Change now seems inevitable, and we must start thinking fast about a plan B
COULD the scrap to shore up the corporate tax regime here become a modern-day Battle of the Boyne for Irish policymakers?
The forces arranged against Leo Varadkar and Paschal Donohoe are impressive and apparently relentless.
It wasn’t a coincidence that Ireland’s finance minister was put up as, in effect, the embodiment of unacceptable tax practices at the World Economic Forum in Davos.
On that panel, Mr Donohoe faced a combined attack from EU Commissioner Pierre Moscovici, Nobel prizewinning economist Joseph Stiglitz, Winnie Byanyima, the UK-based executive director of Oxfam International, and highflying banker Davide Serra.
The minister held his own, just about. But that panel represented a formidable coalition.
The stakes are high. The rhetoric may be that multinationals “pay no tax”, but Ireland collected €8.3bn of corporation tax last year, as much as 80pc of it from foreign-owned companies, according to economist Seamus Coffey.
EU competition commissioner Margrethe Vestager has claimed young people want to see corporations pay “their fair share of taxes”. But for Ireland any move to spread the taxes paid by multinationals across the countries where they sell will harm, not hurt, the State’s finances.
Unsurprisingly, the policy of the Government, along with every Irish government elected for decades, is to resist harmonisation within the EU in relation to tax in general and corporation tax in particular.
All told that has been a remarkably successful policy. More than 200,000 people work in the Irish operations of global, but mostly US, multinationals whose decision to pitch up here in many cases is significantly influenced by the tax regime.
That includes technology firms like Facebook, Google, Twitter and Microsoft, although it has been equally appreciated over the years by pharma giants like Pfizer, Bristol-Myers Squibb and AbbVie. Those jobs are typically well paid and stable, scattered throughout the country, and make up a huge share of the income tax base.
So the case for wanting to defend the Irish regime is strong.
The question that Irish leaders have to ask is whether they can win.
But Ireland’s right to set its own tax rate, and more importantly perhaps the terms of its tax rules, can no longer be taken as a given.
Mr Moscovici, the EU commissioner responsible for tax, would like to be able to change rules across the entire EU without having to get the consent of each country.
Digital companies, whose profits are huge and hard to pin down, are being targeted in particular by EU tax reformers. But there is little reason to think the push for harmonisation will take in profits made by Facebook and not extend to Pfizer.
Countries with large populations stand to make billions if taxation ultimately can be tied to the location where sales are generated instead of where businesses are centred. The stakes aren’t just high for Ireland.
Irish efforts to resist that push for tax harmonisation suffered a significant blow as a result of the UK decision to leave the EU. Even before that, concerted European
and international moves to tackle the most outrageous global tax loopholes have chipped away significantly at Ireland’s ability to turn a blind eye to some of the more outrageous tax mechanisms used by multinationals.
The one element of Ireland’s tax offering no longer under any direct threat is the 12.5pc corporate tax rate. But it’s also no longer the outlier it was, and therefore is losing its lustre as a sales pitch for foreign direct investment.
The US slashed its corporate tax rate from 35pc to 20pc last month in a single bound. Early signs suggest an impact akin to fiscal Viagra. Donald Trump may well come back for a second cut sooner rather than later.
It’s not just America that is changing. France has long been the most bitter critic of the Irish tax regime. It has seen a reduction from 33.3pc to 25pc in its headline corporate tax rate, which critics argue already hides a multitude of allowances and special conditions that mean most multinationals pay far less. So tax rates are falling globally, to meet or even beat our’s, while the drive for tax harmonisation has powerful sponsors.
The question for Ireland is where that leaves us in the mid to long term. If change is inevitable, then it’s time to think fast about a plan B.