Is a low corporate tax rate really in Ireland’s benefit?

May 24, 2013

–Kathleen Brooks is research director at forex.com. The opinions expressed are her own.–

The tax affairs of Apple and Google have brought attention onto Ireland for all the wrong reasons of late. Ireland’s reputation has undeniably been dragged through the mud as the corporate tax affairs of some of the world’s largest companies come under scrutiny in Westminster and Capitol Hill.

The issue at stake is that the UK and the US are massively debt laden, yet the Apple’s and Google’s of the world chose to base their headquarters in Dublin (or other parts of Ireland) and thus avoid paying higher corporate tax rates in the UK or US. Isn’t it funny how no one cared about the intricate details of their corporate tax code in the good times, now the tech giants are the new banks – companies we all love to hate.

But what about Ireland? It hasn’t acted illegally by having a lower corporate tax rate than elsewhere, but some question whether Dublin’s actions are below the ethical bar. However, is Ireland really a beneficiary of its low tax rate, and is it justified to portray Dublin as taking away precious tax dollars or pounds from the US and the UK?

I would argue no. A 12.5% corporate tax rate didn’t stop Ireland from entering a recession in 2008 that lasted for 2 years. It didn’t protect Ireland from near financial Armageddon when it had to go cap in hand to the EU, ECB and IMF in 2010 to save itself from bankruptcy. Ok, the reason for its weakened finances may have been the banking sector, but all the extra revenue from its low corporate tax rate didn’t help Ireland’s financial position. This begs the question: during a financial crisis does it help to have a higher tax rate?

Dublin’s tax revenues plunged from 2007, and only plateaued in 2010. However, since then the “poster child” of austerity has barely seen its tax revenues pick up. If you are a country that needs money fast, then tax deals you have done with powerful, global corporations that keep rates low for the long term are no help at all. After all, a low tax rate is also a low tax base. The Laffer curve, an economic concept that argues a lower tax rate brings in more taxes, is controversial and some argue the evidence it uses is not to be trusted.

Back in 2011, Northern Ireland looked at adopting Ireland’s low corporate tax rate. The Northern Ireland Affairs Committee has put this decision on hold until after Scotland’s Independence vote, however the arguments have been mounting that following the Republic of Ireland’s example would not be in Northern Ireland’s best interests. Apart from the administrative burden that would arise from doing things differently from the rest of the UK, one of the most powerful arguments was the lack of any tangible benefits from a low tax rate for the Irish economy.

Levels of job creation have pretty much tapered off, and although Google bought a new building to house its EMEA headquarters in 2011 from troubled lender Anglo Irish bank, the $136 million it paid to NAMA (the body that owns a large amount of banks’ impaired assets) is only a drop in the ocean.

Low corporate tax rates seem to benefit tax accountants, consultants and companies far more than they help the actually countries’ that have them. I am not in favour of high tax rates, in fact, like most people, I prefer paying less rather than more tax. However, perhaps Ireland could have its own hearing about whether the hassle of having such a low tax rate compared to other countries is really worth it.

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