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Any increase in Ireland’s 12.5% corporation tax, a long-standing carrot to inward investment and – ultimately – job creation, would have to be forced on the country by the powers that be in the EU.
At the time of writing, the European Central Bank was upping the pressure on Ireland to accept an EU/IMF bailout, suggesting that the European Financial Stability Facility could help prop up the banking system and begin to restore investor confidence in the country.
Currently, the government is looking to steer the rescue towards a bailout of Ireland’s banks, rather than the state. Yesterday it emerged that Ireland’s banks had received a staggering €130bn in ECB financing, which amounts to 12% of their balance sheets and 24.3% of the ECB’s short-term lending.
With rumours of a possible €80bn bailout circulating over the weekend, the Sunday Times reported that European officials were attempting to insert a condition into the rescue package that would include a big rise in corporation tax. This possibility has gathered pace so far this week.
It seems the central power-base of the EU, the UK, France and Germany would demand a certain quid pro quo in return for the bailout, and the long-resented 12.5% corporation tax is an obvious target.
Stemming inward investment
As we’ve alluded to previously, employment within international financial services firms based in Ireland has been relatively stable throughout the crisis, and key to attracting these companies (and encouraging them to lay down roots in the country) has been the 12.5% corporate tax rate.
Ireland’s minister for enterprise, trade and innovation Batt O’Keefe has reiterated the government’s stance on corporation tax – that it will not be changed in next month’s Budget.
Chris Sanger, head of tax policy at KPMG, agrees that the “iconic” corporation tax is unlikely to rise any time soon, with Ireland’s 12.5% rate in-keeping with the global trend to reduce the cost of doing business through tax breaks.
“Any change in corporation tax would impact the international perspective of Ireland, with one of the major attractions being the certainty the country offers to multinational investors in this regard,” he says. “In the current environment, the location of business is far more mobile than it was in decades past, and there’s always a danger that companies will reassess the attractiveness of a particular tax regime.”
One recent example of a company swayed across to Ireland is that of insurance firm Zurich, which last year moved its general insurance business from the UK. It’s considering doing the same with it life insurance business, according to reports. The FSA has, however, raised some concerns over the move.
Ireland’s other selling points
However, Zurich has claimed that the 12.5% corporation tax isn’t the main motivator, saying instead that it’s aiming to streamline its legal structure and optimise its capital efficiency.
As O’Keefe also pointed out, the cost of doing business has dropped with “energy, private rents, office rents, construction and labour” all now significantly cheaper. A recent report by the Vale Columbia Centre on Sustainable Investment suggested the current crisis has actually increased Ireland’s appeal as a location for Foreign Direct Investment.
But a low corporation tax remains a cornerstone of any economic recovery in Ireland.
“The corporate tax rate remains a key part of what Ireland has to offer businesses, and is also an important driver in getting the country out of the financial difficulty it now finds itself in,” adds Liam Diamond, leader of the inward investment practice at PwC in Ireland. “Every country in the EU has a veto over domestic tax issues and the Irish government has been very clear about not raising the tax rate.”
Still, much of the pressure to increase corporation tax comes from France and Germany, where it has been a long-standing source of irritation. The Irish government doesn’t wield a massive amount of power in Europe, particularly in the country’s current state, and there’s always the danger it could become railroaded into increasing the rate.
It would seem that most the negative talk coming out of Ireland about the bail out is cominf from one source, Michael Noonan. He is hell bent on turning the panic into political gain at a cost to the country.