Opening the Low-Low Corporate Tax Rate Door

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The Government’s paper on Ireland’s effective corporate tax rate confirms what the dogs in the street have known for a long-time:  Ireland has a low,extremely low, corporate tax rate.

There is that vexed question of what corporate income counts for the purposes of determining the actual rate of tax companies pay here.  Professor Jim Stewart produced data which showed that the effective tax rate of US multinationals operating here was 2.2 percent in 2011.  This was disputed because Stewart – using the US’s Bureau of Economic Analysis – included the $140 billion that US multinationals move through Ireland on their way to other places, including tax havens.  Some claim you can’t count this because it is not taxable in Ireland.

But, of course, that is the point.  The issue is not the Irish corporate tax rate per se but the role that Ireland plays in the global tax avoidance chain – the ability of multinationals to use Ireland to avoid paying taxes that would be due elsewhere.  That is the character of a ‘tax-haven conduit’.

In this respect, it is worth remembering:

Tax havens attract foreign investment not only because income earned locally is taxed at favorable rates, but also because tax haven activities facilitate the avoidance of taxes that might otherwise have to be paid to other countries.

The Irish corporate tax rate is the sign on the door.  It’s an inviting sign – a low-tax rate of 12.5 percent.  But the real goodies are what’s behind the door – the prospect of using Ireland as a transit point in the global avoidance chain.

Let’s park that issue for the purposes of this post (in a guest post yesterday, Niall MacSuibhne examined some of these issues) and look at the sign on the door based on the paper’s own (and contentious) estimates of what is the appropriate level of corporate profits that should be calculated here.  The paper rightly shows that there are a number of different methods to determine the effective tax rate.  In a previous post I used ‘entrepreneurial income’ because both the CSO and Eurostat stated this was the best measurement of pre-tax profits.

The Government paper prefers another measurement – net operating surplus.  Ok, there’s not a whole lot of difference.  Net operating surplus is roughly equivalent to profits minus consumption of fixed capital.

So when we use this measurement, how do we compare with other countries?  The following is taken from a helpful table put together by one of the authors of the Government report, Seamus Coffey.

ECTR

Among advanced European Economies (the EU-15), there’s Ireland – right at the bottom.  To reach the average of the other countries, our effective tax rate would have to nearly treble.  To put a money figure on this – corporate tax revenue would have to rise from €4 billion to €10.7 billion.

  • That’s €6.7 billion below this European average. 

However, corporation tax is not the only ‘tax’ that companies pay.  They also pay social insurance (or the ‘social wage’).  We have looked at this before and – surprise, surprise – found that Irish employers also pay a low, low effective social insurance.

If Irish employers were to pay the same effective social insurance rate as employers in other EU-15 countries (excluding Denmark which doesn’t have a social insurance system), revenue would rise by €6.4 billion.

  • In total – corporate tax rate and employers’ social insurance – corporate Ireland pays €13.1 billion below the average of other EU-15 countries.

Now that’s what I call ‘corporate welfare’.

That’s the sign on the door.  Low corporate tax rates, low social insurance.  No wonder companies put their hand on the doorknob.  Here’s what Arthur Cox offers to German companies who want to re-locate to Ireland:

‘There are numerous advantages for multi-national companies with large Intellectual Property (“IP”) portfolios who locate and manage these portfolios in Ireland. The effective corporation tax rate can be reduced to as low as 2.5% for Irish companies whose trade involves the exploitation of intellectual property.’

No wonder so many foreign companies are opening the door.

 

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