THE GOVERNMENT is stepping up its campaign against imminent moves by the European Commission to introduce pan-European legislation on the taxation of business profits.
Undeterred by the weakness of its own negotiating stance in the wake of the EU-IMF bailout, the Department of Finance has submitted a voluminous report to taxation commissioner Algirdas Semeta in which it sets out the potential for serious drawbacks from the development of a common consolidated corporate tax base (CCCTB).
The report, compiled by Ernst Young, indicates that Ireland would rank among the biggest losers if a CCCTB becomes law in all or some EU states.
Under a mandatory CCCTB, it says, Irish gross domestic product (GDP) could drop between 1.5 and two percentage points, employment could fall by around one and a half percentage points and foreign direct investment (FDI) could decrease by about five percentage points.
Only France, Belgium and Spain would benefit in such a scenario, it argues. Significantly, the losers would include Germany, traditionally a strong supporter of harmonised taxation.
“The other 24 EU countries experience reduced levels of employment due to increases in effective tax rates . . . on affected groups,” the report says.
“Member states that would lose significant corporate tax revenues are less likely to be willing to participate in a CCCTB system. If they participate, they will be faced with difficult political choices including: reducing public spending; increasing corporate income tax rates; increasing taxes on households.
“Fewer participating member states would reduce the potential positive effects of a CCCTB.”
This is a pre-emptive strike by Dublin against Mr Semeta, who plans within weeks to publish legislation to introduce a CCCTB.
The initiative was first mooted in 2001 and the Government has been resisting on and off for the best part of a decade. The topic is highly sensitive given the totemic importance attached to Ireland’s 12.5 per cent corporate tax rate, doubly so given acute pressure on the Government to increase the rate in talks on the bailout.
A CCCTB policy would not harmonise corporate tax rates per se. It would, however, introduce a common European formula for the calculation of tax on the profits of firms operating in more than one member state.
This is still risky territory for the Government, which believes a CCCTB would weaken tax competition generally and dim the allure of its own regime. The argument goes that a CCCTB would reallocate tax receipts to countries in which revenues are received, lessening scope to maximise the profits that companies record in Ireland.
The threat is held in Dublin to be serious, particularly as it comes on the heels of unwelcome attention on the 12.5 per cent rate
Even though the Government successfully faced down pressure from Germany and France over the tax, a well-placed diplomat said the Government’s refusal to revise the rate still rankles with many powerful EU partners.
While the Irish rate was never popular in Europe, the case is now made that a higher corporation tax take would lessen the requirement for emergency aid.
Strong arguments can be made either way here. For the Government, however, the aim is to weaken the resolve of the EU authorities. Unanimity is required for new EU tax measures, meaning the Government can block the initiative.
Mr Semeta has signalled that he may invoke an “enhanced co-operation” procedure in which countries that favour a set of measures can introduce common EU rules to apply only to them. This means a coalition of member states could introduce their own CCCTB, potentially putting non-participants at a disadvantage.
The commission sees economic benefit from a CCCTB, with attendant improvements to the operation of the EU’s internal market. From Dublin, however, comes the message that the initiative is riddled with risk.
A mandatory, voluntary and core nine-country CCCTB would curtail economic activity to varying degrees, it says. In a mandatory system, for example, there would be a reduction of almost 512,000 jobs. “The scenario would reduce GDP by 0.2 per cent and FDI by 1.1 per cent,” the report argues.
“The reduction in employment under the voluntary 27 member state CCCTB is smaller, 0.1 per cent or more than 206,000 jobs. GDP falls by 0.1 per cent and overall FDI falls by 0.5 per cent.
“While companies that choose to participate in the voluntary system reduce their total EU tax payments, their effective tax rate, which is applicable to new investment in most member states, will negatively impact growth in most member states.” The battle is on.
