The Government appears close to making major decisions on the future of corporate taxation. While EU approval for the existing 10 per cent manufacturing tax rate does not run out until 2010, business has been putting pressure on the Government to unveil a plan for what happens after this date. Given that major investment projects are decided on the basis of long time horizons, it is important that the Government outlines its intentions soon and the indications are that it may do so this week.
Much work has been done by Government officials on the future of the corporate tax system. The crux of the problem is that while EU approval for the 10 per cent manufacturing rate runs out in 2010 and in 2005 as it relates to companies in the IFSC the standard rate of corporation tax is much higher at 36 per cent. The solution being worked on involves introducing one rate of tax on corporate profits from 2005 on. The question is what this rate should be and what other accompanying measures need to be put in place?
Within Government, the debate has been on whether to introduce a relatively low rate of, say, 12.5 per cent, or to go for a slightly higher rate of 15 to 17 per cent, in an attempt to safeguard revenue. The argument to go for the lower 12.5 per cent rate appears to have won out, although both Fianna Fail and the Progressive Democrats argue that a rate of 10 per cent should be the target. But whatever decision is made it is important that the Government maintains a regime which proves attractive for inward investment. Recent experience has shown the importance of the 10 per cent rate in attracting major projects, which in themselves then create further substantial tax revenue through generating employment and economic activity.
But other considerations also come into play Business must also pay its fair share of taxation and the straight reduction of all tax on corporate profits to a low rate offers a major windfall gain to many businesses particularly the large financial institutions. It appears that the Government is considering how to address this issue and may also propose charging a higher rate on so called "passive income" such as money earned from rental on property. The proper balance between corporate and personal taxation must also be considered in managing the restructuring of the company tax regime. And the Government may also face adverse reaction from elsewhere in the EU, where jobs have been lost as industries relocate to Ireland to avail of the low tax rate.
While Government officials have spent months considering the future of the corporate tax system, much less thought appears to have gone into a recent change in the business tax structure. It is difficult to see any justification for the decision to designate all the State's regional airports. The idea originated in Mayo where three sitting Fine Gael TDs find themselves chasing two seats in the forthcoming general election. A major project is promised from the US as part of the Knock designation, although it remains to be seen if it will ever go ahead.
Once it became clear that the Knock project would be pushed through, political pressure built that the other regional airports should get the same treatment. Not alone would Knock be designated, the Government decided, but the new status would also be extended to the airports at Cork, Waterford, Kerry, Galway, Sligo and Donegal. Meanwhile, two unemployment blackspots in Dublin and the town of Rosslare are all to get similar special tax treatment. The EU Commission may yet examine whether the designations are in keeping with its rules. But in any case the correct approach to tax policy is to have as few "special cases" as possible, and as low a rate as affordable.