“Following the 25 March 2013 Eurogroup political agreement, additional fiscal consolidation measures of around 1.5% of GDP for 2013 will be legislated and implemented before disbursement of the first tranche of financial assistance, namely (i) increase in the statutory corporate income tax to 12.5%” draft bailout agreement for Cyprus 9th April 2013
You’ll recall how An Taoiseach Enda Kenny vehemently defended the Irish corporate tax rate in the face of flinty pressure from the French president Nicolas Sarkozy and less-obviously, from the German chancellor Angela Merkel in March 2011. There was the famous “Gallic spat” and the result of that was that Ireland missed out on an interest rate reduction on its bailout for another four months. When the interest rates were eventually reduced, the reduced rates applied to all bailout funding but the interest rate wasn’t back-dated – that “Gallic spat” cost us over €10m.
Ireland has an established global tax brand, it’s 12.5% and it’s not changing. This attracts colossal foreign direct investment by companies who want to exploit the low tax rate. For example, Google books half of its global revenues through its offices in Dublin. In 2011 Google Ireland booked €12.5bn of revenue and booked a gross profit of €9bn. It paid just €8m in corporation tax. This has less to do with Ireland’s 12.5% standard corporate tax rate than with the ability of global companies to have discretion in where they ultimately book profits.
But you might also recall that in the recent bailout discussions for Cyprus, a country which has an even lower headline corporate tax rate of just 10%, that Cyprus is being forced to raise its corporate tax rate by 25% in relative terms, from 10% to 12.5%. This change is supposed to improve Cyprus’s economy which, like Ireland’s, also depends on foreign direct investment.
So, why are Cyprus’s friends in Europe forcing it to increase its corporate tax rate, when such an increase is anathema to Ireland?
We don’t exactly know, but germane to the subject is a parliamentary question asked this week by Socialist TD, Joe Higgins of the Minister for Finance Michael Noonan who said that if Ireland were to increase its corporate tax rate by the same proportion as Cyprus, then the State would get €928m extra but only if companies didn’t change their behavior. Minister Noonan went on to say that foreign direct investment would suffer in Ireland and he went on to say “Recent research by the OECD also points to the importance of low corporate tax rates to encourage growth. “
But if that is the position in Ireland, why is it not also the position in Cyprus. Has Ireland overestimated the contribution to the well-being of our economy of foreign direct investment and its relationship with our tax rates, or are the Cypriots just too dumb to understand how their economy will suffer as a result of tampering its rates. Surely, only one answer is correct.
The parliamentary question and response are here:
Deputy Joe Higgins: asked the Minister for Finance the amount of additional revenue that will be raised for the Exchequer if the corporation tax rate here was raised by the same proportion, that is by 25%, as the increase to the Cypriot corporate tax rate in the original Cypriot bailout plan of 16 March 2013.
Minister for Finance, Michael Noonan: I am informed by the Revenue Commissioners that the full year yield to the Exchequer, estimated in terms of expected 2013 profits, of increasing the standard rate of corporation tax by 25% from 12.5% to 15.6%, is tentatively estimated on a straight line arithmetic basis to be about €928 million. While this estimate is technically correct it does not take into account any possible behavioural change on the part of taxpayers as a consequence. In terms of an increase in the 12.5% rate, estimating the size of the behavioural effects is difficult but they are likely to be relatively significant. An OECD multi-country study found that a 1% increase in the corporate tax rate reduces inward investment by 3.7% on average. On this basis, it would take only a 2.5% increase in the rate (to 15%) to decrease Ireland’s inward investment by nearly 10%. This assumes the average applies across the board but in fact the effect is likely to be more extreme for Ireland.
The very major importance of maintaining the standard 12.5% rate of corporation tax to Ireland’s international competitive position in the current climate must also be borne in mind. Ireland, like other smaller member states, is geographically and historically a peripheral country in Europe. A low corporate tax rate is a tool to address the economic limitations that come with being a peripheral country, as compared to larger core countries. Ireland’s low corporation tax rate plays an important role in attracting foreign direct investment to Ireland and thereby increasing employment here. Recent research by the OECD also points to the importance of low corporate tax rates to encourage growth.
Further, it would be difficult to justify such a move in the context of Ireland’s stated position that we will not change our corporation tax strategy. Even a marginal change would undermine both our long held stance on this issue and the certainty of business, domestic and international, in our resolve to maintain that position.