Ireland’s 12.5% corporate tax rate is coming under unprecedented pressure from the UK, US and the EU.
It might be better for the Government to voluntarily close some of the loopholes that make it attractive for multinationals to locate here rather than be implicated in a wider clampdown on tax havens.
Starbucks is the latest big multinational to be lacerated before the House of Commons Public Accounts Committee for the non- payment of corporate tax in the UK. It follows the likes of Google, Amazon and other big brands that have faced the wrath of MPs over their minimal UK tax liabilities.
No evidence of wrongdoing has been uncovered in any of these hearings, but the Public Accounts Committee has put the issue of corporate tax high up the public agenda.
Most OECD countries, and in particular Ireland, are introducing austerity policies. The public mood is very much moving against big companies avoiding their fair share of tax. But what is a fair amount of tax is highly subjective.
Multinationals say that by using all legally available means to reduce their final tax bill, the company’s shareholders are the main beneficiaries.
Large swathes of the international media have depicted Ireland as a tax haven. If a political consensus forms at G8 level that involves legislating against tax havens, then Ireland could be in the firing line.
The Government says Ireland does not share any characteristics with a tax haven. It has a comparatively low corporate tax rate but it is transparent and fully compliant with all existing international tax treaties and legislation.
University of Limerick economics lecturer Stephen Kinsella argues that the Irish tax regime might be following the letter of the law but that does not mean it follows the spirit of the law. “Ireland is tax avoidance compliant.”
A complex tax structure known as the ‘double Irish’, which enables multinationals reduce their effective tax rate to below 5%, is often cited as evidence that Ireland is an important cog in a global network of jurisdictions that facilitate tax minimisation.
JP Morgan chief executive Jamie Dimon once said capital goes wherever it wants to go, but stays where it is best looked after.
In other words, if the Irish Government starts unilaterally changing the corporate tax framework, then that could presage an exodus of multinationals from the country.
“If the Government changed the corporate tax system and suddenly a multinational was paying 9% instead of 5%, then that would bring in billions every year for the Exchequer,” said Mr Kinsella. “But it would take a brave minister for finance to do that. It would depend on what is happening elsewhere.”
Certainly maintaining a low corporate tax rate has been a priority for successive governments. It is seen as attractive in attracting foreign direct investment.
In the US presidential election, the Republican candidate Mitt Romney described Ireland as a tax haven. Raising the Irish corporate tax rate plays well among the electorates of most EU states. In his pre-budget submission last week, the UK chancellor of the exchequer George Osborne criticised Ireland for its tax policy.
If the Government wants to maintain the headline 12.5%, then it might need to tighten up on loopholes. Otherwise, an internationally co-ordinated movement could threaten Irish tax sovereignty.
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