Low corporation tax remains a cash cow in tough times
While most of us will probably pay more tax next year, one sector saw its burden diminish by nearly a quarter. Nobody paid any attention because it was no surprise. From January 1, corporation tax will fall from 16% to 12.5%.
Low as that is, some companies get away with paying even less. Any firm that’s been set up in Ireland since mid-1998 and is working in the manufacturing or internationally traded services sector only pays 10% tax on its profits.
In Britain that figure is closer to 30% while in Belgium it’s over 40%. That 10% rate is gradually being phased out and all companies are moving towards 12.5%. Under particular conditions, however, many multinationals will continue to pay 10% until the end of 2010.
It’s not something you hear too much debate about because in most quarters its accepted that low corporation tax is instrumental in drawing in the high levels of foreign direct
investment (FDI) that we enjoyed during the boom years. And now that times are tough, it’s argued the low tax regime is even more important.
Critically so, says IIB Bank chief economist Austin Hughes: “There’s two ways it’s important. One is the absolute level of corporation taxes, and two, it’s a broader signal that the economy is a low tax, enterprise-
friendly environment.
“So it’s both the absolute level and the message it sends. In an environment where investment is very weak, as at the moment, there’s huge uncertainty about the economic outlook worldwide. We have a lot of corporate retrenchment because of the weakness of equity markets in the US, there is really ferocious competition for international mobile investment and so it is very important in that.”
At the beginning of the growth spurt in the early 90s, much was made of Ireland’s position as the low-cost gateway to Europe. Rising prices and the enlargement process have however ceded that position to the accession countries of eastern Europe while our creaking infrastructure further confounds our ability to draw in foreign direct investment.
Today, it’s down to low company tax and a skilled workforce, though with science in seeming terminal decline in schools, serious question marks hang over our ability to maintain the link between education and what used to be called industrial development. Right now, low corporation tax, fat and juicy as it is, is one lonely carrot.
“It is the absolute essential,” says Colm Donlon of the IDA. “We have a commitment through the Tánaiste and the Government that it’s 12.5% until 2025. That’s what’s promoted internationally and that’s a very stable environment for investors examining Ireland as a location for future investment. It’s not just the low level, it’s the low level and the stability of it are the issues for us.”
But while there is a lack of opposition at home to the low corporation tax regime, some of our European neighbours are less than happy with it.
During the negotiations for the Nice Treaty, we scored a considerable victory against serious German and French opposition when we managed to retain our veto on fiscal issues. Both European heavyweights rely heavily on revenues generated from corporation tax and so do not really have the option of using it as an incentive for investment.
They regard our 12.5% as an unfair distortion of the market and in the negotiations for the next treaty, we will once again come under serious pressure to jack it up. We are not without allies however. Neither Britain nor Sweden is anxious to part with its fiscal autonomy. Moreover, as expansion eastwards continues, the nature of the game is likely to change substantially.
Frank Barry lectures in economics in UCD and has written extensively on the Irish economy.
He says: “The crucial thing is some of the central and eastern European countries are following us down. They’ve learnt our lesson, so Estonia has abolished corporation tax, Hungary is down almost as low as us and the other countries are coming down as well.”
Finish telecoms giant Nokia has set up production facilities in Estonia on foot of a corporation tax regime that could not be more favourable, and what emerges is a de facto
harmonisation in which rates are coming under downside rather than upside pressure.
But will these moves ultimately make our sole carrot unappealing? Not so, says Colm Donlon of the IDA: “The enlargement countries of Europe are not competitors with Ireland. Ireland has gone beyond that level now. We’re competing with places like counties and states in America, we’re competing with places like Sweden and parts of France and Germany. We’re not competing on cost, we’re competing on skills and knowledge and quality.”
Frank Barry isn’t so sure. He points out that when we acceded, the nature of foreign direct investment coming into Ireland changed dramatically.
There’s every reason to expect the same may happen for new members of the union.
He says: “You’re focusing on high-skill economies like the Czech Republic and Hungary. There is the possibility that they’ll be competing much more directly with us.”
Countering this influence, however, is the fact there will be a lot more FDI in the system for which we can compete. But with all our other charms fading rapidly, how much longer can we rely on low tax alone to keep bringing in the bucks?
