In recent times Ireland has come into the spotlight internationally because of the rate at which corporate tax is applied in this country. Corporate tax is a complicated issue and needs to be looked at comprehensively to understand why it has been in the international spotlight of late.
What is Corporate Tax?
Corporate Tax is a tax charged on all profits of companies resident in a State and non-resident companies who trade in a State through a branch or agency.
Corporate Tax in the EU
EU Member States have full autonomy in the field of direct taxation, which includes corporate tax. This autonomy of Member States to set their corporate taxes is limited only insofar as national taxes must be compatible with EU law. In particular, national tax law should not create obstacles for cross-border economic transactions.
As of June 2013, corporate tax rates across the EU ranged from 10% to 35%, as illustrated in the table below.
|Highest Corporate Tax Rates in the EU||Lowest Corporate Tax Rates in the EU|
Corporate Tax in Ireland
Ireland’s industrial policy is firmly focused on attracting and retaining Foreign Direct Investment (FDI) and central to that policy is a competitive corporate tax rate. In recent years, Ireland’s competitiveness for foreign investment and its rate of corporate tax of 12.5% was considered strategically important to aid its recovery plan. However, Ireland’s corporate tax system has also been heavily scrutinised by some of its fellow EU member states with some of the view that low corporate tax rates enable Ireland to maintain an unfair advantage in Europe in attracting international investment.
Obviously Ireland’s low corporate tax rate incentivises FDI; however, the fundamental structure of the Irish tax system also makes it an attractive place for companies to set up. ‘Double Irish’ is a term that is sometimes used when referring to the Irish corporate tax system and describes how a company based abroad can be registered as an Irish company, thereby making it easier for Multinationals to move their profits between a number of Irish subsidiary companies. The scheme can involve two Irish companies, one based in Ireland, and one based abroad. Companies can also send their profits through The Netherlands before depositing them at a second Irish subsidiary company. This is often done to pay a lower rate of tax on the transfer of profits between countries – which is known as ‘transfer pricing’. This is often referred to as the ‘Dutch Sandwich’; foreign companies can send profits through one Irish company, then to a Dutch company and finally to a second nominally Irish company that is usually headquartered in another country.
Recently, international attention was brought onto the Irish corporate taxation system when, on 21 May 2013, three US Senate Members of the Permanent Subcommittee on Investigations published a report entitled ‘Offshore Profit Shifting and the U.S. Tax Code – Part 2 (Apple Inc.)’. The report looked at the taxation of Apple Inc in Ireland, and stated that Ireland had given the technology giant a ‘special tax rate’; it also cited Ireland alongside the Cayman Islands and Bermuda as tax havens. Irish officials have refuted these claims however, saying that the Irish taxation system has always been transparent and open, that it complies with all OECD requirements and that Ireland does not meet the official international criteria for a tax haven.
For the last number of years Ireland had done its utmost to comply with international taxation laws and standards while also trying to maintain its low corporate tax rate. In the Irish budget for 2013, Ireland announced that it was to become one of the first countries in the world to have concluded a new Intergovernmental Agreement with the US to Improve International Tax Compliance and Implement FATCA (US Foreign Account Tax Compliance Act). This Agreement aims to combat tax evasion by providing for the automatic exchange of tax information between the US and several other countries.
Corporate Tax Rates at the G8
The issue of corporate tax rates was at the centre of talks prior to and throughout the G8 Summit, held on 17-18 June 2013 in Enniskillen, Co Fermanagh. G8 leaders focused closely on taxation, with the aim of reaching a consensus on greater sharing of information between countries. Campaigners for greater tax transparency appealed to the G8 to ensure that any potential tax reforms benefited poor and developing countries as well as the wealthy countries. UK Prime Minister David Cameron said that Britain will lead by example by creating a registry of company ownership, and will consider making it public – a move that has run into resistance from other countries. He has urged his fellow G8 countries to follow in Britain’s footsteps. The US, meanwhile, said it was committed to reforming the global accounting rules and to collecting more of U.S. companies’ profits banked outside American shores. In the days directly preceding the G8 summit, many stakeholders in the international and European taxation system weighed in on the topic. At the G8 Summit, European Commission president José Manuel Barroso stated his support for Britain’s agenda of trade, transparency and tax. With regard to Ireland’s role in the international corporate tax system, Taoiseach Enda Kenny stated that Ireland has ‘nothing to fear’ from the changes demanded at the G8 Summit on tax.
These recent developments surrounding Ireland’s corporate tax structure could potentially continue to focus further attention on Ireland’s tax policy. Currently, foreign companies employ about 150,000 people in Ireland, or about 8% of the workforce. However, many of these companies have said that although Ireland’s low rate of tax is certainly an incentive for them to base their European headquarters here, it is not the primary reason. Many have said that Ireland’s young, adaptable and well-educated workforce, coupled with the fact that English is Ireland’s primary language and that we are a member of the Eurozone, are also very important attractions.
For more information, don’t hesitate to contact the EM Ireland office.
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