It’s fair to say that Ireland’s corporate tax policies divide opinion. To advocates of Laffer Curve economics, they are uncontestable proof that lower taxes ultimately bring about higher tax revenues.
Based on Ireland’s recent economic performance, it’s a strong argument. In 2022, the exchequer collected a cool €22.6 billion in Corporation Tax receipts, up 50% on the previous year. And all built on the back of internationally low business tax rates.
To some, the fact that Ireland’s economy is running a surplus largely on the back of its corporate tax policies and that there is talk of setting up a €150bn sovereign wealth fund with the excess to fund future investment in the country, is a source of admiration and envy.
But to others, it amounts to something dangerously close to cheating. A recent report from the EU Tax Observatory, ominously titled the Global Tax Evasion Report, has generated headlines by labelling Ireland one of the world’s biggest tax havens.
Again, the argument is pretty compelling. Not only does Ireland have internationally low corporate tax rates (12.5% headline rate), but a lot of enterprises end up paying much less than that. In 2020, the effective rate paid by businesses in Ireland – that is, the average rate actually paid after all exemptions, breaks and credits were taken into account – was just 7%.
This is a fact not lost on some major international players. In particular, Ireland has attracted a stellar cast of Big Tech and Big Pharma companies who have set up regional headquarters in the country, a list that includes the likes of Apple, Microsoft, Google, Pfizer, MSD, Johnson & Johnson, Meta and Intel.
These companies are also the major contributors to Ireland’s equally stellar tax revenues. It’s estimated that €1 in every €8 in corporate tax received comes from just 10 companies.
Levelling the playing field
The problem is, that much of this tax revenue is not accrued on revenue generated in Ireland. The Tax Observatory report outlines how multinational companies have ‘profit shifted’ up to €140bn from operations elsewhere into Ireland in order to benefit from our favourable tax rates.
This is problematic on two levels. One, it means that Ireland is benefitting from tax revenues that many argue should rightfully be paid elsewhere, i.e. in whichever country they made their money in. And two, Ireland is a signatory of the OECD’s Base Erosion and Profit Shifting initiative (BEPS), a global push to align corporation tax policies to stop exactly the kind of activities that the country has done so well out of.
Indeed, in its latest Budget, the government announced the implementation of so-called Pillar 2 plans to raise its corporate tax rate to the 15% floor standard agreed by OECD members – more than double the effective rate major multinationals have been used to paying in Ireland.
While politically this is undoubtedly the right thing to do, it does raise some questions economically. With roughly a fifth of Ireland’s GDP coming from tax receipts from multinational corporations, there is a strong economic interest in Ireland maintaining an internationally competitive corporate tax regime. This becomes much more of a challenge in the emerging age of international consensus on corporate taxation. How the Irish economy adapts remains to be seen.
