Ireland’s foot dragging on tax reform could prove costly

By failing to sign up to an international agreement on the way forward for taxation of companies, the Government seems to have stumbled rather badly in its communications on what is a matter of considerable importance.

For 65 years Ireland has operated a light corporate profits tax regime. Whether or not this was the best approach to attracting investment and modernising the economy, it has been a key factor in attracting foreign investment, especially from American firms in dynamic sectors. These have strongly helped transform the economy, expanding the number of rewarding jobs. Low company tax has been a core element in the package chosen and endorsed by successive governments. Indeed, predictability and stability of the company tax regime has been a major selling point and, as a country, we became rather dependent on it.

The tax regime’s stability has actually been only partial, though. Ireland has had to make several major changes in the regime over the years in order to be consistent with the expectations of our partners in the European Union. This included moving from a zero tax rate on profits from exports to a 10 per cent rate for manufacturers (1980) and then to the current 12½ per cent rate for most companies (after 1996). Investors were not put off by these changes and understood why they had to be made.

Insofar as it is transparent, the 12½ per cent rate has been seen as being reasonably respectable in international tax circles.

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It is not clear why Ireland has so far failed to find a form of words that would have enabled it to join 130 other countries earlier this month in agreeing a framework for reform

Overall, though, the international structure of company taxation has long been an incoherent mish-mash, partly thanks to political lobbying by large firms in the United States and elsewhere. It has been by exploiting this incoherence that such firms have been able to use Irish tax law in combination with that of other countries to reduce their global tax payments to far below 12½ per cent.

Multinational firms now understand that, if the Biden administration fully succeeds in its reform efforts, the Irish 12½ per cent rate will lose its potency for them: they would have nothing to fear in such circumstances from an Irish move to 15 per cent.

Against this background, it is not clear why Ireland has so far failed to find a form of words that would have enabled it to join 130 other countries earlier this month in agreeing a framework for reform.

To be sure, Ireland has much to lose in this area – especially in terms of revenue (despite the low rates, since many highly profitable firms route a sizable part of their global profits through Ireland), but also in terms of continuing to attract foreign investment.

Some in government seem to overestimate the extent to which society benefits from relying on firms to come up with the financing for public services

But Irish fiscal authorities have already backed themselves into somewhat disreputable company by turning a blind eye to egregious tax-avoidance manoeuvres by numerous companies. These manoeuvres had nothing to do with the 12½ per cent rate; nor had they much to do with employment-creating activity in Ireland. Instead they exploited loopholes resulting from subtle tax and company law differences between countries to reduce effective tax rates to zero. The most indefensible of these manoeuvres have eventually been blocked in recent years, but they should not have been allowed from the get-go. There might be more sympathy for Ireland in intergovernmental tax circles now if it had prevented such contamination.

There may be a wider issue here. Some in government seem to overestimate the extent to which society benefits from relying on firms to come up with the financing for public services. This view reveals itself in a variety of ways, from the incentives provided to public-private partnerships that were used to build some of the motorway system a couple of decades ago to the surprising arrangements whereby public authorities are leasing newly-constructed residential blocks from investment funds.

This comes at the cost of intensifying a colour to Ireland's international reputation in this sphere that is not only far from the self-image held by most voters

All too often, such arrangements are much more expensive than the alternative of efficient public provision. Tolls on the motorways divert heavy goods vehicles back through what should be peaceful town centres on the old main roads. And the local authorities will be long burdened by lease payments far in excess of the interest rates at which the capital cost of the residential blocks could have been covered.

In the design of taxation and of the financing of public infrastructure, Irish governments have given the impression that they are too concerned with fostering the State’s relations with private firms, domestic or foreign, and with avoiding the discomfiture of such firms.

This comes at the cost of intensifying a colour to Ireland’s international reputation in this sphere that is not only far from the self-image held by most voters, but is also likely to prove costly over time. Ireland should continue to welcome the involvement of foreign-owned firms in the economy: we have benefited much from them. But there is much to be lost by leaning too far over backwards for them. With firms one should aim to deal fairly; with partner governments cooperatively.

Patrick Honohan was a governor of the Central bank between 2009 and 2015. He is a nonresident senior fellow at the Peterson Institute for International Economics