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Monday, 22nd April 2024
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12.5p.c. - Is it working? Back  
Our 10p.c. corporation tax rate is an acknowledged success in developing our economy. Our 12.5p.c. corporation tax rate is now in place several months and had been anticipated long before it was introduced. Why are we not trampled down by inward investors? Are we complacent?
Why no growth?
Our 12.5p.c. corporation tax rate for all trading income should be a powerful magnet for mobile international investment. Nonetheless the Irish economy is flat and inward investment is not pouring in.

What’s the problem?
The world economy is flat. But even in a flat world economy there is a lot of business making a lot of profit and paying a lot of tax. That business is capable of relocating in Ireland to reduce its tax burden. Even in a recession, Ireland has the capacity to outperform the world economy. Recession cannot be the full explanation.

We are facing new competition from the ten states who will enter the EU on 31 May 2004. They too have educated hard-working work forces. In many cases they have sophisticated infrastructure. But at the end of the day how many international investors are comfortable in Polish or Czech or Estonian? How many international investors want to grapple with bureaucracies and labour forces whose thinking and work practices were moulded by Socialism? Ireland should be confident that it will remain a favourite location despite the new choice that has opened up.

Can it be cost? Certainly we are not as cheap as we were before. But labour costs in themselves were never the issue. Irish workers have a record of high productivity. In any event, it is questionable if inflation in wages in the private sector has kept place with inflation in wage costs in the public sector.

So let’s look again at tax. Can we do even better then we are doing at present in creating an attractive tax environment for inward investment, while not giving up any significant tax revenues?

Welcome to Ireland
Let’s look at a high tech company proposing to set up in Ireland. The first bad news that it will encounter is that we charge 1p.c. capital duty on the value of share capital of a new company, or an existing company entering Ireland from outside the EU. The UK, along with many of our EU neighbours, do not charge capital duty.

The second piece of bad news will be that the Irish operation will obtain no tax deduction for the payment it must make to buy in know-how from its parent in (say) the USA. The USA will require that either the Irish operation pay substantial royalties for use of know-how generated in the home country, or buy into it. Therefore investment in Ireland is likely to lead to an up-front tax cost in the USA in respect of know-how shared with the Irish operation.

Ireland does grant a deduction for the cost of know-how, but not when it is acquired from a related party. In the context of inward investment, know-how is almost invariably acquired from a related party. So the inward investor is looking at tax cost at home, and no deduction in Ireland.
High tech groups have patents. If the Irish operation wishes to use the patent and technology it will usually have to pay royalties. Patent royalties paid from Ireland to a non-treaty state (and it usually is to a non treaty state in the case of a multinational) face a withholding tax at the rate of 20p.c.. That is a final and real tax cost.

A high tech operation in Ireland is likely to incur research and development expenditure. That cost will usually be deductible in computing Irish profits - but the tax saving is only 12.5p.c., equal to our standard corporation tax rate. In the UK the operation would obtain a 125p.c. deduction at a 30p.c. tax rate.

High tech operations will typically have lots of intellectual property - know-how, patents, brand names, goodwill. These are things that are routinely exploited by such a group, being bought and sold. In Ireland transactions in such intangible assets can attract stamp duty at the rate of 9p.c.. In the UK there is no charge to stamp duty on such transactions. The difference in treatment speaks for itself.

A 12.5p.c. corporation tax rate is attractive, but suddenly you realise it is not the only consideration. In this area at least the answer must be that, yes, we could do better.

What about the head office?
If we want high value added activities in Ireland, what better than to get the regional headquarters of the multinational into Ireland. However attracting in a head office will usually involve persuading senior executives to transfer to Ireland for several years.

Will they be willing to do so when they discover that after five years residence they will become liable to Irish gift tax and inheritance tax both on giving and receiving gifts and inheritances? Many executives might reflect that death comes but once, and there is no reason to make a total disaster out of it by getting enmired in Irish tax.

A regional headquarters will usually also involve locating a regional holding company in Ireland. Again that sounds like a good thing. But it isn’t likely to happen! Ireland’s relatively low tax rate on repatriated dividends (25p.c.) will usually be covered by foreign tax credits on those dividends resulting in no tax cost. But our capital gains tax charge on any disposals of subsidiaries abroad (at a rate of 20p.c.) looks decidedly unattractive compared to the complete exemption available in almost every other member state of the EU, including the UK.

We are the best
Ireland is potentially the most attractive location in the world for high tech investment. Despite the disadvantages outlined above we have been phenomenally successful in attracting inward investment for the last 50 years. Think about how much more successful we could be if we sorted out those few problems!

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