We must keep our corporation tax rate
It’s the kind of reassurance that multinationals located here, or who are thinking about Ireland as a location, needed to hear after the Irish tax regime came under sharp scrutiny this week.
Reports that several US corporations saved hundreds of millions in tax in the US by exaggerating their Irish profits have not gone unnoticed, and the US revenue is said to be taking a hard look at what has been happening. This focus on Ireland has been partly fuelled by The Wall Street Journal.
It is getting worked up about US corporations depriving the US of billions in taxes that it believes are rightfully theirs. It is little wonder then that the issue has helped to focus minds in Ireland as well.
Last year, the corporation tax issue was highlighted in a major study that showed global US firms were making massive profits in countries operating low corporation tax regimes.
In some cases the profits are nearly as big as the turnover recorded in certain tax havens.
The study identified Ireland as one of the chief offenders in this controversial area. It concluded Ireland was the world’s most profitable country for US corporations. Martin Sullivan, of the journal Tax Notes, said profits made by US companies here doubled between 1999 and 2002 to $26.8 billion, (€22.88bn) while profits in most of Europe fell. He fingered Ireland as a “semi-tax haven” for US firms.
Between 1999-2002, US multinationals increased profits in countries with no or low tax rates by 68%, while sharply reducing profits recorded in countries where they actually engage in substantial business activity, according to the report.
The tax rate in the US is 35% and the attractiveness of the 12.5% rate struck here in 2003 is a huge bonus from an inward investment point of view.
Prior to that, foreign firms operated from a 10% CPT base. That was deemed to be preferential treatment and the Government persuaded the EU to allow us implement a 12.5% rate.
That was our clever way around being accused of giving preferential tax breaks to inward investors and it was a stroke of genius. This 12.5% rate has been a vital part of our success as an evolving economy. It has to be kept in our armoury as a small open economy on Europe’s periphery. We have to continue to make Ireland attractive to the US multinationals and indeed to other foreign investors as well.
This tax regime has been the bedrock on which we built the success we enjoy today. If the EU tries to pull us into line then we will have to invoke our veto and tell them where to go.
Unfortunately we do not have the same leverage with the US, but I’m glad to say there is little the Wall Street Journal can do to stop US multinationals from pitching their tents where they achieve best advantage.
They are exercising the right to operate freely in a global market which allows them to go where they get the best advantage.
But we would be wrong to underestimate the influence of the Journal, and the Irish authorities need to be vigilant on this issue.
Mr Cowen acknowledged that threat when he addressed the US Chamber of Commerce on Thursday at its annual thanksgiving lunch. He acknowledged the concerns raised by the top brass in Dell and he told those at the function: “I can assure you that is not going to happen on this Government’s watch.”
We sincerely hope these are not just hollow words.
