Seamus Coffey: Wait-and-see game for Ireland if Biden's corporate tax policy takes hold
UCC economics lecturer Seamus Coffey said of the Biden corporate tax plan: “It is hard to know how this will play out. Back in 2013 it was suggested that the OECD's BEPS project would be a significant threat to Ireland but we have seen an increase in investment, an increase in employment and, most notably, a trebling of corporate tax revenues."
A recent corporate tax policy proposal in the US made the front pages of Irish newspapers. What does it mean for Ireland’s economy?
The Irish Examiner spoke to University College Cork (UCC) lecturer, former chair of the Irish fiscal advisory council, and economist, Seamus Coffey, to assess the significance of the new tax policies of the Biden Administration for Ireland.
US President Joe Biden wants to raise the US corporation tax to 28% from 21% set by Donald Trump. It is part of a $2trn infrastructure investment plan for America’s recovery. Coupled with this is a proposal to set a global minimum corporation rate of tax.
US Treasury Secretary Janet Yellen has suggested a rate of 21% in line with the 21% figure the administration wants to set for the minimum tax rate on earnings generated overseas by US companies.
Ireland has been one of the most successful countries in the world at attracting investment from American multinational corporations (MNCs). The significance of these proposals are enormous.
From tech companies in Dublin to pharmaceutical companies in Cork, foreign direct investment (FDI) has been a huge contribution to Ireland’s economy, and the country’s corporation tax of 12.5% has been a key factor.
It is not so much the 12.5% rate as the contribution FDI makes to the economy. For Ireland, the 12.5% rate is used as a signal of stability, said economist Seamus Coffey.
“The rate was announced in the mid-1990s and has been unchanged since it was formally introduced in 2003. After three decades of inward orientation and trying to develop indigenous industry with trade barriers and semi-state companies, Ireland began the process of opening up the economy in the 1950s.
“Ireland was an economy with a labour surplus and a capital shortage. This was abated through very significant emigration. In the decades since, FDI has been used to fill the capital deficit and this has been very successful with Ireland even moving to a labour shortage on occasion.
“The model has proved so successful that there are significant risks to Ireland. If FDI was not making a very significant contribution to the Irish economy, then there would not be significant risks,” said Mr Coffey.
The UCC economist said when the economy opened up Ireland sought to achieve two things: investment from foreign companies and jobs for Irish residents.
“The investment in some of the sectors, most notably manufacturing, are incredibly large. It is not unusual to hear of multi-billion euro investment projects from US pharmaceutical or computer processor companies. The scale of these in an economy as small as Ireland's is immense.
“Ireland's strategy was not based around collecting corporate taxes. The tax benefits would arise via personal income taxes and the broader contribution of FDI to the economy. Ireland's first tax incentive which evolved in the early 1960s was the Export Profits Tax Relief which offered a zero percent effective tax rate on the profits of export sales.
“This was queried on a competition basis on Ireland's entry to the EU (why should one company making the same product pay less tax than another just because its customers are abroad?) and was replaced by a special 10% rate on all manufacturing activity in 1980 with the standard rate of around 40% applying to other sectors.
“This dual structure was also assessed under EU competition rules in the 1990s and Ireland was forced to move to a single rate with the calculators in the Department of Finance showing that the average of 10% and 40% was 12.5%,” said Mr Coffey.
Although not the original intention, this tax rate is now generating very significant amounts of tax revenue, said Mr Coffey.
“In 2014, Ireland's corporation tax revenues were around €4bn - last year they were almost €12bn.
“US Multinational Corporations (MNCs), in particular, have significant substance in Ireland and that has seen their tax payments here rise significantly,” said Mr Coffey.
“Ireland has now reached a position where FDI is responsible for significant amounts of investment, employment, and corporate tax revenue.
“It is this reason that even proposed changes, such as those published by the Biden administration, are front-page news,” he said.
“The largest FDI MNCs operating in Ireland are headquartered in the US, not Ireland,” said Mr Coffey.
“Irish-headquartered MNCs include Glanbia, Ryanair, and CRH etc. Around 80% of Irish corporate tax revenues are paid by foreign-owned companies. Some of those are here to serve the domestic market, for example retailers, but most are FDI MNCs with operations in Ireland to serve international markets.
“Around 60% of Irish corporate tax is paid by US MNCs. Figures from the US tax authority, the Internal Revenue Service (IRS), show that US MNCs paid $7.9bn of corporate income tax in Ireland in 2018. It is likely to be even higher again now.
“The IRS data shows that unsurprisingly the largest recipient of corporate taxes from US MNCs was the US itself which received $140bn in 2018. Next was the UK which received $10.9bn. Incredibly Ireland was next. Ireland is the third-largest recipient in the world of corporate income taxes from US MNCs.
“The corporate income tax payments contribute around 3% of Ireland's national income.
“Figures from the IRS show that in 2018 US MNCs had around 150,000 employees in Ireland,” said Mr Coffey. “Of countries with a population over 1 million and excluding the US, Ireland has the highest share of its population working with US MNCs.
“The employment of US MNCs in Ireland is equivalent to 3% of the population and around 7% of employment. These are the highest shares in this group of countries. Figures from Eurostat show that Ireland has the highest share of employment arising in US MNCs across all EU countries.
“Eurostat figures show that US MNCs incurred personnel costs of €9.5bn in Ireland in 2018.
In Eurostat's figures this is equal to €70,000 per employee. The pay bill of US MNCs was equivalent to almost 5% of Ireland's gross national income in 2018.
Next highest was Luxembourg with 3% of its national income coming from the pay bill of US MNCs to the 14,000 employees they have there.
“It is likely that around one-third of this pay bill makes its way to the Exchequer. US MNCs would also pay significant amounts of other taxes including commercial rates and possibly also some Vat and excise duty. There would also be indirect revenues from these sources as the employees of US MNCs spend their money in the economy.
“All told, it is possible that the presence of US MNCs contributes something north of €15bn to the Exchequer every year,” said Mr Coffey.
“Countries are looking for tax revenues,” said Mr Coffey. “The OECD BEPS project was initiated as the G7 economies emerged from the Global Financial Crisis and they wanted additional tax revenues to repair their public finances.
“It is worth noting, though, that the "race to the bottom" in corporate tax rates shows up everywhere except in corporate tax revenues.
“It is true that corporate tax rates have been falling in recent decades but governments have also been changing the rules so that the lower rates apply to a broader base - exemptions, deductions and allowances have been curtailed as the rates have come down.
“In the 1970s, the 12 EU15 countries which would join the euro collected the equivalent of 2% of their GDP in corporate income taxes. The most recent figures show that this has increased to 2.5% of GDP. Corporate income taxes as a share of total tax have also not declined and Eurostat figures show that across the EU, the effective tax rate on the profits of non-financial companies has hovered around 20%.
“The exception to this is the US. The US has seen a decline in all of these measures. In the 1970s corporate tax revenues were equivalent to 3% of US GDP. This has fallen, most notably after the Tax Cuts and Jobs Act of the Trump administration and the latest figures put US corporate tax revenues at just 1% of GDP, one of the lowest in the OECD.
Figures from the IRS show that US MNCs had an effective tax rate of 8% in the US. This is lower than the rate they reported for Ireland which was 11.4% in 2018.
“As well as effective rates there is a parallel process to update the rules for taxing companies for the digital age. This is because ICT companies can have a digital presence in a country without having a physical presence and the rules governing taxation largely evolved around the physical location of companies.
“They are different things - albeit possibly with the same end in mind. The US and OECD proposals should also not be considered similar. Many parts of them are different,” said Mr Coffey.
“A large reason why the US has come back to the table for the OECD negotiations is to try and ensure the tax increases that President Biden has proposed are not out of line with the taxation of companies in other countries - the US is trying to ensure that it does not put its own companies at a competitive disadvantage which might encourage companies to move their headquarters out of the US,” he said.
The direct effect of these proposals for Ireland’s economy is not clear, said Mr Coffey who emphasised the recent increases in corporation tax collected in the country. He added the US will attempt to protect its own international economic attractiveness and to avoid isolation on the issue.
“It is hard to know how this will play out,” he said. “Back in 2013 it was suggested that the OECD's BEPS project would be a significant threat to Ireland but we have seen an increase in investment, an increase in employment and, most notably, a trebling of corporate tax revenues.
"The proposal for a 21% rate is just a proposal by the US for its own MNCs. The US already has such a minimum tax but at a rate of 10.5%. The Biden administration proposes to increase this to 21%. But more crucially they propose to apply it on a country-by-country basis.
“If done on a country-by-country basis the benefits of having profit in a low-tax jurisdiction will be reduced. Companies will no longer be able to blend in higher-taxed profits into lower-taxed profits. If introduced, and that is far from certain, this will narrow, but not eliminate, the tax advantage Ireland has over countries like France and Germany."
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