France, Ireland, Corporate Tax Rate: Pot, Kettle, Black

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Given that Ireland’s corporate tax rate is in the news, it is well to get a grip on some facts in the debate.

1. Ireland’s headline tax rate of 12.5 percent is the lowest in the Eurozone. At the higher end are  Germany, France, Greece and Spain with statutory tax rates at 35 percent. Ireland comes in at the bottom. The average tax rate is 30.4 percent (data for Cyprus, Estonia, Malta and Luxembourg are not available).

So if there is a problem with race-to-the-bottom corporate tax rates – with countries slashing tax rates in order to woo multi-national investment – there is certainly a legitimate complaint against, what is called among certain Irish circles, our ‘competitive tax rate‘.

However, statutory is one thing. What happens in the real can sometimes be different.

2. And when it comes to that ‘effective corporate tax rate’, things are different. Effective corporate tax, like effective income tax, is the rate which is paid once reliefs, allowances, exemptions and depreciation is taken into account. When this is done, what do tax rates look like?

The average corporate tax rates – over 30 percent statutory – falls to18 percent effective. Ireland is near the bottom but not at the bottom – that dubious prize goes to Slovakia.

And who is next to Ireland?

France. Its falls from over 35 statutory percent to 14 percent effective – nearly a 50 percent fall. France is below the Eurozone average. France, like Ireland, is a low-corporate tax economy. Tsk Tsk.

This is not to defend Ireland’s low-tax status. It is both unsustainable and regressive; it is the ultimate admission of failure: having failed to build a strong indigenous enterprise base, we now have to prostrate ourselves before mobile international capital with our low-tax offerings.

But the fact is that throughout Europe, corporate tax rates have been falling for years. Using OECD data we find that the average statutory rate in the EU-15 fell from 35 percent in 2000 to 27 percent today. It is reasonable to assume effective tax rates fell accordingly. I doubt that Ireland was mentioned as a factor in the parliamentary debates that sanctioned these cuts in corporate tax rates.

Rather, this is part of the general economic-race-to-the-bottom and a misplaced belief that low corporate tax rates are a precondition to enhancing business activity.

[NOTE: In any event, this debate isn’t about corporate tax rates. It’s about the Common Consolidated Corporate Tax Base and the ability of the Irish tax regime to hoover up profits generated in other economies. In this scenario, we can keep our low statutory tax rates but will have to give up generous transfer pricing policies. The pressure on this point could become irresistible].

We shouldn’t mind lectures from abroad about Ireland’s inequitable corporate tax rate. But it’s a bit rich coming from those Eurozone leaders and ministers who insist that European citizens bear the cross of private banking debt, that private capital be given free reign among public services, and that wages should be kept down and down to promote corporate profits whose tax rates are continually being cut. It’s not as if Ireland acting unilaterally on tax rates can do much to reverse this dismal trend globally. But a European power-house like France – that’s a different matter.

The next time Enda Kenny finds himself at a Eurozone meeting he should lead the fight-back against the race-to-the-bottom economics.

And the first person he should invite into that fight-back is the French President who promotes, and presides over, a low-corporate tax rate economy.

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9 Responses

  1. Conor McCabe

    March 14, 2011 4:32 pm

    Am I correct in thinking that the above figures relate to both indigenous and foreign companies/corporations in Ireland? Most Irish companies pay close to 12.5 per cent, but the foreign (FDIs) pay something like 2.6 per cent.

    It’s the latter that gets France’s goat up as they’re watching potential tax revenue slip away at a time when the squeeze is most certainly on.

    Also, I’m not sure how I feel about Ireland’s corporation tax limiting the tax revenue of France and by doing so feeding into the rise of the Far-fight in that country.

  2. Pope Epopt

    March 14, 2011 11:06 pm

    I confess I’m surprised by how high the effective rate is in other jurisdictions. I’d always assumed it to be effectively not much greater than the Irish one. Instead we see ratios of 2 – 2.5: 1.

    I can’t see how anyone on the left can justify the continuation of our low levels of corporation tax and the transfer pricing scam.

  3. Michael Taft

    March 15, 2011 9:44 am

    Conor – the above figures are relate to an average of all companies in Ireland – indigenous and foreign-owned. You’re correct that anectodal information has the foreign-owned sector paying a lower effetive tax rate. For instance, in the Chem/Pharm sector, I would imagine they avail of considerable allowances owing to the high level of capital investment. Unfortunately, there is no official data that breaks down the difference between the two sectors.

  4. Conor McCabe

    March 15, 2011 10:11 am

    The IDA annual reports tell us how much FDIs under their remit earn in sales, and how much corporation tax they pay.

    Out of I think 110 billion euro in 2009, they paid 2.9 billion euro in corporation tax.

    Now, IDA is not every single FDI in the state, but from my own calculations its around 90-93 per cent.

  5. Conor

    March 15, 2011 8:16 pm

    Why did you say data for Cyprus, Estonia, Malta and Luxembourg are not available when a quick Internet search will bring you to their tax authorities websites. Did you exclude them because those 4 happen to have lower rates and would bring down the average?

  6. Michael Taft

    March 16, 2011 11:50 am

    Conor – the reference to no data available was to the survey I used. The numbers come from this survey – I didn’t do the primary research. It may be that the authors didn’t include it because they could not access data for the purposes of determining statutory, effective (1 year depreciation), effective (5 year depreciation), labour taxes, etc. But to make clear – I didn’t exclude the data. If you have data re: effective tax rate regarding these countries (the statutory is widely available), I certainly would be interested.

  7. Donagh

    March 16, 2011 10:34 pm

    This might be relevant. From Nicholas Saxson:

    http://treasureislands.org/ireland-is-a-hostile-country-it-might-bite-you-on-the-arse/

    Now here is the main point of this blog. Prog Tax notes the obvious question:

    “You might ask why Ireland is used in planning structures like this in place of classic tax havens such as Bermuda, Cayman Islands and Jersey.”

    Why indeed? Good question.

    “The answer is that in these cases many countries would apply withholding tax on interest paid to traditional tax havens.”

    In other words, reputable democratic countries have put in defences against the “traditional” tax havens like the Caymans, Bermuda or Jersey, to try to stem the abuses run out of the hostile financial services industries located on those islands. But not Ireland. It’s not regarded as a hostile country for tax purposes.

    Well, it should be. It is biting ordinary taxpayers, the world over, on the arse.

    He also refers to this report form Revenue:
    The Economic and Fiscal Contribution of US Investment in Ireland

    Which contains this chart showing IFSC and Non-IFSC investment:

  8. Tomboktu

    March 16, 2011 11:14 pm

    Have you read Philip Pilkington’s post on the common consolidated corporation tax base over on Fixing The Economists today?

    I just don’t know enough about how it might pan out if we did change the rate or the base, and that post of PP’s does cause me to pause.