Of all European Union members, Ireland remains the most sensitive to change in its corporate tax regime, as a recent study by the Economic and Social Research Institute showed. An increase to the current 12.5 per cent rate – or significant changes in how it is applied – would adversely affect the State’s ability to attract inward investment and make Ireland a much less attractive place for foreign companies to locate. Hence the acute interest here in the latest move by the European Commission – for the second time in five years – to advance corporate tax harmonisation legislation for member states and to curb large scale tax avoidance by multinational companies. The commission’s proposals do not represent an immediate or direct threat to Ireland’s tax sovereignty but they create uncertainty and give reason for future concern.
In 2011, the commission's proposals for a common consolidated corporate tax base (CCCTB) were rejected by member states. Ireland and the UK were among those most strongly opposed. But in the intervening period, a succession of financial revelations – exemplified by the Luxleak disclosures and the Panama papers – have greatly changed public attitudes to legal tax avoidance measures. As EU taxation commissioner Pierre Moscovici has argued, tax avoidance leaves governments with less revenue to finance public services. The Apple tax decision – which is now under appeal – requires Ireland to recover €13 billion from the company. It also strengthens the commission's case for major reform.
In the latest initiative, the commission is proposing a two-phased approach to establishing a CCCTB. Phase one would see agreement on common rules for taxing company profits. In phase two, companies would aggregate their profits across the EU. Taxable profits would then be divided among member states, with each country taxing its share of those profits at its own national rate. This phase of the tax plan, which is of particular concern to Ireland, has been deferred for now.
Unlike in 2011 when strong British objections to a CCCTB ensured its rejection, Ireland now finds itself without a major ally in protecting a common interest. British prime minister Theresa May has insisted that as long as Britain remains an EU member, it will play a full role in EU affairs. But the UK's credibility and influence will further decline as it negotiates Brexit.
Some aspects of the first phase of the CCCTB process – already adopted by the OECD – may not cause the Government too much difficulty. And the second phase would not directly threaten Ireland’s 12.5 per cent corporate tax rate. However, linking corporate tax to the location of a company’s actual activity could result in greatly reduced tax revenues in Ireland. That represents a significant – albeit distant – threat for which the Government must prepare.