ECONOMICS:While Ireland's low rate is resented by some in Europe, an EU-wide tax rate has never been a real possibility, writes DAN O'BRIEN

PUBLICATION OF the national accounts numbers for the first half of the year this week drew a variety of reactions. One was that the difference between the two most common measures of the economy’s size – GDP and GNP – was caused by foreign corporations sending home all the profits they squeezed out of Irish workers and the wider economy.

To be sure, foreign companies do repatriate profits, just as Irish companies abroad send some of their earnings home. Paying dividends to shareholders, after all, is what companies exist to do. But they also reinvest a chunk of their profits.

As it happens, in the first quarter of the year the difference between GDP and GNP in nominal terms was €8.4 billion. Inward investment accounted for by reinvested earnings stood at €7.6 billion. So, far from bleeding the State dry, foreign companies are among the most important sources of capital investment.

Thinking the worst of foreigners and their motives also crops up regularly in another aspect of the debate on foreign investment – in relation to those in the EU who wish to impose a higher corporation tax rate on Ireland.

While it is certainly true that Ireland’s low tax on profit is resented by some in Europe and plenty wish to see a harmonised rate across the bloc, an EU-wide tax rate has never been a real possibility.

The most recent cause for concern on this front is the risk that, if Ireland has to be dragged from the budgetary hole into which it has got itself, those throwing the lifeline would demand the imposition of a corporation tax hike in return. There are more than enough things to be worrying about right now. This is not one of them.

If it comes to a bailout, the two most important external institutions will be the European Commission and International Monetary Fund. Neither would seek to impose a higher tax rate.

The commission has been central in setting the conditions for Greece’s €110 billion rescue. Its officials have been shuttling back and forth between Brussels and Athens in droves and have made receipt of cash conditional on the implementation of fundamental, and politically painful, changes to policy, such as the reform of that country’s pensions system.

An important difference between Ireland and Greece is that the commission has been calling for these kind of reforms in Greece for as long as anyone cares to remember. It has never advocated raising Ireland’s rate of corporation tax.

This is largely because the intellectual case against competition in tax policy, even among members of a currency union, is weak, and the commission is almost always on firm evidence-based ground when making policy recommendations.

There is, in addition, the not insignificant fact that Ireland’s legal right to set its own corporation tax has been explicitly recognised by the bloc’s highest legal authority, the European Court of Justice, in a case taken against it by Britain half a decade ago.

The commission’s perception of the State matters, too. After the revelation late last year that Greece had been cooking its books, the commission’s usually mild-mannered officials were incandescent at the manner in which they had been deceived (I have never heard Eurocrats, who are normally loath to chastise individual member states, be so scathing).

Ireland is currently viewed benignly in Brussels. Last December’s budget gave reassurance that, when push came to shove, Dublin would do the right thing.

If the folk from Brussels would not demand a profits tax rise as a condition of any rescue, the IMF people would oppose the idea outright. Getting stricken economies off life support is their stock in trade.

When they lend their money, they want to get it back as quickly as possible so that they are ready to dash to the rescue elsewhere if needed. To achieve that, they know economic growth is essential.

Anyone with even a passing knowledge of the Irish economy knows the unusually important role the foreign-owned corporate sector plays here. It was the engine of export-led growth that brought about the Celtic Tiger and foreign companies now account for the lion’s share of exports (Ireland would be the most closed economy in Europe, not among its most open, if all foreign companies upped sticks tomorrow).

There are few things on which economists can agree, but the belief that exports will again be the engine of recovery is almost universally shared.

To do anything that would hinder exports would hinder growth. As the overwhelming share of exports is accounted for by the foreign-owned sector, threatening its presence here would be to delay growth and, hence, the chances of the IMF getting its money back quickly.

So even if it comes to the worst, a 12.5 per cent corporation tax rate is here to stay until an Irish Government, acting of its own volition, decides to change it.