Ireland’s low corporate tax rate – good or bad?

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I wrote this post as a guest post for my fellow blogger Mark Holtzman (see accountinator.com)

Many of you are probably familiar with Ireland’s low rate of corporation tax – 12.5%. It has been the subject of many articles and much criticism over the years and in recent times – articles including companies such as Google and Facebook and terms such as “the Dutch sandwich”. So, for the benefit of anyone outside Ireland, let me try to explain a few things and give my opinion for what it is worth. By the way, I am no tax expert.

Ireland is a small island with little or no natural resources – except our scenery and Guinness perhaps. As a result, we have never had any serious indigenous manufacturing. Thus, at some point in the 1970’s a 10% corporate tax rate on manufacturing was introduced. All other businesses paid a higher rate, which I think was 33%. I remember learning tax in college and with this difference in rates, some companies stretched the definition of manufacturing. There was one case I recall which involved determining whether or not banana ripening was manufacturing. The courts ruled in was and since then, is the largest banana exporter in Europe. It’s true, and no banana republic jokes ! The outcome of this case resulted in a large infrastructure being developed in the country for banana ripening.

Now, our corporate tax rate is 12.5 % for all business. So we cannot say Ireland is a tax haven – as all companies are treated the same. But it is fair to say we are a low tax economy. Our European neighbours (Germany in particular) complain, and there are many reports on large US companies avoiding US taxes by being based in Ireland or using Ireland’s low tax rates to transfer profits through Ireland. So is this good or bad? Well, there is no correct answer to this, and of course the answer depends on your perspective. From my perspective as an Irish person and accountant, it is good – jobs are created, more taxes are brought in than if the rate were higher for example. The German government don’t seem to like our low tax rate – their rate is higher apparently – and there are rumblings to have a more common Europe wide tax rate.

But are low tax rates good? Perhaps they can be. Last year when our government was preparing its budget one economist showed that and 11% rate of value-added tax (like a sales tax) would yield the budget deficit. The current VAT rates are 23%, 13.5%, 9% and 0%. – depending on the type of good or service. If all this was replaced with a single 11% rate, an annual additional intake of €1.5 billion would occur assuming demand was stable. Another idea on low tax rates is that if the rate is lower, more people will pay – or put it another way, less will avoid it. In the 1980’s our income tax rate topped 60%. Small business in particular hid money in off-shore accounts. By the early 1990’s, the top rate had decreased to 48% (now 41%). The tax authorities had a tax amnesty, whereby heavy penalties and interest were waived on the off-shore monies. This, and the lower tax rate, brought many thousands of people into the tax net. And as the tax rate has stayed lower than previous times, these businesses have by and large stayed in the tax net and the black economy is less than previous.

A final point when comparing tax rates is what do we mean by tax. For example, all businesses in Ireland pay very expensive rates to the local council/municipal authority. In other countries, this is much less. For example, certain German states keep their local taxes low to attract investment. So before comparing headlines tax rates, we have to ask are we comparing apples with apples. As any management accounting student knows, we cannot compare figures which are not comparable as a basis for decision-making.

I hope you find these thoughts useful. I have included some links below which may be relevant.