Corporation Tax: How Important is the 12.5 % Corporate Tax Rate in Ireland?

Jim Stewart investigates this question in this new IIIS DP.

19 replies on “Corporation Tax: How Important is the 12.5 % Corporate Tax Rate in Ireland?”

@Ernie Ball

NO. It is merely an abstraction on an accounting output – albeit we have made a few bob from it.

12.5% tells us nothing about type of industry, potential markets, type of skills required, nature of co-ordination between subsystems [e.g. Germany and Japan has banks which are closely aligned to industry; ours went ponzi and puked on the citizens], and so on.

As Stewart’s paper points out – Ireland has some elements of the ‘haven’ but in general, in terms of ‘effective’ corp tax intake, is not really different, and in many cases better than other European economies.

IMHO, we have never been industrial. Might be time to begin …

Can we agree that Ireland as an outpost for American Corporate Investment has reached its apogee.

In Europe there will be a common corporate tax base and begging bowl Ireland is in no position to call any shots. In America there is a clangorous uproar about bringing jobs back to the US and the tea party have already made it a central plank of their next presidential campaign.

@Robert Browne

I was wondering if Obama would be addressing this in his big speech on jobs tomorrow. I don’t think it’s just the Tea party that want to repatriate those jobs. Some are just quieter about it.


I was being facetious. Having just read an article that was pretty categorical in its contention that the low corporate tax rate IS NOT the cornerstone of industrial policy, I was getting the jump on the group-thinkers on this blog for whom it is an article of faith that it is the cornerstone and therefore untouchable no matter what the evidence might show.

‘Ireland has had preferential tax rates for over 50 years, initially for
exporting firms, then manufacturing firms and more recently all
incorporated entities, yet has failed to develop a strong indigenous
base, or a national system of innovation’

Notwithstanding the benefits of the process, is clear that low corporation tax has failed as an economic development strategy. The fact that most firms pay no corporation tax does not alter that conclusion.

‘The dominance of accounting/taxation specialists in senior managerial positions is at the expense of those skilled in new product development, production expertise, logistics, and marketing’

The financialisation of the corporate sector has had negative consequences for the real economy, and not just in Ireland. Transfer pricing artificially inflates our GDP, and serves to obscure a strategic failure.

The introduction of a CCTB will lay bare the reality.

When FDI in key sectors becomes significant, then it’s generally easier to attract new entrants because of the availability of skilled labour.

The tax-exemption on patent income with few restrictions for many years has been a big attraction as have the other tax haven incentives.

Microsoft paid Ireland $300m in tax on foreign profits routed through a no-staff company in Dublin in 2004 – – that was about 5% of corporate tax receipts in 2004.

The tax haven facility is very important and that’s why a low CT rate is important.

Microsoft recently told the SEC that it is increasingly channeling earnings from sales to customers throughout the world through the low-tax havens of Ireland, Puerto Rico and Singapore.

The way it put it was that lower taxes in the recent quarter were “primarily due to a higher mix of earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland, Singapore and Puerto Rico, which are subject to lower income tax rates.”

Microsoft’s pre-tax profits booked overseas nearly tripled over the past six years, to $19.2 billion in the fiscal year that just ended, from $6.8 billion in the year ended in June 2006, according to company filings. By contrast, its US earnings have dropped, to $8.9 billion from $11.4 billion in the same period. Foreign earnings now make up 68 percent of overall income.

@Michael Hennigan
Your post demonstrates why it is imperative we retain what we have as securing large scale new investment is going to be an uphill battle. On that note, the delay on the Intel work is worrying.

@ PR Guy

Maybe he will address this issue tomorrow, lets see. Before he was elected president, he told voters he would address the issue as a matter of urgency. However, lucky for us, once elected he conveniently forgot about it. Elections come around faster than politicians imagine and now that it is “show time” he needs their votes, again. I am sure this will assume some prominence in his scripts. One caveat I have is, I believe this issue is gaining more and more traction. Eventually, it is going to crossover from scripts and talk, to action.

In any event, why is something that is beyond our control the ‘cornerstone’ of Irish Industrial Policy? The tax advantage can be removed by the EU and repatriation tax can be removed by the US. Where does that leave us? I’ll tell you where I think it leaves us. We need a new cornerstone. I have not had a coffee yet but maybe that cornerstone should be Agriculture with a capital “A”.

The findings of this short report may be normal information to some economists but many of the main points are not at all well known by the public in general

Multinationals pay the vast majority of Corpo tax in Ireland.
The vast majority of Irish indigenous firms pay very little as they make very little profit.
The average effective rate of Coropo tax paid is around 4% by the Multinationals in Ireland.

I would suggest this report needs to be read by all journalists and members of the dail. I think many would be surprised.

Our current national policy of investing in Rand D in university’s and then selling any of the success stories needs to end.

We have to start developing indigenous industry in this country.

A shameful aspect to the equalisation of rates at 12.5% on trading income with big banks and every other indigenous company getting a big drop from 40% in the mid-1990s, was that part of the gain was not used to partially fund a basic mandatory pension scheme.

The construction industry had a pension scheme and in 2006 the Minister for Finance’s rep on the pensions board vetoed a plan to recommend a mandatory scheme.

The then minister is now 51 on a super-VIP scheme.

It has been official policy to keep employer social security costs low (less than 10%) compared with rates of 30% elsewhere – – also as an incentive for MNCs.

When the State is the employer it’s a different story and a huge conflict of interest for the decision makers.

“The scene was sickening and all the Irish were there, most of them vying with each other in eagerness to plunder the public purse,” William Ewart Gladstone, British Chancellor of the Exchequer, wrote in an 1859 letter to his wife concerning a House of Commons debate, on the cancellation of a subsidy for the mail steam-packet service between Galway and Newfoundland. Gladstone was facing a budget deficit of £5m.

This is an interesting and helpful paper but leaves me confused about how effective CT rates can be measured. I would have thought that the ultimate measure of effective rates of CT would be aggregate CT receipts as % of aggregate Corporate Profits. As far as I can make out (albeit from a non- exhaustive examination) estimates of the latter are not readily available from countries’ national accounts (other than Ireland) which only publish the total for all enterprises, incorporated and not. Does anyone therefore think that the next best indicator, CT as percent GDP, has any relevance in this debate? Eurostat (Taxation Trends in the EU, 2011) shows that in 2009 the weighted average in the EU 27 was 1.9% with Ireland at 2.5% and France at 1.3%. Germany at 0.7% hardly figures. At the minimum it seems to me it must be hard to argue that one way or another CT rates have a major distortionary effect. Maybe I am missing something.

There was a time when Ireland was cost competitive after a century and a half of poverty and stagnation. The boys and girls were bright eyed, bushy tailed, eager to work and not over burdened with a sense of entitlement. Low corporate taxes were effective as a mild stimulant when inputs were relatively low cost particularly labour, property, rents, transportation. Profits were possible without transfer pricing tactics. We all know what happened during our quarter century basking in prosperity. Since 2007 we have had gov’ts propping up labour and property costs in order to ensure our return to poverty and cement our position as a ward of the EU.

Low corporate taxes are an idee fixe in Ireland that is clouding our judgement and eliminating the possibility that we will deal rationally with our problems. Take off the emerald tinted lenses and look at countries with 30% corporate tax rates and ask your selves why the taxpayers in those countries should bail out those sleazy, underhanded opportunists that are undermining well governed economies.

I think the Corporation Tax debate has become overblown.

While I favoured it in previous years, I now think that it should be raised and the bands reduced. The simple fact is that business in Ireland contributes virtually nothing to the exchequer. I’m not saying they should cover our deficit or pay penal rates of tax like in other countries -but this country is in the slop and we need both households and business to contribute in order to get out of it. Allocating all of the burden on one without troubling the other is a recipe for failure.

It is not being unreasonable to ask Irish businesses to contribute even a small percentage of what business in other countries contribute to their exchequers.

The paper by Jim Steward shows that the low corporate tax rate is not a decisive factor in the recent Irish economic growth rate ,but I would like to point out why the other European countries are (with some exception like the Netherlands and the Baltic countries) pretty sore about the subject.
The problem is not so much the localization in Ireland of factories or services that employ Irish labour, some of which, presumably would have chosen another country if Ireland has had an average corporate tax rate ,the problem is with companies that have no economic activity but have chosen to localize their profit at a mail address in Dublin in order to minimize their global taxation .It is the case ,for example for Google and Microsoft .The Irish tax collector gets a windfall by taxing profits that exist because of American ingenuity and European markets with no contribution of Ireland except for a few Irish lawyers.
This is not a zero-sum game, Irish gain is much smaller than its partners losses .
The corporate tax is an excellent tax .First ,at the moment big corporations, American and Europeans have profits at a record level and are flush with cash with which they invest very little ,preferring to raise their dividends or repurchase their shares ,they can easily pay more taxes.
Second there is an increase in inequality in most countries, the rich and the super-rich are increasing their share and the middle-class is fast disappearing .The problem could be alleviated by raising the marginal rates of the income tax or the “death- tax” but raising the corporate tax is a way to raise the income share of labor relative to the income share of capital and in doing so to go against the ever-increasing inequality in income distribution.
The present mind-set of Irish politicians is such that any increase in the corporate tax rate is improbable as long as they do not ask further assistance from their European partners, but if they are forced to do so ,it is near certain that they will use their leverage to force the issue.
The Irish people, at the moment ,see themselves as victims, but it is a known fact that the Irish income level per capita is still substantially higher than the Italian, the German and the French. The next time the Irish ask for assistance they will not be seen as the underdogs.

I am so relieved to read a debate on this topic. I argued against the uncritical support of a low corporate tax regime in another forum recently and could get no support for my view that not alone is it not a sustainable competitive advantage but could be compared to the property bubble in that it masked what we should be doing about the fundamental building blocks of the economy. And is also potentially disadvantaging the small indigenous industries on which we may need to rely. As Robert Browne (above) puts it ‘why is something that is beyond our control the ‘cornerstone’ of Irish Industrial Policy?’

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