Ireland has been offering an attractive taxation regime to international business since the 1950s and its reliability as a partner to international business over that very long period is perhaps without equal.
Ireland has been offering an attractive taxation regime to international business since the 1950s and its reliability as a partner to international business over that very long period is perhaps without equal. While others change Ireland remains, at it has for decade after decade, a low corporation tax, pro-business, English speaking EU member state.
It is noteworthy that at Ireland’s weakest point during the IMF / EU bailout, the Irish State stubbornly refused to bow to EU pressure to increase its corporation tax rate. The admirable degree of domestic political consensus around our low corporation tax rate gives great reassurance to international businesses that they can make long term investments in Ireland and know that the low corporation tax rate will likely survive over future decades.
Furthermore, it is important to note that the Apple case has nothing to do with the 12.5% corporation tax rate which is not being called into question. This has been confirmed many times by the EU, the OECD and all informed observers. We expect that the Budget this week will once again confirm Ireland’s commitment to foreign investors. It is hard to overemphasise how critical this commitment has been to Ireland’s economic recovery and in countering the external diseconomies inherent in Ireland’s peripheral location.
A wealth of economic research in recent decades, including the Nobel prize winning work of Paul Krugman and others, has confirmed that factors such as a small domestic population, absence of natural resources, geographical isolation from major markets and a history of economic underdevelopment create massive competitive disadvantages – this can trap countries in an ever worsening cycle of economic disadvantage. The economic policies adopted by successive Irish governments since the late 1950s have been designed to compensate for these structural disadvantages by offering a better corporation tax regime than that available elsewhere.
A good education system, an English speaking workforce and a reliable and incorrupt public sector have also been critical positive factors. The employment and taxation base supported by the inward investment brought to Ireland by such policies is far greater than in the vast majority of other countries and has become a critical economic advantage. The decision by the Irish State to fight the EU Commission on the Apple matter ought to be seen in this context.
It is widely accepted that Ireland’s personal taxation regime has not matched the competitiveness of the corporation tax regime. OECD research has found that, after corporation taxes, personal taxes have the highest impact on economic growth. This is evident in the excellent economic performance of, for example, Switzerland, Singapore and Hong Kong which are similar to Ireland in terms of size of domestic economy and extent of natural resources – all of these countries have combined low corporate taxes with income taxes which generally max out at no more than 20% and with low or no capital gains tax.
By contrast, Ireland’s personal taxes max out at over 50% and studies show that Ireland has the most progressive income tax system in the EU and the second most progressive in the OECD. The top 1% of income earners pay more income tax than the bottom 75% combined. Ireland’s capital gains tax rate of 33% is extremely high by international standards – for example, it compares with a 10% rate of capital gains tax for entrepreneurs in the UK.
Entrepreneurs are particularly sensitive to tax rates as they bear 100% of the risk of loss on their investments which in some cases can total their entire life savings. High tax rates on their profits can significantly alter the risk: reward analysis - possibly to the point of causing projects to be cancelled or moved to a more welcoming country.
Irish inheritance and gift taxes are also high and of wide scope by international standards. All of this has made it difficult to attract and retain entrepreneurs and senior executives in Ireland.
The OECD’s Base Erosion and Profit Shifting project is reshaping international tax laws to allocate taxing rights over corporate profits more to countries where senior executives are based. Many suspect this agenda is being pushed hard by larger countries as it tends to benefit them over small countries. Be that as it may, it is a reality which Ireland cannot afford to ignore.
If we are to continue to compete, we need to ensure that we can capture a decent share of entrepreneurs and senior executives in order to secure the employment and taxation revenues that come with them. For this reason, we hope that the forthcoming budget takes measures specifically targeted at making Ireland more attractive to such groups. In particular an Entrepreneur's Relief that competes with that in the UK, together with enhancements to the existing Special Assignee Relief Program would, in our view, be of enormous economic benefit and spur the creation of economic growth and jobs in Ireland.
Conor O’Brien is Head of Tax and Legal Services at KPMG.
This article was published in the Sunday Business Post (9 October 2016) and is reproduced here with their kind permission.