Taking Care of Business

Ireland’s corporate tax rate is under threat from the UK and the US. The government must help domestic companies to grow or the future will be bleak

Ireland is facing a number of threats to its economic growth strategy. Donald Trump has pledged to drop the US corporate tax rate to 15 per cent within his first 100 days in office and Theresa May committed to making Britain’s corporate tax rate the lowest in the G20 in her speech at the Confederation of British Industry’s annual conference yesterday.

The EU tax directive, published in October, includes proposals for a common consolidated corporate tax base (CCCTB). If implemented in full, this would seriously undermine the appeal for Ireland’s 12.5 per cent corporate tax rate because companies would be forced to pay tax where the bulk of their economic activities occur.

In the case of the EU that would mean that bigger markets such as France and Germany, where the bulk of sales occur, would be eligible for a much greater share of Irish taxable profits. Government sources are quick to emphasise that none of these threats might materialise.

Mr Trump, for example, has promised a nationwide infrastructure investment programme that would cost hundreds of billions of dollars. If the US corporate tax rate is cut from 35 per cent to 15 per cent, this would deprive the US government of the resources needed to fund this investment.

The British government is facing a potential £100 billion black hole in its finances because of Brexit, which could limit the prime minister’s ability to cut taxes.

In the case of the EU, the commission’s proposals for tax consolidation have failed in the past because it needs unanimous agreement from all member states.The Irish government could be lucky and the appeal of the state’s corporate tax rate could endure for a number of years yet.

What is certain though, is that at some stage the country will face an existential challenge to its very narrowly focused development strategy. The American Chamber of Commerce Ireland estimates that US multinationals are directly responsible for 180,000 jobs here.

There is growing competition for foreign direct investment and, sooner or later, another country will develop a model that is every bit as compelling as Ireland’s. It could be that the US will eventually follow through on promises to reform its corporate tax system to make it more attractive for companies to stay at home.

Britain may also opt for a low tax model after Brexit. That is why the government should start planning for a future where it can no longer rely on foreign direct investment to create employment and contribute corporate tax revenues. The tax system must be calibrated to encourage and develop domestic entrepreneurs.

There is a lamentable record in this country of companies reaching a certain scale and then selling to the highest available bidder. There are very few Irish companies that grow from medium to large-sized enterprises.

Part of the reason for this is the punitive tax treatment of share options, which makes it less appealing for owners and employees to stay with a company when it becomes successful. There is a built-in incentive to sell the company to cash in on its success.

Irish capital gains tax, capital acquisitions tax, the tax treatment of the self-employed and tax incentives for investors are far less favourable than the regimes in other countries.

Successive governments have promised to turn Ireland into the Silicon Valley of Europe. Indeed, Enda Kenny pledged to make it the best small country in the world to do business.

Unfortunately, much of the legislative focus is still on attracting multinationals. The government must now ensure that domestic entrepreneurs get equal billing and that Irish companies are given every encouragement and incentive to grow.

In the medium to long term, it is the only way that the country will become less vulnerable to an attack on its corporate tax rate.