As we all know, or at least should realise, foreign direct investment is an incredibly important component of Ireland’s economic model and structure.
Directly and indirectly, it accounts for around 340,000 jobs in the economy, and this employment is spread regionally around the country.
The 12.5% corporation tax rate has been instrumental to Ireland’s success in attracting such investment, but the pro-business environment (amongst those who matter) and the quality of the labour force have also contributed. However, Ireland’s economic model is now under pressure from a number of different sources.
US president-elect Donald Trump has pledged to cut the US corporation tax rate from 35% to 15% to encourage US multinationals to divest overseas and come back to the US; the UK could well take its rate down towards 10% over the coming years in response to the possible Brexit impact on foreign investment in the UK; Ireland is currently appealing the Apple state aid ruling by the EU Commission; and the Common Consolidated Corporate Tax Base (CCCTB) has reared its ugly head again.
The CCCTB is an attempt to eliminate corporate tax avoidance by Brussels through the use of transfer pricing and other mechanisms that have the effect of locating profits in countries with the lowest corporation tax rates.
This has the effect of depriving some countries of much-needed tax revenues, and gives other countries a dubious tax boost.
The basic aim of the CCCTB proposal is to make sure that every country utilises similar transfer pricing and other mechanisms and ensuring that there is a common methodology for assessing how much tax corporations should pay in the jurisdictions where they create economic activity.
The Commission opened a public consultation into its proposed scheme for a CCCTB last year, ahead of its relaunch this year.
It is now very much back on the agenda and is creating considerable concern for policy makers here.
Without the UK as a strong ally at the EU table, Ireland’s position will be weakened as it strives to fight it off.
Regardless of what happens with the CCCTB, and even if Ireland can veto it, the reality is that at a global level, the OECD and the EU are hell-bent on ensuring that corporations pay their fair amount of tax in the jurisdictions where they should.
In an environment where the legacy of the great recession is still being felt, and faced with the expenditure implications of ageing populations, the pressure to maximise tax revenues will only intensify. Ireland is very much in the firing line.
The 26.3% GDP growth rate in 2015 has not helped.
The implication for Ireland is that the ability to attract investment from overseas is becoming pressurised and we will really need to focus on non-tax forms of competitiveness, such as public services, information technology infrastructure, physical infrastructure, and most importantly the quality of education and the labour force.
Faced with these challenges it is more important than ever that we nurture and support our beleaguered SME sector.
Our economy will inevitably become more dependent on this sector. SMEs do not have it easy in Ireland.
A research paper from the Central Bank this week showed just how disadvantaged SMEs are in relation to the high cost they are forced to pay for bank credit.
The tax system also still discriminates against self-employed SME owners, despite the derisory changes in the recent budget.
Many SMEs in the retail and agri-food industries are also now under pressure from the sterling-induced cross-border shopping craze.
There is a myth that fortunes can be saved by travelling north to do the grocery shopping. It is a myth, unless one wants to binge on alcohol.
Those who travel north of the border to achieve derisory savings, and ultimately end up worse off, cannot afford to complain about unemployment and under-funded public services.
They are contributing to those problems.
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