Ireland - a place of tax safety and refuge ?

Posted on September 16, 2013 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

Writing in the Irish Times recently, Feargal O’Rourke head of tax at PwC Ireland declares: ‘What can be said with absolute certainty is that every company within the charge to Irish tax pays tax at 12.5 per cent on their activities – that is a fact.’ (‘Whatever way you look at it, Ireland is not a tax haven’). Certainty is a word to be used with caution. One cannot presume to know the details of any particular case and nobody is suggesting that. Indeed the tax code allows for special and specific cases of taxation at 10% and 25% but these are exceptional cases. Frequently, in matters to do with taxation, commentators have a fixation with ‘headline’ rates.

‘Effective rates’ understood as what companies actually pay on the basis of gross income attract less attention. The difficulty can be compounded by definitional differences around what constitutes gross income or allowable income for tax purposes (of which more anon.) Coverage of Ireland's position on corporate tax receives less glowly treatment as reported in an article recently in the Financial Times (with Green Shamrocks just below the title with caption 'The double Irish - how tech giants are slashing their tax bills')

A perusal of Irish economic history since the late 1950s through the period of initial membership of the European Economic Community on to the establishment of the Irish Financial Services Centre in the late 1980s and up to the present day would suggest that low corporate taxes and ease of business have been important features of attempts to attract inward investment. The suggestion that the Republic of Ireland is in any sense a haven has negative connotations as implying ‘a place of safety and refuge’ (Oxford definition) from lawful or just taxes (the two not being the same of course). Recent suggestions and allegations on both sides of the Atlantic have sent many in Ireland to the front lines to defend the current arrangement as legitimate, transparent and in keeping with OECD guidelines. Linked to this the case for a low headline rate of corporate tax has become a kind of key national rallying cry – a test of loyalty to local good against the prying views of alien and hostile interests. One might be forgiven for concluding that Ireland Inc would sacrifice anything in international negotiations but will not surrender on the matter of low corporate tax.

First, a few statistics are in order.

According to the latest European Commission data on taxation trends, the total of corporate taxes as % GDP in 2011 was 2.4% in Ireland (Republic) compared to an EU27 average of 2.6%. In 2011 taxes on incomes of corporations came to 8.3% of total taxes in Ireland compared to 6.6% on average across the EU (taking a weighted average of the EU27).

These numbers do not include employer contribution to social security (e.g. PRSI) – an important area of difference between Ireland and most of the rest of Europe. But that is another story for another day. On the face of it, Corporations in Ireland are paying their way no more or less than in most other European countries. However, the unique nature of economic activity in the Republic of Ireland must be considered. With the growth of a large exporting multinational sector since the 1960s a large amount of profit is generated (or ‘booked’) in Ireland because of relatively favourable tax conditions (among other factors).  If data on profits and various categories of non-wage income are examined Ireland emerges as a country with a high non-wage share of national income as well as one of a few European States with a high outflow of income under the heading of ‘net factor income’. Hence, the large gap, in Ireland, between Gross National Product (what is retained within Ireland when flows of income in and out are taken account of) and Gross Domestic Product (what is produced and earned by all resident households and corporations before account is taken of factor income flows).  The share of ‘non-wages’, in 2012 in Ireland, was 49.4% (indicator 4.5 in NERI Quarterly Economic Facts) compared to 36.1% in the UK and 42% for the EU-27 as a whole. The profit base – before adjustment for net factor income flows – is large in Ireland. This is hardly surprising given the presence of some very large multinational companies in the pharmaceutical, IT and business service sectors.

In any year the Irish Government takes in around €3.5 billion in Corporation Taxes. Taxes paid by corporations are calculated on the basis of a ‘headline’ rate of 12.5% with many adjustments for relief on capital allowances, research and development and other allowable expenses. Calculating the total revenue tax base for corporations is not simple. One way to measure it is to take ‘domestic trading profits of companies (including corporate bodies) before tax’ from the latest CSO National Income and Expenditure 2012 (Table 1 ESA code B.2 part). The CSO estimates this to be €46.6 billion in 2012.  It refers to domestic trading profits refer to all domestically-based enterprises (including foreign owned multinationals) in the State.   This provides a key benchmark against which to measure the effective tax rate on corporations. At the very most the effective rate of tax is between 7 and 8% going on a Corporation tax base of €46.6 billion across all corporations included in the CSO estimate. However, it is not as simple as that. It should be noted from Table CTS1-3 in the Revenue Commissioners Statistical Report 2011 that what they refer to as ‘Gross Trade Profits’ come to €70.8 billion in 2010. After deduction of capital allowances (€12.3 bn), trade losses (€4 bn) and trade charges (€11.7 bn) as well as group relief (€2.7 bn) and addition of other profits/capital gains net trading income/profits as calculated by Revenue comes to €41.2 billion in 2010. The CSO estimate of €46.6 billion provides the best approximation of Corporate income as measured in the national accounts without regard for the complexities of administrative treatment of taxable income by the Revenue Commissioners. On this basis the effective tax rate is likely to be no more than 8% and is probably less.

Further detail about Revenue Commissioner statistics may be found here.

In regards to questions about secrecy and tax avoidanceI leave it to the authoritative  international Tax Justice Network to comment in the case of Ireland here.

But, Is Ireland a tax haven? The OECD has declared Ireland (along with the Bahamas and the Isle of Man as ‘Jurisdictions that have substantially implemented the internationally agreed tax standard’. In fact, only two jurisdictions fail the test under this definition: Nauru and Guatemala.

The OECD use the following criteria to classify jurisdictions as tax havens:

(a) No or only nominal taxes;

(b) Lack of effective exchange of information;

(c) Lack of transparency;

(d) No substantial activities.

Dr Jim Stewart of TCD in a recent paper (‘Is Ireland a tax haven?’) concludes that ‘Ireland is not a tax haven but has features of a tax haven’. These feature include, according to Jim Stewart: Low corporation tax rates; ease of incorporation; relatively light touch regulation; and tax and other legislation that is very responsive to the needs of multinational corporations.

 Well If it walks like a duck ….

It was proposed in the NERI Summer Quarterly Economic Observer that, 'pending further research, that €250 million additional revenue could be raised in 2014 by reforms to Corporation Tax reliefs and provisions for carry-over of losses. An additional €250 million in corporation tax receipts would represent an increase in the effective rate by a fraction of one percentage point. This measure is unlikely to deter existing or future foreign direct investment.'   €250 million represents between 0.5 and 1% of total estimated corporate profits each year.  We are talking about minimal measures to restrict existing tax reliefs for corporations or impose a minimum payable amount in the case of each corporation reporting a profit. In the case of a minimal payable amount it is not possible on the basis of existing research to specify a rate. However, it is possible that in the case of one or two large corporations a minimum rate of 5% (for example) might yield a very sizeable amount of revenue for the exchequer. Replies to recent Parliamentary Questions have not clarified the matter. On a separate, but not unrelated matter, a recent Research InBrief paper by Dr Micheál Collins of the NERI has indicated a possible net yield of more than €300 million to the Irish exchequer as a result of implementing the European Union Financial Transactions Tax (FTT) here.

This blog started with a claim of certainty. Lets re-work that claim a little:

What can be said with absolute certainty is that every company within the charge to Irish tax pays an effective tax rate of between zero and some higher percentage on their activities. On average it is considerably less than the headline rate of 12.5%. That is a fact.

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