Poorer states pay dearly to attract global giants

One of the principal effects of the ceaseless drive by multinationals to reduce their tax bills is to create pressure for the reduction of corporation tax rates.

This in turn can shift the tax burden from capital to labour, according to economists and observers.

The effect is felt most outside the developed world. Oxfam has said developing countries lose out by an estimated $50 billion annually through having reduced corporation tax rates to attract foreign investment.

Irish corporation tax rates are very low in global terms and are the main reason why so many foreign multinationals are located here.

The policy of taxing foreign manufacturing companies at a special low rate of 10 per cent was criticised by the Organisation of Economic Co-operation and Development (OECD) and EU members, because it discriminated between types of companies.

The Government's response was to announce that it would introduce a low corporation tax rate of 12.5 per cent for all companies, foreign or domestic, manufacturing or otherwise. The new rate is to be introduced by January 2003 and compares with German and US rates of 25 per cent and 35 per cent respectively. Most developed countries have corporation taxes in the 30 to 45 per cent range. The general trend is downwards.

While the Government's decision on corporation tax met OECD criticisms, some EU members-states remain resentful. They feel that competition for foreign investment by way of reducing tax rates will undermine governments' abilities to provide comprehensive public and social services.

The OECD wants to create a "level playing pitch" within which jurisdictions can decide whether they wish to charge high or low corporation tax rates or even, like the Cayman Islands, no corporation tax at all.

It believes special measures for foreign companies discriminate against domestic companies, creating a competitive disadvantage. It believes the use of tax havens that refuse to share information with foreign tax authorities can also lead to unfair competition.

The positive and negative effects of tax competition is usually viewed from the perspective of the developed world but it is also, according to Oxfam, a crucial issue for the developing world. In a paper published last year called Tax Havens, Releasing the Hidden Billions, Oxfam estimated the revenue loss to developing countries from tax havens to be $50 billion.

"To put this figure in context, it is roughly equivalent to annual aid flows to the developing countries. We stress that the estimate is a conservative one," according to Oxfam.

"Tax competition, and the implied threat of relocation, has forced developing countries to progressively lower corporate tax rates on foreign investors. Ten years ago, these rates were typically in the range of 30 to 40 per cent - broadly equivalent to the prevailing rate in most OECD countries."

If developing countries were applying OECD rates, their corporate tax revenues would be $50 billion higher, according to the agency.

"None of this is to argue for a return to high tax regimes that deter investment activity. Foreign direct investment has the potential to generate real benefits for development. But without reasonable levels of tax collection, governments cannot maintain the social and economic infrastructure needed to sustain equitable growth," the agency added.