Ireland continues to fight off calls for it to raise its low corporate tax rate.
Although officially denied, there are many in the European Union grousing that Ireland is getting off easy by not increasing its low corporate tax rate as collateral for the big cash infusion it received from the European Union.
At a recent EU summit, according to the Economist, France’s Nicolas Sarkozy and Germany’s Angela Merkel took issue with Ireland’s 12.5 percent corporate tax rate, particularly as the country tried to renegotiate the terms of its billions in EU loans. Although not officially stated, many EU members want a little something back in exchange for adjusting the interest rate on Ireland’s bailout, currently a rather stiff 5.8 percent.
Attractive business locale
Over the years Ireland has emerged as a favored onshore location for multinationals establishing regional or global headquarters to manage their profits, taxes, and other business functions related to running an international corporation.
According to IDA Ireland, the Irish Development Authority and an agency funded by the Irish government, Ireland offers many tax advantages for holding companies who want to make the country their corporate home. Among the main ones, according to IDAIreland.com, are:
- Capital gains tax participation exemption on disposal of qualifying shareholdings
- Effective exemption for foreign dividends via 12.5 percent tax rate for qualifying foreign dividends and flexible foreign tax credit system
- Double tax relief available for tax suffered in foreign branches and pooling provisions for unused credits
- No dividend withholding tax to treaty countries (or intermediary subsidiaries) under domestic law
- Access to treaties to minimize withholding tax on royalties and interest and further domestic legislation provisions to minimize withholding tax on interest
- Extensive treaty network and access to EU directives.
At its peak in 2007-2008, nearly 100,000 people were directly employed in over 580 US firms in Ireland, according to the American Chamber of Commerce – accounting for 70 percent of all IDA-supported employment. US companies also have an $87bn (approx. €60bn) cumulative stock of investments in Irish- based operations, the Chamber said.
Low tax rate needed
One of Ireland’s arguments for not messing with its tax regime is that it wouldn’t be able to repay the ECB loan, which new Irish Prime Minister Enda Kenny called “penal” in an interview with the Wall Street Journal.
Said former Prime Minister John Bruton to an Irish Day audience in New York: “It would be quite perverse to insist that we were to abandon that policy because that would frustrate our capacity to repay the loans, which we are determined to do.” He also called French and German calls for the increase political theater aimed at placating voters at home. It also hasn’t gone unnoticed that both France and Germany have more than double the corporate tax rate of Ireland. Some speculate that their leaders are just using the crisis to level the playing field. Its other argument is that its low tax rate didn’t cause the financial crisis. It did allow Ireland to rise from economic sloth to gazelle.
The other thought is that “punishing” demand for an increase in the corporate tax doesn’t fit the “crime” of its borrowing. Currently, Ireland, because its government guaranteed all bank debt after that country’s real estate collapse, is borrowing at more than 30 percent of its GDP a year. However, the economy is so small that EU loans of about €85bn can easily cover the country’s debt needs.
While they should keep an eye on the Ireland situation, on the whole, US treasurers should continue focusing on US corporate tax rates and the efforts to bring them down from their high-30s level.