What British voters decide in next week’s Brexit referendum and what the European Commission (EC) concludes in its case challenging Ireland’s tax arrangements with Apple – its verdict is due shortly – will renew debate on corporate taxation. The EC last January announced an anti- tax avoidance package and later this year it will re-launch its proposals for a common corporate tax base. The reform is seen as a potential threat to the tax sovereignty of member states and is a major concern to Ireland.
In a research paper, the Economic and Social Research Institute (ESRI) has outlined the importance of Ireland’s low (12.5 per cent) rate of tax in attracting foreign direct investment (FDI).
Of all European Union countries, the paper’s authors say, Ireland is the most sensitive to changes in the corporate tax rate which affect its ability to secure FDI. Even a small (one per cent) increase in the rate would diminish Ireland’s appeal as an investment location.
Such a modest rise, the authors estimate, would reduce – by almost five per cent – Ireland’s chance of selection as a location for FDI projects from non-EU countries. With the UK remaining an EU member, a cut in Britain’s corporate tax rate (from 20 per cent to 19 per cent) would also reduce the probability (by 4.3 per cent) of Ireland’s selection as a location for new FDI projects from non-EU countries.
In the event of Brexit, investors from outside the EU and in the services sector would, it is suggested, be more likely to redirect FDI from the UK to Ireland in order to secure the benefit of access to the single market.
A low corporate tax regime is seen as a key factor in attracting overseas investment to a country. However, it is not the only concern. Overseas investors also assess the overall competitiveness of the economy.
The ESRI paper says “maintaining cost competitiveness and enabling further R&D investment” is critical. In that respect, Ireland’s recent rise to fifth place in the World Competitiveness index has enhanced the country’s appeal as an investment location.