We're relying on the St Augustine approach right now when it comes to our corporation tax rate — Lord make me pure, but not quite yet. This week, there’s been a subtle but significant shift in this long-running saga. We’ve moved from absolute brazenness to a muted acceptance of financial and political realities
We’ve been running out of road for a while now on our 12.5% rate. It’s going the way of ‘Leprechaun economics’ and the double Irish. We are being forced along the path to redemption by international OECD tax reforms. During his trip to the US, Taoiseach Micheál Martin acknowledged this by saying he could give no commitment to US companies either way on Ireland’s 12.5% rate.
The change, when it happens, won’t just be an economic one, but will also reflect a much-needed maturing in how we conduct our affairs and how we are viewed internationally.
It may also, through financial necessity, force us to face the reality of being an independent nation with a broadly-based tax base; where there exists a grown-up acceptance of things like water charges and property tax, rather than a place where it’s no great surprise that a good few billion euro in corporate taxes are serendipitously to be found to boost the State coffers just in advance of the budget.
To set it in context, our favourable regime was introduced at a time when we were a poor nation with chronic unemployment and mass emigration. Lots of countries adopt measures to make themselves more attractive to foreign investment — that’s an age-old story — and we got ages out of it.
Our case internationally hasn’t been helped by high-profile companies that availed of what’s been on offer — big international brands that everyone chases. These corporations play countries off each other to secure the greatest returns to their shareholders.
Those shades of shadiness will finally be lifted along with a succession of taoisigh and ministers for finance adopting the Pinocchio approach by insisting to our international neighbours that there was “nothing to see here” as their political noses grew even longer.
At home, it’s been an informal agreement between the government of the day and the main opposition parties that our corporation tax rate was a sacred cow in terms of being off the table for criticism — given how much of a cash cow it’s been for the State coffers.
However, outside of these shores we’ve had some top names call out our chicanery over the years.
In the midst of the economic crash, US president Bill Clinton gave a speech in New York in which he spoke of the profound damage that had been done to the Irish psyche by our economic collapse and the “impacted sense of shame” that it had given to us as a nation.
We would rise once again and be prosperous. But he did add that we were not to think that “any economic management cannot be improved, and that clever things that we do, may not be tinged by a little arrogance carrying seeds of its own destruction”.
There was all the wrong sorts of publicity we got for our ‘Leprechaun economics’, a derogatory twist on one of our national emblems traditionally pictured sitting next to the crock o’ gold at the end of the rainbow.
It was Nobel Prize-winning economist Paul Krugman who came up with that description in 2015 after figures showing the Irish economy grew by an incredible 26%.
Needless to say, a slew of our politicians and experts lined up to explain why that did not reflect reality at all at all and was dramatically overinflated since it was mostly caused by the activities of our multinationals and aircraft leasing sectors.
As Krugman himself might have put it, if it walks like a duck and quacks like one… The same economist was back at it just a few months ago in a piece in The New York Times with the headline ‘Yellen’s New Alliance Against Leprechauns’.
The Yellen referred to is the US Treasury Secretary Janet Yellen who urged finance ministers from the G7 — the Group of Seven major advanced economies — to set a minimum tax rate of 15% on the profits of subsidiaries of multinational corporations.
Krugman went on to tell the profit-shifting story of “Apple and the leprechauns” and how Apple had to report its earnings someplace, opting for “international locations with low tax charges on these earnings, Ireland particularly”.
He looked back to 2014, where a big share of its world earnings was assigned to Apple Sales International, which was registered in Ireland for tax functions. In 2015, Krugman explained, some mixture of pressure from the European Commission and adjustments in Irish tax legal guidelines induced Apple to reassign lots of its intangible assets to its regular Irish subsidiary.
“How large a deal was this? On paper, Ireland’s gross domestic product all of a sudden jumped 25%, despite the fact that nothing actual had modified — a phenomenon I dubbed ‘leprechaun economics’, a term that has stuck. (Fortunately, the Irish have a sense of humor.)”
Maybe we do have a sense of humour, but only when we’re running all the way to the bank, since the Irish ambassador to the US, Dan Mulhall, was moved to write a letter of protest to the newspaper saying this way of describing our tax policies relating to multinationals was an “unacceptable slur”.
The ambassador went on to say that Ireland had “proactively and diligently” reformed our tax code in line with the new international norms agreed to thus far.
Remember in 2016 how the EU Commission said Apple owed us €13.1bn in back taxes?
The Commission has appealed the earlier ruling by the General Court of the CEJU — that Ireland did not give the iPhone maker illegal state aid — to the Court of Justice of the European Union, the EU’s highest court.
The former chief economist at the World Bank, Professor Joseph Stiglitz, laid bare our modus operandi around the time of the original Apple judgement.
“You were encouraging tax avoidance, you knew it,” he said. “You got a few jobs at the cost of stealing revenues away from countries around the world and that’s the kind of activity that has to be stopped.”
Now the time for reckoning on our corporate tax rate looks like it is fast approaching — given a few key factors such as the ability of US president Joe Biden to get a corporate tax deal through Congress.
There are opportunities to avoid tax in lots of locations around the world for the clever accountants, and our arrangements will be less attractive for sure. The challenge will be to remain competitive and attractive to the companies that shop around the world for the best returns — it’s just business to them.
We will be put on a more level playing field through the international moves — but we are still a small country with an enviable international industrial base which will be aggressively targeted by other countries.
We also have a lot going for us including our European location, that we are English-speaking, and our existing skillsets.
We’ll miss it without doubt — weaning ourselves off a river of cash like that will be tough — but we will be able to look back with satisfaction and say we milked the situation for all it was worthwhile we could.
But it is the right thing to do.