Corporate Tax Saga, May 11 Edition

I’m not sure who you mean, but I doubt you will find many here who believe that the EU’s institutions ‘have our best interests at heart’. I am, however, aware of quite a few (among whom I would be happy to be associated) who believe that the institutional and political EU will put its own interests first, but that the government should strain every sinew to convince them that it is also in their interests to cut the smaller peripherals some slack.

And I think many of us are aware that a politically dead President walking in France (soon to be accompanied possibly by a politically dead Chancellor walking in Germany) has to do a bit of ‘grandstanding’ in the face of the surge in support for populist, nationalistic, xenophobic rhetoric.

“Those who believe that Ireland’s situation will end well because European institutions have our best interests at heart may wish to consider how things have played out over the past few weeks.”
I used to… but not for a while.

Why was it again we couldn’t just have the IMF?

I believe that Ireland’s situation will finish way clear of the apocalypse, so popular, even craved for, in these parts, because European institutions have THEIR best interests at heart.

Mote, beam.

The French know all about tax incentives for companies. This from their Invest in France site:

“Setting Up in France
Modified Tax System

For the past five years, France has been pursuing an ambitious policy to reduce corporate tax. Although the nominal rate of corporate tax (33.33%) is higher than the European average, the corporate tax system has become just as competitive as in other European countries. Recent international comparative studies have confirmed this, with France now ranked as the second most investor-friendly country in Europe, after Ireland and ahead of the United Kingdom and Germany (KPMG/EVCA research).

France is a real tax haven for research and innovation
France has had the best research tax credit in Europe since reforms were passed in 2008.
Reduced corporate tax rate of 15% (instead of 33.33%) for income from intangible property.
Creation of the innovative new company (jeune entreprise innovante – JEI) status in 2004, allowing such companies to benefit from tax and social security exemptions as well as the research tax credit in their first year of existence.
In light of these various measures, the KPMG “Competitive Alternatives” study, which examines different start-up costs in 10 countries, has ranked France second for tax competitiveness when it comes to setting up R&D activities.”

http://www.invest-in-france.org/us/business-environment/modified-tax-system.html

It is most likely that all these statements are mere political grandstanding and that an agreement will be reached sooner or later. It all reminds me of the negotiations leading up to the Good Friday Agreement. When addressing the media, each side makes hardline statements that are primarily designed to pacify their own voters, but a fudge nearly always emeges from the negotiations. The one certainty is that Ireland’s CT rate will NOT be increased. Period. Full stop. If the French want some meaningless fudge to save face, so be it. If it means no interest cut, so be it. It is hardly the end of the world. However, a far better route to achieving an interest rate cut would be to introduce an immediate further cut in public expenditure, say equivalent to 1 per cent of GDP. From the IT article that Professor Karl Whelan linked to:

“Euro zone sources have suggested that Dublin could secure a cut in the cost of its EU bailout loans by accelerating budget austerity instead of raising its business tax rate.”

This avenue should be pursued. Pursuing it would result in double savings: the savings from the cuts and the savings on the interest rate. It is also what ESRI suggest in their Quarterly Economic Commentary out today (link below):

http://www.rte.ie/news/2011/0510/esri_economy.html

It is increasingly clear that those who predicted at the the time of the December 2010 budget that the cuts introduced then would destroy the economy have been proved wrong. Since Brian Lenihan’s last budget, which many here predicted would kill the economy, the live register has fallen virtually every month, monthly job redundancies have fallen every month, monthly job vacancies have risen every month, and, most important of all, tax revenues in the first four months of 2011 are running 1% ahead of what was forecast in that budget, while spending is running 2% below what was forecast in that budget. Hands up all those who posted here back in December, or on their blog/twitter sites, that Brian Lenihan’s fiscal targets were unachievable because the cuts he was introducing would kill off economic growth. How do you explain away the fact that, so far in 2011, they are being more than achieved?

Now today, in that same QEC, ESRI have revised UP their forecasts for GDP growth to 2% in 2011 and 3% in 2012. This is hardly the economic ruin that Morgan Kelly claims is imminent. Naturally, this news has received little publicity, indeed negligible publicity in comparison to Morgan Kelly’s mad rant in the Irish Times last weekend (I’m sure that this post will be the first time that many readers will have become aware of it).

http://www.esri.ie/UserFiles/publications/QEC2011Spr_ES.pdf

We should take advanatge of the fact that Ireland is politically and socially stable, on a scale that few other countries in the EU can match. Greece was on general strike today. Ireland wasn’t. Other countries, not just the PIIGS, but France and the UK have had general strikes and/or riots in protest at public expenditure cuts in recent months. Ireland hasn’t. If modest further cuts are introduced, commentators like Browne and O’Toole, and nutters on sites like this, will be saying ‘this is the last straw’, ‘the people can take no more’, ‘march on the Dail’, ‘general strike’, blah, blah, blah, but everyone knows that it won’t happen. A combination of public acceptance, without protest or industrial action, of public expenditure cuts and public support for keeping business taxes low will look extremely impressive to those who make FDI decisions. In most EU countries, the oposite would be occurring.

@ Overseas guy

“Precisely,that is why the rest of Europe will not and should not let go.”

To be honest, the more I’ve looked at the consolidated tax base thing, the less it makes sense.

I’ve no problem at all with the idea of harmonising on what can and cannot be deducted from the definition of income. But the idea of a corporate income tax that hands over its revenues to places outside where the income is declared on the basis of where the stuff was sold, strikes me as odd. Direct taxation is supposed to be a national prerogative within the EU and this idea that you have to fork over corporate tax income to other countries seems, to me at least, to be inconsistent with that.

And why does it have to stop at corporate income tax. Why not have Ireland hand over part of the personal income tax that Google’s employees make to other countries rationing it according to Google’s sales? The principle would seem to be the same.

@Karl Whelan
Google is a very good example. The search engine is being developed in California. Most of the servers are in the US. The sales activities are located in the respective countries. There is practically no value added in Ireland .I suspect that the computer which is in charge of the billing is also based in the US even though the invoices I receive by mail have an address in Dublin. The only reason that Google has a legal entity in Ireland is to avoid paying taxes in the US or in the countries where the service is sold.
Granted, Jersey, the Isle of Man, the Caiman Island etc, are doing the same or worse, I doubt very much that they will ask for a guarantee for their borrowing to the AAA countries of Europe.
Irish attitude toward that problem is the same that I meet when discussing numbered accounts with a Swiss .Somehow, straight Calvinists from Geneva cannot find anything wrong with tax cheating.
Nobody expects to change your mind or the mind of any Irish on the subject, but I hope that your partners in Europe will use any leverage they can get to change the status quo.

re “consolidated tax base thing” bureaucratic, expensive nightmare, designed to keep lawyers in business for eternity, divide and hide, to make transfer pricing aka Overseas Dutch Sandwich, Double Irish, legal, complex, unwieldy, unnecessarily complicated and a scam:)

This comment is relevant here and the link in the subsequent comment. There won’t be an interest rate cut next week according to Lucinda Creighton. The difference between the EFSM and EFSM in terms of conditionality is huge. Since all decisions relating to Portugal are now by QMV, the Irish government should strongly point out the difference in treatment between Ireland and Portugal. Rehn has stated previously that under QMV there would be an immediate interest rate cut.

The CCCTB is essentially unworkable as politically impossible to achieve consensus on the particulars amongst 27 national interests. I have no problems with agreeing to discuss it, but I wouldn’t be placing all me negotiators on that unworkable table. Discourse on the distinction between the standard and the effective could drag on for twenty years, but it will be put quitely to bed well before that, hopefully. The twelve point five percent isn’t cast in granite, and if further EU integration (unlikely as it seems at the mo) ensues then some movement towards an effective EU mean is likely, but that time is certainly not now.

Whether the present French Admin saves face or not is entirely irrelevant.

I don’t even know why the French want it.

Our Corporation tax revenues of 4bn a year?

How do they compare to the average Euro take?

Some studies in the media recently enough (the source of which I can’t quite recall atm) said that the main beneficiaries of the CCCTB would be Spaina and some other non-french/german countires.

Whats actually in it for the French and Germans? Our MNC jobs? The FDI? The tax take? Or do they want such benefits transferred to somewhere like Spain for unemployment, euro stability reasons?

I don’t know.

?

I don’t understand why our politicians had to start mouthing off about the interest rate reduction before it happened. The Commission proposed it. All we had to do was keep our mouths shut. Instead we start making pronouncements and alerting the French media to it. Is being able to take credit for this more important to Enda Kenny and Lucinda Creighton than actually getting the reduction??

@ Overseas commentator

The fault in your logic is the fact that direct taxation remains a national prerogative. Ireland is not required to change its tax laws or rates because no other country of the EU can be required to do so. The countries of the EU have not agreed by treaty to do anything else.

The French position is outrageous (the Germans are just along for the ride)because it links unrelated issues in order to blackmail a smaller state to make concessions in another area where the member states HAVE agreed to act together – to the extent of sharing a single currency – and the problems associated with which require action by all the countries involved and not solely Ireland.

This is not the behaviour of a country that understands what the EU is all about. I fear that, under Sarkozy, it has forgotten the vital principle that the Union is based on solidarity not inter-state displays of political power. We all know that France is a big country. It does not have to throw its weight around in this manner to prove the point. Unfortunately, the people who surround Sarkozy seem to either share this view or are unable or unwilling to persuade him otherwise.

The stalemate is now a purely political one.

On the CCCTB, the proposal is based on an article (Article 115 TFEU) dealing with the approximation of laws under which the Commission may make proposals and which Member States are obliged to consider under the principle of loyal cooperation enshrined in the treaties (Article 4.3 TEU). The final decision is based on unanimity which will not be forthcoming. What the French may be seeking is some form of common understanding among the member countries of the euro area that they will proceed by way of an enhanced cooperation (a minimum of nine countries under Article 20 TEU) when the CCCTB proposal is shot down (a foreseeable event but quite some time away).

The row with Ireland is a useful preliminary skirmish which they cannot lose. The Commission and other Member States are perfectly aware of this. But Berlin will not move until Paris does. That is politics but not as it is normally understood in an EU context.

@DOCM
“The fault in your logic is the fact that direct taxation remains a national prerogative. Ireland is not required to change its tax laws or rates because no other country of the EU can be required to do so. The countries of the EU have not agreed by treaty to do anything else.”
You are perfectly right ,under the present treaties there is no way that France or Germany can force Ireland to change its corporate tax rate. There was no obligation either for the French or the German government to finance the Greek, Irish and tomorrow Portuguese bail-out .The treaty instituting the Euro expressly forbids any type of bail-out! Mrs. Merkel is paying a heavy political price for not having respected the treaty and there are several challenges in the German judicial system against her .There is no way that anybody can oblige the French or the German to agree to a rate reduction ,therefore they can ask anything that they please in return ,the Irish government is perfectly free to accept or refuse such a trade-off .If you agree with me that it is likely that Ireland( and Greece) will not be able to finance its debts on the market for years to come ,there will be new confrontations on the same subject in a near future.
@ Christy
“If the answer to that is it will decrease our chances then it is preposterous for EC governments to pursue it – an Irish default is far more detrimental to EC interests than a marginal or even a meaningful change in the rate.”
I think that you have a strong argument there, but try to put yourself in your partner’s shoes, if they wait until Ireland economy gets better to press the issue, what is their chance of success?
I think there is a way out of this dilemma: Ireland can propose to change its taxation in the future, as soon as a certain target is reached (for example until the moment where the budget reaches a primary balance surplus).
@Rob S
Why do the French (or the German) want the Irish to change their taxation rate?
The present crisis has shown that the EZ ,as it was initially designed does not work .Financial regulation must be tighter, budgetary rules must be enforced, national accounts must be audited etc.
If we want to share a currency, we must agree on a common set of rules. One of them is a minimum taxation of businesses (there is presently a precise set of rules for the VAT concerning the consumer taxation) .A very low rate of taxation in one country forces the others to reduce their own taxation or risk losing its tax base. Some of the biggest German and French firms are incorporated in the Netherlands to lower their taxation, for example .
When one reads this blog ,it is very clear that many Irishmen have given up on the idea that Ireland will ever have its own indigenous manufacturing industry and that Ireland will always be dependent on an economic model where the attractiveness of Ireland can only be dependent on cute tricks to entice US firms to incorporate in an Irish tax heaven .I do not believe this is true .The “Celtic Tigers years” were based on a fraud and, long term were years wasted. There is absolutely no reasons Ireland cannot develop its own successful indigenous economy.

@DOCM

I do not think that you answer my answer. In your first sentence you frame the debate in a legal framework: under present treaties Ireland is free to set its corporate taxation level. Under present treaties the other countries are free to lower ,or not, the interest rate applied to the bail-out .
To counter this argument you answer that the creditor countries are under a moral obligation to lower the interest rate because the bail-out terms were inequitable .This is a moral position not a legal one .As far as I know a legitimate Irish government signed the bail-out papers .As to the responsibilities of the present situation few people outside of Ireland accept the view that the ECB and the bond-holders are responsible for the housing bubble, the guarantee to the banks etc.
I happen to agree completely to your critic of the VAT system. What I was pointing out is the fact that the states must obtain the approval of their partners before any change to the rates of TVA applied to any category of goods or services. It took years for the French to apply a reduce rate to the restaurants, because the Germans where against it (I wish the Germans had not capitulated ,it was one of the most stupid ideas of Sarkozy).
As to your critic of the French Corporate tax system ,it is a very good argument in favor of a common tax base. By the way ,you should read the French budget, the revenue forecast are audited by the “Cour des comptes” which is very critical of the government. You will see that the effective tax rate is nowhere near the numbers that are floated in the op-ed Irish or British papers.

@overseas commentator

If we want to share a currency, we must agree on a common set of rules. One of them is a minimum taxation of businesses (there is presently a precise set of rules for the VAT concerning the consumer taxation) .A very low rate of taxation in one country forces the others to reduce their own taxation or risk losing its tax base.

The logic here is flawed. There is no need for tax harmonization in order for a common currency to work. The USA is an existence proof of this. States compete with each other by offering tax and other incentives to lure foreign investment (e.g. BMW car plants) – the dollar seems to survive just fine. You should not are make the false argument that the tax rate issue is linked to or necessary because of sharing a currency.

“What is at issue is an attempted crude inter-state exercise of power which is foreign to the very idea of the European Union. ”

I’m not sure where you have been all these years; it’s more like such horsetrading has been and still is at the very heart of the European Union. E.g. the famous case in 2002, when Germany supported the French on EU agricultural subsidies in return for French support vs Bush on the Iraq war issue.

But the issue of interest rate paid by Ireland and corporate tax rate *is* linked and it does make sense to link it. As someone asked, “Do you think an increase in our corporation tax rate will improve or decrease our chances of avoiding default?” Since an increase in the Irish corporation tax rate, matched by an appropriately calculated decrease in interest rate, would lead to a neutral impact on the Irish government treasury (less money in from the tax rate, less money out from the cut in interest rate), it is clear that by linking the two one can increase the Irish corporate tax rate and not change the Irish chance of defaulting.

A man becomes gravely ill and is taken to hospital. After intensive treatment, he awakes: his fever has gone but he is still very weak. Around his bed are ranged doctors in their white coats. One steps forward and smiles: “On behalf of the medical team, can I say how glad we are that our treatment has been successful. We hope to see you back on your feet soon. However, it has been suggested that you should give us a little something in return” (one of the others hands him a scalpel) “and we believe that a leg would be an appropriate gesture. Ready?”

In composing this little drôlerie, I had considered giving the lead doctor a name–Nicolas Sarkozy was the one that came to mind, for some reason. But that might have been too far-fetched.

@incognito

There is a difference between healthy tax competition, where countries with lower public expenses can set lower tax rates, and tax parasitism, where a bankrupt country is keeping tax rates lower than every single other EU country thanks to bailout money.

So you agree the issue has nothing to do with being part of a currency union?

You can make the argument that tax competition should be abolished, and use perjorative language to do so if you want, however this argument must begin with the argument for a Treaty change where national governments agree to pool sovereignty in matters of direct taxation. After this has occurred then the issue of tax competition is “in play”, before this has occurred it is not. It really is as simple as that.