Taking no action on corporate tax is not an option

Some commentators have emphasised the certainty of the 12.5 per cent tax rate as the key part of “Brand Ireland” and the importance of not changing anything with regards to it.

In navigating Brexit, we are advising clients to effectively plan and "future proof" business for the ultimate exit scenario and the disruptions which result. This will impact such things as their strategy/ operating model, supply chain and talent agenda.

Ireland Inc needs to take the same approach from a tax-policy perspective. Sitting on our hands while the world moves around us is not a prudent strategy. This is not a time for brand arrogance (anyone remember Kodak moments in a pre-digital time?).

Obviously tax is only one element of the offering. For example, what response do we give to the prospective expat with the following question?

“Hi, we are moving to Dublin and looking for an area to live in, that has good public primary schools and facilities for our young children, as well as transport to the centre of Dublin. Looking for a reasonably-priced two-three bedroom house with a yard or some type of outside area.”

The answer might well be: “It’s trickier than you might expect.”

The challenges Ireland faces are multiple and include:

The continuing trend of reducing headline corporate tax rates in the UK and generally across Europe. These countries also have bigger local consumer markets than Ireland, resulting in a “pull factor” to those locations.

The increased risk of a Common Consolidated

Corporate Tax

Base (CCCB) becoming a reality in an EU without the UK. If implemented, this would result in a greater share of business profit being allocated to “destination countries” where the customers and manufacturing plants are located – the biggest of whom are Germany and France. France clearly has a strategy to become a stronger leader within the EU, and globally, arising from Brexit.

The EU directive on taxation which will impact on many areas but particularly on the ownership of intellectual property (IP). It will significantly increase the tax cost of moving same between countries from 2020. This may lead to the growth in non-EU hubs for the ownership of IP exploited on a global basis.

The tension between Ireland becoming part of Schengen (free movement of non-EU citizens based on a common visa policy) to facilitate the State becoming a “go to” hub within the EU versus the continuing closer relationship with the UK.

Customs duties/tariffs impacting on supply chain/oper- ating model.

We are not London, Frankfurt or Paris. However, we need to continue to aspire to become “the best small country in the world” regardless of what happens to the UK or indeed to the EU in general.

Ireland made a bold move 20 years ago (in 1996) to move to a 12.5 per cent tax rate on a graduated basis by 2003. We have reaped significant benefit from that visionary move. As 2023 will soon be upon us, we now need to be similarly bold and innovative in refining our offering. A key danger is that the UK becomes the “gateway” to Europe, analogous to Singapore – the gateway to Asia.

In the context of our fiscal space, there is a limited amount that can be done this year but we have significant ability to commit to what our regime will evolve to over a period of time.

Personal tax

A lot has been written about our personal tax regime. For many employees in the foreign direct investment

sector, it is not a personal factor because they are tax equalised, with the employer guaranteeing their net income. It then becomes an employer cost which forms part of the overall location decision.

We could make a clear decision any fixed entitlement is liable to income tax based on the existing regime while any element of reward that carries real risk, and predicated on business growth, is taxed at a much lower rate, eg 20-30 per cent. This could apply to cash bonuses/share options linked to achieving real growth, and capped by reference to a percentage of base salary.

It remains the case that the Irish entrepreneur is overtaxed and underappreciated. Only very tentative steps (in fairness because of the fiscal discipline required) have been taken to date. We need to move by 2020 to deliver a 10 per cent capital gains tax rate on gains generated by entrepreneurs to match the UK.

Corporate tax

When Ireland announced its 12.5 per cent tax rate the UK rate was 31 per cent. They have committed to reduce it to 17 per cent and it may go to 15 per cent or lower. The Netherlands rate at that time was 35 per cent, and is now 25 per cent, and may be 20 per cent or lower by 2020.

Committing to move to a lower corporate tax rate – perhaps even 5 per cent – on a phased basis by 2023 would send a powerful signal that Ireland will remain competitive and diminish the “pull” factor.

Such a move would fully align with the OECD’s hierarchy of taxes which shows that lower corporate taxes are the most beneficial to growth prospects. Such a change would also position us as a competitive location for the ownership of IP.

Research commissioned by the Department of Finance has shown significant correlation between headline tax rate and location. We need to maintain our pro rata rate advantage over bigger economies.

Finally, it would provide welcome relief/impetus to our indigenous sector and make it less likely that they would move activities to the UK market.

The time for action in a collaborative way between all stakeholders is now.

Pádraig Cronin is a tax partner and vice-chairman of Deloitte Ireland