Is corporation tax north and south on the brink of harmonisation?

New Irish Finance Minister Michael Noonan’s pitch for more time to pay back the bailout at a steady predictable level seems to have hit deadlock over the sacred cow of  12.5 % corporation tax, the Irish Times’ Arthur Beesley reports.

Mr Noonan also said the Government was not for turning on the country’s corporate taxation rate, but French finance minister Christine Lagarde called for a “gesture” in return for lower bailout costs.

“Without that we won’t budge on the interest rate. I hope some progress will be made,” she said last night.

 

Fintan O’Toole has broken ranks to question  the “ fetish” of the Irish rate.

No one actually believes that a rise of a couple of percentage points in our 12.5 per cent corporate tax rate would create any serious problem for transnational companies operating here.

Moreover, having grasped these points, we need to qualify them in two important ways. The first is that French president Nicolas Sarkozy in particular is being staggeringly hypocritical. The effective rate of tax on corporate profits here (what companies actually pay as opposed to the theoretical rate) is almost 12 per cent. In France, it is 8.2 per cent.

Meanwhile speculation led by the unusual source of Andrew Neil in the BBC’s Poltiics Show suggests the UK government may at last allowNI a substantial cut from the UK level of 24%..  Despite the likely consequence of a cut to the block grant of public investment, might quite different pressures  result in a harmonised corporation tax rate north and south of the border?  

 

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  • no

  • ItwasSammyMcNally

    Brian,

    slightly alarmist (for Unionists) headline – the TUV will be be saying ‘Yes’ loudly and SF and SDLP will be saying ‘Yes’ quietly.

  • vanhelsing

    Michael Noonan “was not for turning” reckon he got this one from the Iron Lady 🙂

  • The use of the term “harmonisation” of one tax is misleading because it suggests that fiscal policy is the same on both sides of the border. That only happens when the tax regime right across the board is the same.

    For example, what is the duty on fuel on both sides of the border? What about business rates? I dont know the answer to that, actually. Maybe their are lower in the South.

    Taxes are not the only factor either, however. You have to look at operational costs generally. Northern Ireland’s labour costs are much lower. Once that 12.5% kicks in for Northern Ireland, there will be a golden opportunity to attract investment here.

    By contrast, the Republic of Ireland has now got to persuade would be new businesses that the 12.5% rate will hold in the light of pressure from Europe.

  • Old Mortality

    Where has the assumption that a reduced rate for NI will be 12.5% come from? Why not 10% or even 5%? Once the principle of a lower rate has been accepted by the EU, it can be any number you want.
    Of course, the consequent reduction in the block grant will probably be a deterrent to a very low rate but in an ideal, rational world this problem would be resolved by hammering public sector pay which would reinforce any advantage from the lower corporation tax rate.

  • The Raven

    “…this problem would be resolved by hammering public sector pay which would reinforce any advantage from the lower corporation tax rate.”

    Chuckle. That old chestnut…

    Also, while great for our local established businesses, I am keen to hear where people think the Great White Hope of FDI is going to come flooding in from, regardless of drop in CT.

    Seymour also correctly raises the point of business rates. I won’t rant on this one – don’t need to.

  • The problem is not whether CT could be notched up a point or two – the problem is defining where the limit on the increase would be, especially when externally dictated. O’Toole is spot on about the Double Irish but the Dutch Sandwich is equally important – is anyone leaning on the Dutch to stop tax free transfers on royalty income moving outside the EU and thus remove the attraction of such an arrangement? After all, if Ireland were instead to start levying withholding tax on intra-EU transfers it would probably be accused of impeding the Single Market or something.

  • aquifer

    For example, what is the duty on fuel on both sides of the border?

    Good question. Heating oil is dearer in the Republic because of their new carbon tax, inviting a new generation of smugglers.

    Best harmonise duties North and South.

    One thing multinationals hate is armed local hoodlums, and smuggling fuel paid them to exist for years. Yes we good as paid the IRA to shoot us.

  • john waterford

    French finance minister Christine Lagarde called for a “gesture” in return for lower bailout costs.
    “Without that we won’t budge on the interest rate. I hope some progress will be made,” she said last night.

    Ireland lies on the periphery of Europe. Hence it has higher transport costs. The 12.5% Corporation Profits Tax helps to compensate for this somewhat. Michael Noonan is right to dig in on this issue. Germany and France have regularly broken EU rules. France has used various measures to reduce its real rate of Corporation Profits Tax.

    Ms Lagarde needs to wake up and smell the coffee. The debt burden imposed on Ireland is unsustainable. Unless the EU moves quickly to ease the savage imposition- in a meaningful manner- a total default on bank debt is inevitable. One cannot knock blood out of a turnip. The German bondholders will then pay a heavy price with knock on effects on German banks and the Euro

    Put simply the EU must allow a STRUCTURED DEFAULT if it wishes to protect the Euro and German banks.
    The Germans and French are playing with fire. They are playing silly political games. designed to win votes.
    If Ireland crashes in flames the Euro and some German banks will follow. Germany and France will be hoist by their own petard

  • HeinzGuderian

    Ireland got themselves into this mess…………..it is up to the rest of Europe to bail them out…..AGAIN …………ahahah

    Yes,I jest.

    The only solution,is to rejoin our Glorious United Kingdom.

    Oops,must dash……..The Morning Line from Cheltenham is about to begin………….tatty bye………;-)

  • Mack

    The argument about higher transport costs because we are an island is a red-herring.

    Consider –

    The cost of shipping goods by sea is often lower than by rail & road.

    Germany and China are export powerhouses – exporting high margin top of the range engineering products to far flung emerging markets (Germany) and low margin goods to the USA, Europe and the rest of the world (China). Their global reach is largely independent of road & rail and highly dependent on sea traffic.

    If it is cost efficient to shell, shell fish landed in Kilkeel in Thailand (to take advantage of cheap labour there) for re-export back to Europe then transport costs are probably only a tiny fraction of a products price – certainly much lower than labour costs.

    Many goods & services can be ‘transported’ digitally.

    The reason why the low corporation tax is essential is because we don’t have a large well developed indigenous sector yet. Multinationals account for the vast majority of our exports and of the value-added in our economy.

  • Old Mortality

    Raven
    ‘Chuckle. That old chestnut…’

    Maybe you would be good enough to explain why it is an ‘old chestnut’ ?

  • Old Mortality

    Mack
    ‘The reason why the low corporation tax is essential is because we don’t have a large well developed indigenous sector yet. Multinationals account for the vast majority of our exports and of the value-added in our economy.’

    I’m not sure whether you’re referring to the RoI or NI but perhaps it’s more useful to identify the reasons why there is no well developed indigenous sector and, in the RoI’s case, why low corporation tax hasn’t solved that problem.

  • DC

    Lack of niche-market thinking.

  • Mack

    @Old Mortality

    Refering to Ireland (Republic / the south etc). It’s true that low corporation tax hasn’t solved the specific problem of building up our own large scale indigenous companies. But it has provided us with a large number of large companies that generate employment, exports, tax revenues, help up-skill our workers etc.

    So it depends what you want – actual indigenous ownership, or the benefits that a modern economy brings?

    I suspect most people want both. At the moment at least we have the later while we work on the former. There’s bound to be both positives and negatives in terms of impact of (particularly large scale) FDI in building up an indigenous industrial / service base.

    FDI both provides high skilled employment (trained workers who could in the future work for native companies) and crowds out native businesses by attracting the best talent (by driving up wages, conditions etc).

    It’s also clear Irish companies haven’t been particularly successful at building up the relationships to supply the MNCs here.

    At a point in time when our banking system is completely shattered (understatement of the century) and unemployment is sky high. I don’t think it is the right time to take a huge gamble on the indigenous sector filling any gap by pursuing policies that will, with certainty, reduce FDI.

  • Mack

    By the way, I think we need a number of things that aren’t in place.

    #1 Access to capital

    That means a functioning banking system that knows how to lend to businesses (and not property)

    It also means a larger network of Angel & Venture Capitalists willing to invest in startups and growing companies. Probably particularly the later – I know that in software there is a tendancy for good medium sized Irish companies to sell out to larger firms rather than take the risk and grow fast. US companies tend to be much better funded, and thus arguably have more opportunity to grow at a faster pace and win markets ahead of their European rivals.

    If we had more reliance on the private sector for startup funding rather than Enterprise Ireland, I think we’d do better. (Startups jump through hoops to satisfy government agencies rather than customers – I think a large network experienced investors & mentors, investing their own resources would be more likely to focus startups on the correct areas to get their products honed and released quickly.)

    #2 Reformed bankruptcy laws & better welfare support for self-employed

    These are penal in Ireland. Why take the risk of leaving a well-paid job with benefits, redundancy payments & social welfare if it all goes wrong ?

    #3 Possibly more government support in accessing foreign markets

    E.g. state funded expos abroad that small businesses can pool together and exhibit in to promote their products.

  • Old Mortality

    Mack
    I can’t disagree with much of what you say but I still think that low corporation tax has done little to stimulate domestic enterprise.
    I also think that the abolition of the dual corporation tax rate at the behest of the EU was bad for Ireland in that it made less desirable types of business such as retailing and property development more attractive than they had been before.

  • DC

    A reduced corporation tax could attract ‘new green’ industry back into Belfast – back into the harbour.

    For instance, wind turbines. Indigenous companies could figure out how to provide smaller quality parts for electricity generation around wind turbines. Basically native companies could do the niche market things linked to wind turbines, whereas large scale big business will do the building of them – pre-assemble – at Harlands – big business encouraged to come here as a result of a very attractive corporation tax rate. So Belfast becomes pro-business once again.

    See link below:

    http://www.bbc.co.uk/news/uk-northern-ireland-12333589

    It’s the economic formula used in Germany – niche markets, quality products down to the very basic things such as running casters used for industrial storage purposes – like ‘frictionless’ pull out drawers that holds industrial parts for plant assembly. Nuts, bolts and batteries.

    Hegra Linear produces a little-known niche product: linear guiding systems and telescopic slides. These are high tech, low-friction shelves, slides, and drawers needed in a wide range of industrial applications, including factory automation, automotive assembly, airplane production, and more. “Let’s say you have a very large, heavy battery for a metro bus that you need to have easy access to for maintenance,” says company co-owner Lisa Theuer. “You need a way to smoothly slide that battery in and out. We can set that battery on one of our high tech, near frictionless drawers that make it easy to gain access. That’s what we do.”

    Germany has evolved a social capitalism which has proven to be more stable and efficient than America’s Wall Street capitalism, not to mention more ecologically sustainable. Shrewd governmental policies, smart reactions to crises, and economic democracy are the secret to Germany’s global economic success. That, and being a master of the niche product.

    Full report here: http://www.ip-global.org/2011/02/22/economic-powerhouse-germany/

  • DC

    Just to add, much in the same way as the Rep. Ireland had its own niche market during the proper tiger years – providing optics/optical parts to the IT/computer industry. Dell etc.