EU uses bailout leverage to target Ireland’s weak corporate tax regime

Ireland is facing pressure from the European Commission over its weak tax system as the country seeks a slice of the EU recovery fund to help its economy rebound from the Covid-19 pandemic.

Ireland’s corporate tax rate is one of the lowest in the world at 12.5%, drawing criticism from the European Union not only for taking profits away from other countries, but also for rely heavily on big tech companies such as Apple and Alphabet’s Google – which have set up operations there – for jobs and investment.

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The Commission now wants Ireland to raise taxes in exchange for its share of the 750 billion euro ($900 billion) recovery and resilience plan.

Late last month, Economics Commissioner Paolo Gentiloni sent a letter to Irish MEP Chris MacManus saying it was important “to step up the fight against tax avoidance and close the loopholes that can lead to situations of double non-taxation”.

“In the Irish context, the high level of royalty and dividend payments as a percentage of gross domestic product suggests that the tax rules are being used by companies that engage in aggressive tax planning,” according to the letter seen by Irish weather.

Along with each EU country, Ireland has been awarded a share of the €750bn Next Generation pot to help its economy rebound from the crisis, with expectations its share will rise to €900m euros.

However, to guarantee this money, Ireland’s economic proposals must be approved by Brussels and it must also ensure that the money is spent on projects that guarantee long-term prosperity, such as infrastructure investment with a green label or digital.

A number of member states have already submitted their national recovery plans, meeting a flexible deadline of April 30 to receive the first disbursements from the EU recovery plan.

Among them are France and Germany, and Italy, which hopes to fix its economy using 191.5 billion euros in EU funds – one of the largest shares.

In addition to pledging to use the money for investments, member states can only get their spending plans approved if they agree to implement long-standing reforms, known as ‘country-specific recommendations’.

BRUSSELS, BELGIUM - MARCH 02: People walk towards European Commission in Berlaymont building on March 02, 2020 in Brussels, Belgium.  UK chief negotiator David Frost has met his EU counterpart Michel Barnier to begin formal negotiations on the future relationship between the EU and the UK.  (Photo by Leon Neal/Getty Images)

For Ireland, this means reforming its tax laws, with the Commission recommending in May last year that tackling aggressive tax planning is key to improving the efficiency and fairness of the tax system across the economic block.

“The high level of royalty and dividend payments as a percentage of GDP (gross domestic product) suggests that Irish tax rules are being used by companies that engage in aggressive tax planning, and the effectiveness of national measures will need to be assessed. “said the European Commission wrote in its Council Recommendation Report for Ireland in May last year.

“The high concentration of corporate taxes, with the top 10 companies accounting for 45% of corporate taxes, their volatility and potentially transitory nature, and their growing share of total tax revenue, underscore the risks of excessive dependence on these revenues for the financing of permanent current expenditure.

The Commission also argued that broadening the tax base would make the Irish public accounts “more resilient to economic fluctuations and idiosyncratic shocks”.

Irish Finance Minister Paschal Donohoe defended Ireland’s fiscal record in a speech last week, saying the long-established corporate tax rate of 12.5% ​​was “fair” and “within within the framework of healthy tax competition”.

“It’s a rate that can contribute to Treasury revenue for investment in infrastructure and capacity, and which can also spur investment, growth and innovation, which are at the heart of the country’s industrial policy. ‘Ireland,” Mr Donohoe said.

Facebook offices in Dublin's Grand Canal Square, Docklands.  (Photo by Brian Lawless/PA Images via Getty Images)

The EU would like to see Ireland’s corporate tax rate in line with that of other member states, with rates in France, Germany and Italy all above 25%.

Elsewhere, Britain’s Chancellor of the Exchequer, Rishi Sunak, raised the country’s corporation tax to 25% in his budget statement in March.

In its spring outlook for the UK and Ireland, global consultancy EY said the debate over the level of tax paid by businesses and individuals “is coming to the fore in many markets across the world”.

“Calls for a minimum corporate tax rate and greater harmonization of tax rates are growing,” EY said.

President Joe Biden’s administration has signaled more support for an OECD-led crackdown on tax loopholes in the global economy called BEPS, targeting domestic tax base erosion and profit shifting.

The BEPS process, involving more than 135 countries and jurisdictions, focuses on allocating cross-border taxable profits to better reflect where customers and business value are, and setting a minimum tax rate .

This would level the tax playing field between virtual companies like Google and Facebook and their physical competitors.

However, such a move is not in favor of Ireland, with the Department of Finance already expecting its annual revenue to reach up to €2 billion by 2025 from BEPS, with profits reallocated. somewhere else.

In his speech last week, Mr Donohoe agreed that there is international momentum to reach international agreements on minimum corporate tax rates and digital taxation, and said that Ireland “has fully committed to making massive progress on the broad tax transparency agenda.”

However, he argued that small countries must be able to use fiscal policy “as a legitimate lever to offset advantages in scale, location, resources, industrial heritage and the real, material and persistent advantage enjoyed by great countries”.

“At the same time, I fully accept that there is a need to have clear boundaries to ensure any competition is fair and sustainable,” Mr Donohoe said.

“Today we have much stronger international tax rules and safeguards to prevent abuse, arbitrage, base erosion and profit shifting than a decade ago.”

While the original deadline for Ireland to submit its national spending plans was April 30, the country has been given an extension and is expected to submit its proposal in May.

However, the Department of Finance’s Stability Program Update (SPU), which was submitted to the Commission on time, offered an increasingly optimistic outlook for the Irish economy as it emerges from the pandemic, indicating that the government should not be under too much pressure to raise taxes or cut spending.

The department expects the Irish economy to grow by 4.5% this year and 5% in 2022, driven by a rebound in consumer spending.

However, unemployment is expected to average over 16% this year and over 8% in 2022, with the outlook also dependent on a gradual reopening of the economy as vaccines are rolled out.

Ireland has weathered the pandemic relatively well compared to its EU counterparts, recording over 250,000 Covid-19 cases and over 4,900 deaths.

During the crisis, the Irish government spent more than €28 billion on Covid support measures, almost half of it on direct income support, such as pandemic unemployment payment schemes and grants. wages.

“We expect public finances to improve next year. There are, however, clear downside risks to public finances. In particular, international corporate tax reform could weigh more heavily on this revenue stream than currently assumed,” Donohoe told SPU last month.

“That said, public finances are in a much better position to absorb the expected shock to corporate tax revenues than, say, a decade and a half ago.

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