Ireland’s corporation tax is not about to change any time soon

Too many people in Ireland have worried about profit tax issues for too long. Little is likely to change in the years ahead, writes Dan O’Brien

IRELAND’S national paranoia about profit tax is unending. Last Thursday, the top stories on the front pages of national newspapers dealt with the matter. Two things happened on Wednesday to cause this.

One was words written (but not uttered) by Eurocrat-in-chief Jean Claude Juncker. Among many other things in a wide-ranging “state of the union” address, he suggested in the script of the speech that EU member countries should give up their right to veto new tax laws that his institution comes up with.

The second development that pushed profit tax on to the front pages was an economist’s opinion.

Seamus Coffey, who runs the public finances watchdog, was before an Oireachtas committee. He was asked what would do more damage to the Irish economy: Brexit or one of Juncker’s tax proposals that has recently been put forward for consideration to (veto-wielding) EU countries. He answered that the latter would be worse for Ireland.

Juncker is delusional and Coffey is wrong.

Let’s start with the former. In the 1980s, EU countries decided to give up their vetoes on the making of laws relating to product specifications — everything from the nuts and bolts in your lawnmower to the chemical compounds in the pills you pop.

Decades later, they are nowhere near giving up their vetoes on tax laws. While there may be some political parties in some countries which would support ending the veto on some specific tax laws currently under consideration, none is even close to advocating the leap that Juncker proposed last Wednesday. No sleep need be lost over that.

What about Coffey’s views on the differing threats to the Irish economy?

First off, it is very likely that Brexit will happen. It is quite likely that Irish farmers and the food industry will end up losing much, if not most of their most important market. If that happens the effects on rural Ireland will be quite frightening.

Now consider the effects of the European Commission’s draft law on the Common Consolidated Corporation Tax Base, or CCCTB.

It would, as Coffey said, cause a big loss in revenues to the government’s coffers. But even if the measure was adopted as currently proposed, and it probably won’t (as discussed below), it would not come into effect for years and it would likely be phased in over years.

That would provide time to prepare.

The much bigger issue is whether it would cause an exodus of multinational companies from Ireland. The reason for the paranoia in this country about continentals’ corporation tax intentions is because these companies are the most powerful engine of economy and if they were to leave en masse the impact would be greater than the property crash and banking crisis.

But it is extremely unlikely that this would happen even if CCCTB were to be enacted. To see why, consider a bigger change to Ireland’s corpotax ration tax than the one on the table in Brussels at the moment. Imagine if Ireland had been forced to increase its corporation tax at its moment of historical weakness — November 2010 when the State was bailed out — and let’s suppose that the rate had gone from 12.5pc to 17.5pc.

That would certainly have made Ireland a less attractive place for multinationals. But global businesses that have their European headquarters in Ireland would not have been upping sticks and dashing to the Continent.

That is because the headline profit tax rate in most countries has always been far above 17.5pc. It should also be said that companies are located here for reasons other than tax and its avoidance.

Given the amount of gnashing of teeth that goes on over corporation tax it is worth stepping back to look at longer term trends on the matter.

The issue of multinationals using clever accountants to minimise their global tax bills has been on governments’ agendas for decades. It moved sharply up the agenda during the Great Recession, which started in 2008 and which blew a hole in almost all rich countries’ public finances. The growing prominence and profitability of technology companies has pushed the issue further up the agenda in more recent years.

The response in Europe has three current manifestations: Juncker’s aforementioned proposed change to the way profit tax is calculated and divvied out; a brand new proposal to technology companies’ sales revenues, which has not even been drafted yet; and a wider push towards creating a Euro finance minister with much greater tax and spend powers.

But when the dynamics behind each one of these is looked at in detail, it is unlikely that any of them will pose a major threat to the Irish economy.

The first two proposals require all 28 members of the EU to agree. Every member country has a veto and there is nothing approaching unanimity on either proposal. A significant number of countries oppose them. The departure of the UK will change a lot in Europe, but it will not change the interests of Ireland and other countries which don’t want harmonisation measures.

The third “line of attack” is the creation of the eurozone finance minister with greater powers over taxation. This is being driven mostly by the new French president. But his ardour is not matched by other leaders. There is considerable opposition to taking such a big step, both within and without the eurozone.

But even if agreement was reached on the idea in principle, it is important to remember that harmonisation of corporation tax would not necessarily be involved. The economic logic behind it is to lessen austerity in parts of the currency union that suffer economic shocks. It is not about profit taxes, as the US and Swiss currency unions illustrate. They both have finance ministers with huge tax and spend powers, but the states and cantons, respectively, still set their own profit tax rates.

The Irish economy faces serious risks and the presence of multinationals should never be taken for granted. But fears about an exodus of companies because of an imagined imminent EU-level changes to tax laws are hugely overblown.

‘Fear of a mass flight from Ireland by multinationals is overblown’