Ireland’s corporate tax advantage may have limited life

THE advantage Ireland has in attracting foreign companies as a result of its low corporation tax rates may have a limited time to run, a report on taxation in the EU has warned.

While the country’s 12.5% tax on companies has been undercut by Cyprus and Bulgaria, which have an unadjusted rate of 10%, it is still proving very attractive to foreign direct investment.

The country’s corporate tax take of 2.9% is less than the EU average of 3.3%. But the problem for Ireland may not just be pressure from other EU member states that want to see Ireland’s rates move closer to their own but also falling income from companies.

The 2010 edition of the Taxation Trends in the European Union shows corporation income tax rates have been cut from an average of 35.5% in 1995 to 23%. Countries are experiencing high levels of income from company tax, but the report finds it is unlikely to remain at this level as the economic downturn hits profits.

The report reveals that measures taken at EU level to limit harmful tax competition may have resulted in less erosion of the capital tax base. In Ireland, the strong economic growth up to 2007 offset the effects of the cuts in corporation and capital taxes. The increased revenue from taxes on capital was, however, due to soaring receipts from the capital gains tax and stamp duty, which rose 500% and 337% respectively from 2002 to 2007 thanks to the building boom.

The total tax-to-GDP ratio is now slightly below the 2000 level. In 2008, the tax take at 29.3% was the fourth lowest in the EU.

Ireland and Estonia have experienced the greatest drop of more than 2.5 points in consumption taxes, such as VAT and excise duties, as spending by households fell.

The report points out that the EU as a whole is a high tax area with the average tax and social security contributions amounting to just short of 40% in 2008 – more than a third above the levels in the US and Japan and higher than Ireland’s 29%. The differences, however, also reflect social policy choices, as states provide such services as healthcare and pensions directly or via tax reductions.