Great article as usual and I agree with the thrust of the arguments you make. What I think is open to debate is that ‘Ireland sets a tax rate and charges it’.
As you acknowledge the PWC figure is based on a very specific firm. Given the small army of tax professionals employed by MNCs in Ireland, I am sceptical that Ireland’s tax regime is as simple as this.
However, if it really is the case, then the Government could knock this argument with Ms. Lagarde on its head by releasing the data it collects on effective corporation tax rates paid by IDA clients. Something tells me that this transparency is unlikely to materialise. Either way, it should be forcefully making all the arguments you outline.
Hi Eoghan,
Thanks for that. You have a valid point, and it would be good to know. The more data, the better, in my opinion!
My only counterpoint would be that MNCs do this everywhere, not just in Ireland. Indeed, they are legally obliged to do so, if they are publicly listed companies, otherwise they would be in dereliction of their duty to shareholders. So whereas Irish-based MNCs might, by using loose Dutch tax treaties, be able to get their tax rate down from 12% to 8% in Ireland, that might be even larger in other countries. Even if Ireland did have a larger gap than other countries, the blame may lie elsewhere, e.g. the Dutch sandwich!
R.
John Mack
,
When you surrender your currency you surrender your sovereignty.
Hi John,
While I totally agree on the lack of adaptation in the Irish system in response to a life in the eurozone, I disagree on the sovereignty issue. In the USA, states, counties and even small towns still have “sovereignty” over taxation issues.
R
Very interesting analysis. I think it is worth noting that in Belgium the “insiders” have a very good deal in relation to tax. There is no CGT and rent is earned tax free. In addition senior employees are allowed incorporate to take advantage of the lower corporation tax rates, avoid social security payements and benefit from expense deductions.
On the other hand the outsiders which includes regular employees, civil servants and small businesses are crucified by high income taxes, social security and VAT rates.
In addition it costs at least €2K to set up a private company in Belgium, compared with €100 in Ireland.
Another point in relation to our tax rate relative to our economy is well made by TCD academic Frank Barry where he traces the history of our corporation taxation policies from the their origins in the 1950’s. He even shows that for a period leading up to our joining the EEC we had zero tax for manufacturing exports and that the 12.5% across the board was only phased in between 2000 and 2003.
Barry also cites research that finds that the level of FDI in Ireland is 70% higher than it would be if were to have the next lowest tax rate in the EU and that 80% of our FDI would disappear if we raised our rates to the EU average.
In summary, he pointed out that the Bulgarian way of managing the insider-outsider issue in the post Communist era means that they now have a 10% tax rate on corporate profits, dividends and personal income tax.
Among those presenting was Jean-Loup Loyer, (Project Manager, France 2025, Centre d’Analyse Strategique)who spoke about a similar exercise in France. As I remember it, one of his slides made it very clear that France wanted a higher corporate tax rate throughout Europe.
At the time, I regarded it as a “shot across our bows”.
Among the three next steps identified in the Forfas exercise was
“We should develop institutional capacity to anticipate and prepare for future
challenges, trends and opportunities.”
I just hope that in 2025, we will not find the same inertia, smugness and complacency on the part of our governing elites in their response to Ireland joining the €uro
“In the past decade, Ireland’s approach to fiscal policy, prices, costs and financial
regulation were not sufficiently adapted to the disciplines of a single currency.“
(Press Release from National Economic and Social Council (NESC) on a report “The Euro: an Irish Perspective” 17th August 2010. NESC is 30-person social partnership body made up of representatives of government, business, trade unions, agriculture, community and environment. The Secretary General
of the Government chairs NESC. Among the seven Government nominees are the Secretaries-General of five Government Departments. http://www.nesc.ie/dynamic/docs/The%20euro%20MEDIA%20RELEASE%20from%20NESC.pdf)
For some ideas on what we can do to work ourselves free of this, see my contribution to the Dublin City Business Association 10-point Manifesto Towards a Second Republic from p. 57 here http://www.dcba.ie/static/doclib/Towards_a_Second_Republic.pdf
AdamS
,
I get the impression that France, Germany, etc, aren’t really that bothered about what Ireland charges its local flower pot makers, but are far more bothered about their loss in revenue when companies that primarily do business in their countries pay tax elsewhere.
Therefore, the levels of company taxes applying to *local* businesses is irrelevent to some extent; the fact is that cases exist where millions of euro of profits are being routed through Ireland purely for tax reasons and the French & German revenues are losing out.
This doesn’t seem to be happening in the opposite direction, whatever the reports say.
Damian T
,
Ronan – interesting sentiments – but I would be far more critical of the methodology used.
Schleifer is a leading economic theorist, but not a policy maker (few academics are).
PWC is an accountancy/tax consultancy – secrecy is their trade! US data that I have seen for 2007 from the US side suggests that the average US non-financial affiliate employs about 170 employees and has capital investments that thankfully don’t relate to flowerpots!
For that year Revenue data suggest that US companies paid some 1.7 billion euro in corporate tax (the largest single contributor) – a quick back of the envelope calculation would suggest that even if all the above was paid by the same non-financial affiliates (of which data is most readily available) the simple effective tax would be about 3.6%.
I would think that the Department of Finance know these figures, and can probably be rest assured that they would never be crazy enough to publish them! Where I would agree with you is that if we charged what we said we did (or perhaps even less) both our fiscal and negotiating strategy would be far stronger. Who knows, we could be the shining light in the murky world of corporate taxation!
It’s very relevant that PWC have chosen a farcical type of company to do this analysis.
A company that only trades nationally? What use is that in a debate about EU corporate tax laws, since we’re all trying to attract FDI and as such companies that only trade nationally are irrelevant.
Since PWC makes so much money from giving advice on how to avoid paying tax, it’s in their interests to frame this debate with a simple data-set. They can be fairly confident that most people that see the main graph/conclusions of the study (i.e. don’t increase corporation tax) will not dig down into the methodology in the way that Ronan did.
I think that corporates must dig a little deeper, like the rest of us. There is a case for a small rise in the corp tax rate, 1 or 2%.
We can consider it a PR success for companies like PWC that our entire cabinet is resolute against increasing corporation tax, in the context of all personal taxes increasing.
[…] effective rate of tax is lower than Ireland’s. If you want to read more about this, check out Ronan Lyons’s rather excellent article about this – it is well worth a […]
Eoghan O'Briain ,
Hi Ronan,
Great article as usual and I agree with the thrust of the arguments you make. What I think is open to debate is that ‘Ireland sets a tax rate and charges it’.
As you acknowledge the PWC figure is based on a very specific firm. Given the small army of tax professionals employed by MNCs in Ireland, I am sceptical that Ireland’s tax regime is as simple as this.
However, if it really is the case, then the Government could knock this argument with Ms. Lagarde on its head by releasing the data it collects on effective corporation tax rates paid by IDA clients. Something tells me that this transparency is unlikely to materialise. Either way, it should be forcefully making all the arguments you outline.
Ronan Lyons ,
Hi Eoghan,
Thanks for that. You have a valid point, and it would be good to know. The more data, the better, in my opinion!
My only counterpoint would be that MNCs do this everywhere, not just in Ireland. Indeed, they are legally obliged to do so, if they are publicly listed companies, otherwise they would be in dereliction of their duty to shareholders. So whereas Irish-based MNCs might, by using loose Dutch tax treaties, be able to get their tax rate down from 12% to 8% in Ireland, that might be even larger in other countries. Even if Ireland did have a larger gap than other countries, the blame may lie elsewhere, e.g. the Dutch sandwich!
R.
John Mack ,
When you surrender your currency you surrender your sovereignty.
Ronan Lyons ,
Hi John,
While I totally agree on the lack of adaptation in the Irish system in response to a life in the eurozone, I disagree on the sovereignty issue. In the USA, states, counties and even small towns still have “sovereignty” over taxation issues.
R
Fred Logue ,
Very interesting analysis. I think it is worth noting that in Belgium the “insiders” have a very good deal in relation to tax. There is no CGT and rent is earned tax free. In addition senior employees are allowed incorporate to take advantage of the lower corporation tax rates, avoid social security payements and benefit from expense deductions.
On the other hand the outsiders which includes regular employees, civil servants and small businesses are crucified by high income taxes, social security and VAT rates.
In addition it costs at least €2K to set up a private company in Belgium, compared with €100 in Ireland.
Another point in relation to our tax rate relative to our economy is well made by TCD academic Frank Barry where he traces the history of our corporation taxation policies from the their origins in the 1950’s. He even shows that for a period leading up to our joining the EEC we had zero tax for manufacturing exports and that the 12.5% across the board was only phased in between 2000 and 2003.
Barry also cites research that finds that the level of FDI in Ireland is 70% higher than it would be if were to have the next lowest tax rate in the EU and that 80% of our FDI would disappear if we raised our rates to the EU average.
http://www.tcd.ie/business/staff/fbarry/papers/export%20platform.pdf
Donal O'Brolchain ,
Thanks Ronan for setting out the case for saying NON.
In support of this policy, I refer you to the presentation given by Simeon Djankov, Bularian Deputy Prime Minister and Minister of Finance at the IIEA recently here
http://www.iiea.com/events/corporate-tax-investment-and-entrepreneurship-in-europe
In summary, he pointed out that the Bulgarian way of managing the insider-outsider issue in the post Communist era means that they now have a 10% tax rate on corporate profits, dividends and personal income tax.
re. France.
In July 2009, I attended the launch of a Forfás future scenarios report as I had taken part in some of the preliminary work.
(http://www.forfas.ie/media/forfas090713_sharing_our_future_press_release.pdf)
Among those presenting was Jean-Loup Loyer, (Project Manager, France 2025, Centre d’Analyse Strategique)who spoke about a similar exercise in France. As I remember it, one of his slides made it very clear that France wanted a higher corporate tax rate throughout Europe.
At the time, I regarded it as a “shot across our bows”.
Among the three next steps identified in the Forfas exercise was
“We should develop institutional capacity to anticipate and prepare for future
challenges, trends and opportunities.”
I just hope that in 2025, we will not find the same inertia, smugness and complacency on the part of our governing elites in their response to Ireland joining the €uro
“In the past decade, Ireland’s approach to fiscal policy, prices, costs and financial
regulation were not sufficiently adapted to the disciplines of a single currency.“
(Press Release from National Economic and Social Council (NESC) on a report “The Euro: an Irish Perspective” 17th August 2010. NESC is 30-person social partnership body made up of representatives of government, business, trade unions, agriculture, community and environment. The Secretary General
of the Government chairs NESC. Among the seven Government nominees are the Secretaries-General of five Government Departments.
http://www.nesc.ie/dynamic/docs/The%20euro%20MEDIA%20RELEASE%20from%20NESC.pdf)
For some ideas on what we can do to work ourselves free of this, see my contribution to the Dublin City Business Association 10-point Manifesto Towards a Second Republic from p. 57 here
http://www.dcba.ie/static/doclib/Towards_a_Second_Republic.pdf
AdamS ,
I get the impression that France, Germany, etc, aren’t really that bothered about what Ireland charges its local flower pot makers, but are far more bothered about their loss in revenue when companies that primarily do business in their countries pay tax elsewhere.
Therefore, the levels of company taxes applying to *local* businesses is irrelevent to some extent; the fact is that cases exist where millions of euro of profits are being routed through Ireland purely for tax reasons and the French & German revenues are losing out.
This doesn’t seem to be happening in the opposite direction, whatever the reports say.
Damian T ,
Ronan – interesting sentiments – but I would be far more critical of the methodology used.
Schleifer is a leading economic theorist, but not a policy maker (few academics are).
PWC is an accountancy/tax consultancy – secrecy is their trade! US data that I have seen for 2007 from the US side suggests that the average US non-financial affiliate employs about 170 employees and has capital investments that thankfully don’t relate to flowerpots!
For that year Revenue data suggest that US companies paid some 1.7 billion euro in corporate tax (the largest single contributor) – a quick back of the envelope calculation would suggest that even if all the above was paid by the same non-financial affiliates (of which data is most readily available) the simple effective tax would be about 3.6%.
I would think that the Department of Finance know these figures, and can probably be rest assured that they would never be crazy enough to publish them! Where I would agree with you is that if we charged what we said we did (or perhaps even less) both our fiscal and negotiating strategy would be far stronger. Who knows, we could be the shining light in the murky world of corporate taxation!
Eoin Ryan ,
It’s very relevant that PWC have chosen a farcical type of company to do this analysis.
A company that only trades nationally? What use is that in a debate about EU corporate tax laws, since we’re all trying to attract FDI and as such companies that only trade nationally are irrelevant.
Since PWC makes so much money from giving advice on how to avoid paying tax, it’s in their interests to frame this debate with a simple data-set. They can be fairly confident that most people that see the main graph/conclusions of the study (i.e. don’t increase corporation tax) will not dig down into the methodology in the way that Ronan did.
I think that corporates must dig a little deeper, like the rest of us. There is a case for a small rise in the corp tax rate, 1 or 2%.
We can consider it a PR success for companies like PWC that our entire cabinet is resolute against increasing corporation tax, in the context of all personal taxes increasing.
Enda, here’s a 5-point EU plan | Plain Talking ,
[…] effective rate of tax is lower than Ireland’s. If you want to read more about this, check out Ronan Lyons’s rather excellent article about this – it is well worth a […]