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Ireland’s corporate tax regime better not be the anchor of its competitive advantage

by Aaron McCormack on November 14, 2011

There are two very real threats to the Irish corporate tax rate of 12.5%.

One is direct – that is the further moves in Europe toward deeper financial integration.  Since the choices on offer in the Eurozone are “wade deeper into the torrent in the hopes of reaching safety” or “Chaos” there is a likelihood that the EU will seek to create further alignment of economies as a price for effective bailout.  For example if the ECB is to try to mutualise European sovereign debt (as suggested by some, only above a 60% debt/GDP ratio) then a price will have to be paid by nation states – likely that will include harmonization of tax regimes.  Never mind that all of this will need treaty changes and the like, or that it may not come quickly enough to keep Mr Market happy.  These are the sorts of “comprehensive plans” that now seem to be on offer, even if the Eurozone has to shrink to make it work.  The current Irish government would like to be in the Top Tier and would have to pay the price of seeing its headline corporation tax rate rise in line with other Eurozone countries.

The other threat is indirect, but could be much more immediate.  As the US government (executive and legislative branches) wrestles with the issues of debt and job creation, a rare but likely point of bipartisan agreement will be to give some form of tax amnesty to corporations who wish to repatriate overseas cash.  Such a measure would likely contain provisions that corporations must use at least some of the money to create domestic US jobs.  That would not only be a measure designed to prevent this being seen as a “reward for companies that send jobs overseas” but also to counter the valid criticism that the last time this happened in 2004 it created few US jobs, if any.  Most of the money was used in stock buybacks, enriching shareholders.  I think Democrats will (reluctantly) agree to the amnesty and Republicans will (reluctantly) agree to the strings attached.  Both will trumpet it as a model of bipartisanship and co-operation.  The best thing of all for both parties is that they don’t have to pay anything to fund it.

The only possible spanner in the works would be if enough Democrats would rather pursue the alternative of taxing US corporations on the differential between their effective overseas tax rate (say 12.5%) and the domestic headline rate (35%) and perhaps lowered that headline rate in the process to get Republicans on board.

Either way, the impact on the Irish situation would be the same in terms of US corporate choices.

I have been trying to find an analysis of what the 2004 program did to investment in Ireland by US corporations but can’t find any.  If you do trip up over such a study let me know.  If you are in the right academic field, now may be a good time to do that analysis 🙂

The main point is this – if corporations only chose overseas domicile on the basis of corporate tax regimes, then the world will see a race to the bottom, to the point where a country will take only the trickle-down benefits of a corporate presence.  One has to believe that other things (beyond hygiene factors like rule of law, transport links, stable government) matter to corporations.

Paying tax on your profits is a “nice problem to have” compared to those companies trying to find a working business model and make profit in the first place….but a company has only a legal obligation to maximise returns to shareholders.  Since it is profits “after tax” that matter, shareholders expect corporations to minimise their tax bill.  In fact it is their fiduciary duty to do so.

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