Since the 1950s, Ireland has used its corporate tax rate to attract business, which at 12.5% is much lower than the OECD average of 25% and the US rate of 35%. Now, international pressure has forced the Irish government to review modifications to its corporate tax system ahead of a planned international overhaul of global tax rules.
The review was prompted after the Organization for Economic Co-operation and Development (OECD) began a review of global tax rules because of concerns amongst world leaders that corporations were deploying aggressive strategies to minimize their taxes. The OECD review will conclude in November 2015, at which point a binding multilateral proposal to overhaul global business taxation will be considered.
Central in Dublin’s review is a proposal to phase out the “double Irish” tax mechanism, beginning in the upcoming October budget. The mechanism attracted controversy in the U.S. after a Senate hearing on Apple’s use of the system to minimize its corporate income tax rates. Although the Irish government has defended its corporate tax system in the past, increasing political pressure from Washington and elsewhere has begun to take its toll. Several groups including the Irish Tax Institute, the Consultative Committee of Accountancy Bodies and Washington-based Tax Executives institute have contacted the Department of Finance to express their concern over the proposed changes. A change in tax policy would see a reduction in foreign investment, as corporations that have structured their business models based on assumptions around the current policy are forced to make changes and downsize their presence. Ireland, which has long benefited from its pro-business tax policy, would seriously damage the vitality of its economic recovery and threaten the jobs of the 130,000 Irish that are employed by foreign corporations.
According to American Chamber of Commerce, Ireland Chief Executive Mark Redmond, ‘Ireland has for a very long time identified a corporate tax regime as being really important to attracting direct foreign investment.’ The policy has caused significant economic benefits, by promoting an entrepreneurial culture in the country, and being a source of significant tax revenue to the government– US based companies alone contribute between €3 and €5 billion a year to the Irish Exchequer.
Despite these concerns, critics of the current tax system are increasingly anxious about Ireland’s international reputation and want to begin a gradual phasing out immediately. Just last week, EU officials hinted that their commitment to providing a package for Ireland’s debt repayment is linked to a removal of pro-business tax mechanisms and an Irish trade mission to Australia faced criticism over perceptions that Ireland encourages tax avoidance.