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Wednesday, 17th April 2024
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Corporation Tax 12.5% or 19% Back  
The Government have legislated for a 12.5% corporation tax (CT) rate. Proposals for a surcharge mean that the real corporation tax rate on trading profits may be 19%.

The Government fought hard with the EU to secure our right to a low corporation tax rate. The introduction of a 12.5% CT rate (supported by all the major political parties) is seen as one of the important foundation stones of our economic future. It has already been legislated for. It will come into operation on 1 January 2003 for many companies. This is what is generally understood to be the case.

A Civil Service planning document published under the Freedom of Information Act reveals a different picture. Serious thought is being given to introducing a surcharge on undistributed trading profits of closely held companies (broadly speaking, Irish owned family companies). The outcome that appears to be favoured in the published discussion paper is to produce an effective CT rate of 19% on undistributed trading profit, and of 30.6% on undistributed passive income. This is a long way from our heralded 12.5% CT rate for trading income, and 25% CT rate for passive income.

What of our efforts to attract inwards investment, you may ask? The answer lies in the proposal to confine the surcharge to closely held companies. Most multinationals (but not all) operating in Ireland, or likely to be attracted to Ireland in the future, are not closely held. They tend to be controlled by quoted companies or to operate as a branch of a non resident company. Therefore it is likely that the surcharge would not apply to the great majority of foreign owned industry in Ireland. Equally, the surcharge would apply to a large part of indigenous Irish industry and business. The proposal implies a dual rate system. The 12.5% rate would effectively be available as a final tax rate largely only to foreign investors. Irish entrepreneurs face the prospect of a 19% rate.

This is crazy. It is blatantly in contravention of EU rules. These are precisely the rules which have forced us to abandon the 10% rate of corporation tax, and to introduce in its place, a nation-wide 12.5% corporation tax rate applying to almost all trading activity. The 10% corporation tax rate may have discriminated between different trades, in that some were entitled to it and some were not. But at least it did not discriminate largely on the basis of nationality. It was availed of as much by Irish entrepreneurs as by foreign entrepreneurs investing in Ireland. The new surcharge proposal seemed to be a much more objectionable from a European perspective than was the 10% corporation tax rate.

It is a crazy for a second reason. Ireland cannot indefinitely base its economy so heavily on inward investment. We must grow our own entrepreneurs. A healthy economy will require a mix of foreign investment and native enterprise. The proposal to apply a 19% rate to local entrepreneurs suggests a lack of faith in our ability to develop our own economy. It cannot be said too often that tax is a cost. For a business, it is no different to rent, electricity charges, or phone bills, save that the benefits may be less evident. The Government seem to appreciate the advantages to Irish industry of competitiveness and low costs. To secure this competition is being introduced in many areas, including telecoms and electricity generation. The discussion document does not appear to appreciate that Irish business requires a competitive edge on tax costs also.

The proposal for a surcharge on trading income is not a claw-back of a tax break, consisting of the 12.5% CT rate. A large part of indigenous Irish industry pays tax at a 10% rate for them. For them the 12.5% rate will represent a tax increase, not a tax break. The proposal is that companies presently liable at a 10% corporation tax rate would be moved up to a 19% corporation tax rate. For those slow at arithmetic, that would represent a 90% increase in the tax rate. What is frightening is that this discussion document reached a web-site, rather than a wastepaper basket.

The reasons advanced for the proposed surcharge are firstly, that is “inequitable” that unincorporated traders and PAYE workers should pay tax at 46% while incorporated businesses would pay tax at only 12.5% on trading profits. Secondly, it is suggested that surplus cash would be built up inside trading companies, in order to avoid payment of tax on distribution as income to individual shareholders. These reasons don’t stand up to examination. Who in their right mind would build up surplus cash inside a company, in the proposed new tax system? A tax rate of 25% will apply to income from passive assets such as cash. That 25% tax will not be creditable against the personal tax payable when it is eventually distributed. That personal tax will be at a rate of approximately 42% (if the Government keeps its promises) in the case of a dividend. That gives you an overall tax rate of 67% on the passive income. Hardly attractive!

If the passive income is taken into the shareholders hands by liquidating the company, the effective tax rate will be 45% - not even as attractive as having earned the passive income directly and few companies are likely to be liquidated in order to get out passive assets. We are after all talking about trading companies. If these problems did not emerge over the two decades of the 10% CT rate, why is it feared they would be major issues with a 12.5% CT rate?

The equity argument is equally flimsy. Equal treatment of dissimilar items does not constitute equity. Trading profits are largely required for financing business expansion. They are not available, when earned and retained by a company, to meet the living expenses of shareholders.

Shareholders have to take either dividend income or salaries if they want to live. The high marginal tax rate (42% is our target according to another released strategy document) is the rate paid by those who want the freedom to spend money in any fashion they please - whether on children’s education or gambling in Las Vagas. If however they forfeit that freedom to do as they please with the money, by leaving it in the hands of a trading company, where is the equity in taxing them as if they were free to spend it as they please?

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