The Government endured a wave of criticism in recent months for holding out for the best possible outcome for Ireland in the new international agreement on corporation tax but their approach has been more than vindicated in the final draft of the deal.
The earlier wording which exposed this country to a potentially unlimited rise in the current 12.5 per cent corporation tax rate has now been clarified to a commitment to a minimum 15 per cent rate across the globe.
The most interesting feature of the domestic debate surrounding the resistance to an open-ended commitment was the way the Government was denounced by political opponents and a range of commentators for having the temerity to stand up to international pressure.
The 12.5 per cent corporation tax rate has been one of the foundation stones of Ireland’s dramatic rise from one of the poorest countries in Europe half a century ago to one of the richest today. The other big factor of course is membership of the European Union and it is the combination of the two which has transformed the country’s economy.
The domestic critics of the corporate tax rate, who profess such concern about the alleged damage the rate has done to the country’s image, sound a little like pampered teenage children ashamed of their hardworking parents but quite happy to enjoy the fruits of their labour.
There is simply no arguing with the fact that the corporate tax system has been a critical factor in attracting foreign direct investment to this country. Without it we would be a much poorer place, even with EU membership, as it provided a counterweight to our peripheral status as an island nation on the western extremity of the continent.
Despair and stagnation
The strategy of using the corporate tax system to encourage industrial development emerged in the mid-1950s as a response to official despair at the stagnating economy. At that stage, the population of the State had fallen to less than three million as young people fled in their droves for a better life in the UK and the US.
The notion of a zero export tax was devised in the department of industry and commerce and proposed by minister and Labour Party leader William Norton as a way of encouraging domestic industry. It was introduced by minister for finance Gerard Sweetman in 1956 against the advice of his own officials who feared the loss of tax revenue and did not appreciate how it would, in time, attract foreign investment.
Export tax relief was changed to comply with EEC rules after 1973 and morphed first into a 10 per cent corporation tax rate for all firms whether exporters or not. In 1997, another Labour Party minister, Ruairi Quinn, presided over the move to 12.5 per cent to conform to evolving EU rules.
The benefits of the wave of investment since the 1990s cannot be underestimated, even if they are taken for granted by most people. In terms of employment, income tax generated and, in recent years, massive corporation tax receipts to the exchequer, the impact has been staggering.
While living standards across the globe have risen significantly in recent decades, Ireland is one of the few countries, along with Israel, which has made the jump from the league of middle-ranking economies into the category of wealthy nations. The far-sightedness of politicians who in desperate times laid the foundations of our modern prosperity should not be overlooked.
Foreign investment
As foreign investment poured into the country in recent decades, some big EU states, notably France, mounted a campaign against the 12.5 per cent rate. It was also widely criticised in the US, the main source of foreign direct investment, even though it was the loopholes in the American tax system that made this country such an attractive location for investment.
Criticism of the Irish 12.5 per cent rate obscured the fact that the rate is only one factor in the equation. One of the experts on corporate tax in Ireland, economist Seamus Coffey, earlier this year did a calculation based on the corporation tax per head of population paid across the EU. In Ireland, this figure was €2,350 per head, in France it was €1,000, in Germany €1,100 while in Spain and Italy it was below €600. So whatever else may be said, the Irish exchequer is not losing out; the problem is that it may have become too dependent on corporation tax.
A legitimate criticism of the Irish regime was not so much the actual rate but the way the system enabled some of the big global tech companies pay very little tax anywhere. The major loophole that allowed this to happen was closed off by Michael Noonan some years ago and, hopefully, the new international code will ensure a much bigger tax take across the globe from the tech sector.
One way or another, the Minister for Finance Paschal Donohoe has had a lonely battle, at home and abroad, in recent months to ensure the best possible outcome for the people of this country in a changing international tax environment. In the end, his stubbornness paid off and for that he deserves considerable political credit.