The corporate tax ‘article of faith’ could be on the verge of collapse
What is the most undisputed space in Irish politics? Our corporation tax of 12.5 percent. The policy – announced by former Labor finance minister Ruairí Quinn in 1997 and signed into law the following year by his successor Charlie McCreevy – is the cornerstone of an economic about-face initiated in the 1960s.
One that replaced decades of protectionism and near total dependence on the UK market for exports, with an internationalist agenda that opened the economy to global markets and foreign investment.
This is perhaps the main reason why 24 of the world’s 25 largest pharmaceutical companies have operations here. Or why we have the biggest tech hub per capita in the world – responsible for 30% of EU digital exports – with all the names from Apple to Google to Facebook using Ireland as a bridgehead to market most lucrative consumer in the world.
A study by Wolfgang Digital on behalf of Smart MBS estimated that 54 billion dollars (48 billion euros) was invested here in 2017 alone by American technology companies, equivalent to the entire GDP (gross domestic product) of Croatia.
These measurements are off the charts; no one else in the world has anything like them. They transformed us economically from one of the poorest European countries into one of the richest.
When Ireland joined the EU in 1973, its GDP per capita was 53% of the EU average, the lowest of the nine member states at the time. In 2017, Irish GDP per capita had reached 184% of the EU average.
On page 26 of their draft program for government, Fine Gael, Fianna Fáil and the Greens state: “We are committed to the corporate tax rate of 12.5% and recognize that taxation is a national competence . It was probably the first line written on paper and the least controversial aspect of the document.
Our corporate tax code is now an economic article of faith, adhered to by nearly all major parties. Deviation is heresy, worthy of political beheading. Even Sinn Féin, which once advocated raising the rate to 17%, has given up the ghost and is now quietly acquiescing while railing against almost every other aspect of the tax system.
And yet, in the eyes of the world, corporate tax is perhaps our most controversial policy, the one that draws the most criticism, the one that puts the most strain on relations with EU allies and the United States. We are regularly referred to as a tax haven like the Cayman Islands by NGOs and a patsy for large corporations.
The European Commission’s €13 billion Apple tax ruling, making it the largest corporate tax fine in history, lands the Irish government on the charge of ‘artificially’ lowering tax paid by Apple here since 1991.
US economist Joseph Stiglitz this month accused us of “stealing” our European neighbors by allowing Apple and others to pay such a low effective tax rate.
But it’s not Ireland’s low corporate tax rate that’s so infuriating, but rather the effective rate that businesses end up paying here. And it was perhaps just as much a flaw in the American code, albeit before it was reformed.
Undeterred, the government is forging ahead, taking the line of least resistance, opposing change within the EU while ostensibly toying with global efforts to reform the system under the auspices of the Cooperation Organization and Economic Development (OECD). Now this process threatens to collapse. US President Donald Trump has seemingly destroyed plans for a new global tax framework for tech companies by backing out of talks with European countries and warning them of retaliatory action if they pursue their own taxes.
The move was met with dismay in Europe, where several countries are hoping to use a new digital sales tax to replenish their public finances depleted by Covid-19.
The US exit could be a temporary ploy by Trump to push back the thorny issue of taxation after the US presidential election in November or something altogether more controversial. We do not know yet.
France is threatening to push forward its own digital tax, potentially putting the EU and US on a collision course with Ireland once again the meat in the global tax sandwich.
As host to most of these digital giants, Ireland’s default position is to side with the United States. That’s why we oppose EU moves to push forward a digital tax, advocate a global deal through the OECD, and support Apple in its appeal against the Commission’s decision. This position could prove extremely tricky in the coming months when we need EU help on Brexit.
Failures of reform
Europe’s push for a digital tax is a reaction to the fact that successive attempts to reform the global system have generated very little additional tax revenue for countries like Germany, France and Britain, where these digital companies make most of their European sales.
The decision to better align reported earnings and economic activity is proving extremely problematic for digital services, where value derives less from production than from intellectual property.
Imagine how difficult it would be for a traditional brick-and-mortar company to make a product that goes into every home in France and how easy, relatively speaking, it is for Facebook.
The digital age has created giant corporations – Amazon, Google, Apple – which dominate markets and run circles around traditional global tax rules and Ireland is the center of this.
Reforms under the OECD’s Beps (Base Erosion and Profit Shifting) project or the reform of the US tax code itself have only strengthened Ireland’s position as the main beneficiary with further offshoring assets here and an even greater influx of corporate tax revenue. This despite repeated warnings that we could lose out if the system changed.
Will USA’s latest decision shatter our winning streak?