatriation, educated workforce, manageable bureaucracy. If Ireland changes its corporate tax policy, the investment fulcrum will dramatically change to the negative.

Right now Ireland needs to show political solidarity in its economic decision making and against all threats to its fiscal sovereignty. A national government embracing a national recovery plan would be a good way to go, and would be positively viewed externally. The Irish government needs to viewed as in control and pro-active. Jay Leno’s portrayal of Brian Cowan last week as a drunken buffoon is not what Ireland needs now, a more parsimonious face to the nation would be more apt, maybe this is Alan Dukes’s hour.

@ Eureka,

Interesting comment, not only do tax rates change over time, but so do products and markets.

A 20 year old plant could be coming to its end of life about now, the company is trying to make the decision to rebuild a new plant here or move on.

I believe Intel recently closed a older Fab shop as the market for the micro device had dried up. Israel has been successful in attracting some of the new Intel plants.

Our FDI strategy may have worked 20 years ago, but now that these plants are getting older I am sure the decision to reinvest here will be much more difficult the next time round.

Another view to consider….to solve the problem.

http://www.guardian.co.uk/commentisfree/2010/oct/01/eurozone-core-nation-periphery-stagnation

Maybe Ireland needs to make the problem bigger for Europe. A problem shared is a problem halved or might we say divided by 16.

The Euro cannot work for Ireland now, Ireland in recession with the strong Euro cannot earn its way out of the problem. Default might be better …. the world wants value from Ireland, and Ireland cannot deliver value while tied to the Euro.

With Ireland credibly threatening to exit the Euro …the choices for the Euro members become clear. Let Ireland go and default on its Euro debts or support Ireland by creating mechanism that allows some easing by Euro nations like Ireland that are in difficulty. Either way Ireland might be better off.

@ Peter Carney

Quick question: why do you think Microsoft are operating their 2 tax haven companies in Ireland and not the Canary Islands or Cyprus?

Just as US management consultants Accenture, moved their HQ from Bermuda to Ireland in 2009, US companies don’t like politicians branding them as evaders of US taxes by operating in tax havens. Ref Carly Fiorina and the charge in the US Senate race in California on ‘shipping jobs overseas.’

Being in Ireland is among many other top US companies and also having significant real business operations there, gives a cover for the other motives.

At the height of the bubble, Accenture had about 1,600 staff in Dublin, mainly doing public sector work.

@ Newbie

A tax exemption on export profits was introduced in 1956; a 10% tax on manufacturing – broadly defined: it included growing mushrooms under galss – was introduced in 1981 as some companies were due to see their 1956 exemption expire.

Intel for example began on a 10% rate in the early 1990s.

The EC agreed in 1997 to one rate of 12.5% replacing the general corp rate and the two schemes above.

@ paul quigley

Fair enough. What exactly can we rely on them for ?

A significant downscaling of costs and reform to have a governance system comparable with the Nordic model.

Declare open season on sacred cows; despite the crash, it’s private sector workers and business collapses where the real pain has been experienced.

The rest have experienced baby-step adjustments.

We have got most of the big US companies that are likely to locate in Ireland; the key challenge now is keeping them. This is why the recession period fall in costs is just not enough. Rivals in Eastern Europe have also had big drops.

Why has Intel got its original plant idle in Leixlip?; it has to have a strong reason to invest $3bn in another plant in coming years when the centre of economic gravity is moving eastward.

Research should focus on the food area; amazing isn’t it that Ireland’s cheese output could be as low as Sweden’s?; lower than in Spain and Greece while production in the Netherlands is six times the Irish level.

Amazing too that a New Zealand company could capture almost 40% of international trade in dairy products.

The the main focus of increasing exports should be in the single currency area.

Cowen said last week there should be more trade missions to regions like Asia; we can’t be all over the place like a company with too many
products or a restaurant with too many choices on the menu.

We have little recognition in Asia; Roy Keane and Boyzone gave us some; logistically it is also a big challenge.

I have some idea of what I’m talking about as I live in Kuala Lumpur!

@Michael Finnegan
“it’s private sector workers and business collapses where the real pain has been experienced.”
Really I am sick and tired of this public sector/private sector divide thing. Everybody is suffering. (Are you still living in KL by the way?)
We do need public sector reform – absolutely – but we also need a public sector.
Open season has already been declared on this country by the EU, IMF and bondholders. You can join them if you want or you can start the fight to defend what we have.
This tax should not be touched. We have already given in way too much. We are the casualties of a badly constructed monetary union. It’s time to start defending our interests and start fighting the good fight. You might want to live in a country where you can spend your day cribbing about how bad it is. I want a country where my children can be educated, my parents can get decent care when they get sick.
We did no more wrong than the UK who send their young men to die in wars that nobody understands, or the Germans who brought the continent to its knees twice in 50 years. Messing up is part of the human condition. Self-flagellation seems to be distinctly Irish.

@ Eureka

I referred to ‘real’ pain – – not arguing about the need for a public sector.

Note I said ‘workers’ as distinct from some of those still doing well in the protected private sector.

Ever wonder what the fear of running out of money in the modern economy is like? Or the fear of losing your home, having lost a job with little prospect of another one?

@Michael
Ever wonder….reality is all three.
It’s crap every where. We can’t fight this by fighting each other.
Let’s start to protect everything we have. We’ve given away too much already.

Those in the FIRE economy and journalists etc all fear the depression as their jobs will simply disappear.

The core public jobs will not. Except for army etc and many teachers as we use the internet to educate children and adults.

I repeat: the disease was easy credit and excess borrowing! We should rejoice that we no longer have those distortions. The Sixties were a fab time, we got the Beatles etc then! Did we get much from the thirties?

@ Pat
You call it right with the depression. You call it right with the disease too.
The last decent battle we won was against the Swedes in 1014. This blog kinda shows why.
We are completely incapable of unity against a common threat.
The French might have a reputation for surrender – we surrender, and start shooting ourselves to save the enemy the trouble.
Pity is we’re a good people – just too willing to accept pain caused by others. This crisis arose because the low interest rate environment exposed serious flaws in the Euro – not our fault.

It’s not just the CT that makes Ireland attractive. There is a welter of reliefs on leasing, intellectual property, royalties, personal tax rates for MNC executives, R&D credits, MNC finance units in the IFSC, etc. Once an MNC is HQ’d in Ireland it can gather in all these reliefs on its operations in the EMEA.

For those who consider that the affects of Ireland’s tax haven driven industry policy have been detrimental to the country (it has produced a skewed fiscal reliance on corporate entities who in fact add little value in Ireland) the 12.5% corporation tax rate is an unworthy idol.

At this point an increase and a decent one might be the best way forward for Ireland.

Short-term more likely that it is revenue enhancing, but in the long term killing off all this eulogised, but farcical “FDI”

@ Seamus Grimes

‘It is necessary to be aware that it is not just a low rate of tax that is being threatened, but the actual FDI model that has evolved here’

What kind of model is it ?

1 It’s made in USA. That is not bad as such, but it doesn’t guarantee anything long term. US business is as businesslike as other business.

2 It is no longer creating net new jobs. As Michael H points out regularly, we are at 1998 levels (c 100k).

3 Domestic linkages aren’t huge, as @ Con has kindly shown on another current thread:

‘As of 2009, employment in Irish-owned companies in the main FDI sectors was as follows (Forfas Employment Survey of development agency clients):
Pharmachem: 3,084
Computer, Electronic and Optical Equipment: 5,169
“Other Misc Manufactiring & Medical Devices”: 5,038
Computer Programming, Consultancy & Related Activities: 11,844

So there’s a significant CT tax take, but realistically that is dwarfed dwarfed by income tax and VAT. There are the financial transactions which enhance our trade balance and give Ireland the appearance of a substantial economic entity. Good for posturing abroad.

The reality is that we have over-inflated our state and entered into billions of private and public sector debt, on the promise of an FDI-driven, knowledge economy, trickle down, growth. It’s been a really good relationship. For them, as @ Alchemist hints.

@Eureka

It’s not an ‘either-or’ situation. You can cut welfare and raise taxes at the same time. In fact, this is likely to be the case. When it comes to fixing the balance sheet all income and expenditure have to be considered and in Ireland’s case all incomes and expenditures will have to be amended, by the looks of things.

Paul

You are correct in pointing out that the FDI sector is no longer making a major contribution to employment creation.

Production jobs in IDA assisted firms have remained at around 80,000 since 2004. Jobs in internationally traded services (software, business services, financial services) have grown from 50,00 in 2004 to 58,590 in 2008, reflecting a significant shift from manufacturing to services.

Of the €86bn manufactured exports and €67bn services exports, foreign firms accounted for 85%.

Obviously we have a very weak indigenous sector, whose main exporting activity is in the food and drink sector.

So, yes, the FDI sector is unlikely to be a major source of future employment growth in future, but it continues to play a huge role in the overall economy, with significant direct and indirect employment.

Also, although proportionately, foreign forms purchase lower levels of goods and services in the economy relative to their revenue, the overall volume of purchases locally is as significant as the indigenous sector.

Many years ago we had a programme promoting local linkages, but global procurement has become a more dominant force in the FDI sector.

These companies have evolved a very profitable and successful model for themselves in Ireland. I would be very concerned that we would underestimate their overall contribution, despite the lack of control that we have in this development model.

@ Peter
I know it’s not either or but multiplier effects have not been factored into alot of decisions.
Any increase in this tax would have a serious negative multiplier effect (you’re talking economics and opportunity, and esteeem and image)
On the other hand cutting welfare does have negative effects but does allow scope for minimum wage reduction and incentivises returns to work etc. I’d be in favour of a substantial cut in welfare but allowing people on welfare to work tax free up to a certain ceiling. That would make a lot more sense

@ Seamus

So if

* our indigenous sector remains weak
* the FDI sector has already delivered its complement of jobs
* CT rate is sacrosanct and
* our banks and state are on the ropes

what is our economic development/employment pathway ?

One good thing for Ireland might be that even high-earners might suffer from negative equity and therefore less mobile. Cap some deductions and maybe some more money can be squeezed out from them.

Not sure what the story is about wages for the Irish exporters, should they:
-go up so that the domestic economy gets a boost or
-go down so that competitiveness can be improved?

Should rents:
-go up so that NAMA won’t make so big losses or
-go down to increase competitiveness and increase domestic economic activity?

Taxes should increase except for:
-corporations and
-individuals

Not quite sure where the increased taxes will come from. Magic sock?

@Peter Carney – “It’s not an ‘either-or’ situation.”

I agree. I think the next budget will take a little bit from every area so that they can claim to be spreading/sharing the pain around equally. Cuts here and here, tax rises there and there, etc. and no doubt the PR arm will soften us up in the lead-up over November including questioning certain areas as to whether they are really necessary in times of austerity. Public funding of the arts will be banjaxed in Ireland for the next few years that’s for sure.

I love listening to that Peter Sutherland guy telling us we need 5bn in austerity when you know damn well it will never have the slightest impact on people like him.

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