Our 12.5% corporate tax rate is no longer the big clincher it once was as rivals shrink their rates and the US attempts to lure back multinationals with tax incentives, writes Kyran Fitzgerald
The Government has a refreshed look about it.
The economy is ticking along nicely, with employment nationwide returning to levels last seen in 2008 and prosperity spreading to larger conurbations across the country.
But this time round, can we really be sure that we won’t lose the run of ourselves and blow it all on baubles, cakes and ale, wooden decking and apartments in Bulgaria — as was the case a decade ago?
There are a few arguably ominous signs.
The sheer scale of the unfolding tracker mortgage scandal points to a banking sector almost beyond real salvation.
The usual suspects are all over the media screaming for extra Government spending.
The Brexit monster has yet to be tamed despite the successful conclusion to the Phase One talks. President Trump has just pushed through a tax reform law which could impact on Ireland’s attractiveness as an FDI location.
Brussels too is stepping up the pressure on the Irish FDI model, moving to rein in the aggressive tax planning of the technology companies while pushing for tax harmonisation.
That said, households continue to pay down debt. The banks are under tighter Central Bank surveillance. Wages and salaries are rising at steady but hardly stellar levels. The big bugbear is the cost of housing, but costs are being driven up not be an excess of credit but rather by a dearth of supply.
When it comes to home construction, we are about as far away from 2006 as it is possible to be.
The political class that has emerged is treading carefully. The real threat to sustained growth is a lack of decisiveness in the implementation of necessary reforms.
Finance Minister, Paschal Donohoe has worked his passage in the area of public expenditure control and he seems canny enough, but the main governing party, despite a recent poll boost, remains reliant on the goodwill of Fianna Fáil.
Consensus politics can work well — it can also lead to policy drift.
The Government really needs to be running a budget surplus at this stage in the economic cycle and given our reliance on corporate tax revenues which may not be sustained. The politics dictate that we spend and spend.
The public wants human interest stories, not dry analysis. There are few votes in efficiency measures. Thousands of protesters can be mustered in a flash at the hint of an overhaul in services at an underperforming local hospital.
Once the abortion referendum is done and dusted, we could be in the run in to another general election as the parties tussle for control of the proceeds of what is predicted to be a bumper budget. This leads inevitably to ‘safety first’ governance.
While the ship cruises on, icebergs loom.
Donald Trump’s tax reforms, as approved by the US Congress, are set to produce a reduction in the effective as opposed to headline tax rate on companies from 21% to 9%.
Companies with overseas operations can be expected to repatriate a part of the huge swag they have parked in tax havens.
As international tax partner at PwC, Liam Diamond can assess the likely impact of the reforms.
Take the significant US investments of Irish-based companies. While the headline rate is being cut from 35% to 21%, the tax base is being broadened with deductible items being hit. Highly leveraged firms will be hard hit by the reforms, those that are debt-free far less so.
The real focus is on the likely impact of the reforms on the stock and flow of US investments, here. A 15.5% tax rate will now apply to all foreign earnings of US companies previously left untaxed in America.
Mr Diamond points to previous US profit repatriation legislation in 2005 which “did not have a huge impact on Ireland”.
Our 12.5% corporate tax rate is no longer the big clincher it once was as various competing countries shrink their rates, France being the latest. Liam Diamond believes that most US companies are putting their roots down, here so as to service customers in the EMEA region. However, smaller, younger firms may opt for a lighter presence here than previously planned due to the reforms.
The sustainability of Trump’s reforms are in question given the possibility of a political rebound by the Democrats, witness the recent spate of electoral results culminating in a shock Democrat victory in Alabama.
All that said, it would be interesting to be a fly on the wall at the office of IDA boss, Martin Shanahan.
At least the threats posed by Brexit in the form of a ‘hard Border’ and a British move to a WTO-type relationship appear to have lessened following the recent deal. While the deal is not written in legal stone, it amounts to a strong indication that the Brexiteer faction in the British Government are adopting a more pragmatic stance ahead of the key trade talks.
While cross-border shopping has resumed with a vengeance and British tourism is down, the export sector has showed resilience.
A higher proportion of business investments are being made in cities like Limerick. Unemployment in the south-west region is now well below the national average.
The recovery is spreading out, but perhaps not fast enough, certainly not enough to alleviate the housing crisis.
The Housing Minister, Eoghan Murphy is making a real effort to tackle some of the planning roadblocks, but the State needs to tackle the issue of land hoarding with greater vigour while ensuring that more funds are steered toward home builders.
Entry taxes and charges on residential projects need to be reduced for the short term.
The sale of Eir to new French owners has raised fears that the previous management’s commitment to the nationwide rollout of broadband will be reduced.
The Government needs to step in to breath life into a broadband strategy delivery which appears to recede into a distant future.
Many Irish retailers and smaller manufacturers are losing out due to poor connectivity. The IE Domain Registry (IEDR) say one quarter of firms in Connacht Ulster rate their connectivity as ‘poor’ or ‘very poor.’ The IEDR has proposed a rollout of a digital skills programme for micro businesses along with a ‘buddy system’ offering IT expertise to such firms.
Tax breaks could be designed to encourage start-ups in regions well away from the capital.
The country as a whole needs to come up with a strategy aimed at increasing the conversion rate of tiny lifestyle businesses into larger entities.
The quality of management in Irish organisations is under the microscope following revelations of malpractices in An Garda Síochána, Irish banks, and in certain academic institutions. It is now three years since groundbreaking legislation on whistleblowers came into force. Ireland now has some of the widest-ranging protections for whistle blowers, seen as critical agents of reform yet, in practice, the laws have not apparently been greatly availed of.
The message has gone out — you stick your neck out and snitch on the rest of the group at your peril.
The Garda management are an interesting example of a group that under fire has developed a circling of wagons mentality.
Yet the opening up of monolithic organisations appears necessary if Irish organisations, public and private, are to perform effectively during the challenging period that undoubtedly lies ahead.
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