The above question suggests that potentially our low rate of corporation tax is under threat. For each of the last number of budgets the Minister in the hot seat has made a point of stressing that any change to our 12.5% corporation tax rate is completely off the table. I will be surprised if the current Finance Minister includes similar terminology in his next budget speech.
In my view it is a matter of when and not if the rate will increase. Minister Donohoe has effectively said as much in recent speeches on global tax reform. There are two issues currently been driven by the EU power houses along with the US:-
- Which country gets the tax in a digital economy; and
- To introduce a minimum global effective tax rate.
Digital Economy
This is one area that is guaranteed to be changed over the coming years; although it’s not going to be easy to implement, mainly due to the fact that most items can now be sold on the digital market. The idea with this policy is that the country where the product is consumed would be the country that receives the tax. A very simple example is if an Irish company sells its merchandise into Germany via their online platform then the tax should be paid in Germany. This would hurt Ireland more than benefit us so we will undoubtedly be seeing considerable political lobbying to ensure the bulk of the tax remains in the exporting country in situations like this. But make no mistake, this will be implemented in the EU and it’s just a matter of deciding how the tax is to be divided up between the export and import countries.
Global minimum effective tax rate
One way of dealing with the digital economy is to simply have a harmonised EU tax rate. This has been pushed by the more influential EU members, notably France and Germany. This would largely mean that the tax rate in each EU country would be the same. You might question how would this effect foreign direct investment coming into Ireland? My reply would be we would have to rely on our educated workforce, our proximity to the US and the fact that we are English speaking. My experience is that most first world EU countries are as well-educated as us and speak multiple languages. Other countries also even have accommodation for employees to live in! Very simply we rely on our tax rate to entice companies into Ireland and then the other aspects come into play. Without the 12.5% headline rate I think we are going to struggle when it comes to foreign direct investment.
The Minister at a recent speech has effectively said we now need to start talking with the EU with regard to tax reform as opposed to just saying no. There are a couple of things that worry me with regard to this. Firstly our greatest ally against tax reform will no longer be in the EU by the end of the year. Secondly and possibly very importantly, the EU is backing Ireland to the hilt with respect to Brexit. We will “owe” them one for this and possibly that favour will be called in when it comes to tax reform. Finally, the US are pressing for worldwide tax reform as they continue to push for more tax to be paid by US companies based in countries like Ireland who are, at the moment, keeping profits outside the US.
Corporate tax reform is going to happen. Possibly within the next 5 years we will see major developments. Ireland will unfortunately have to embrace it. We do not know how this will look yet but my own take on this is that Ireland will have less corporate tax receipts to play with as multi-nationals will be less likely to choose to be based here and also the multi-nationals that are here will be paying more tax in other countries and less tax in Ireland. One would hope that this means that Ireland Inc. concentrates on indigenous companies; however I suspect that this concentration will effectively mean a higher tax rate for Irish owned companies.
Regards
Dave O’Brien
