Changing Corporation Profits Tax Rate is a Red Herring but ....

| No TrackBacks

In a recent entry Banking Crisis: Help Us or We Default, I suggested that Ireland could introduce a temporary levy on top of its current 12.5% rate for Corporation Profits Tax (CPT) as a quid pro quo for EU/IMF/ECB agreement on restructuring some of its bank bonds and slashing the interest rate applicable to the bailout.

It is apparent that there is substantial resentment within the EU, most notably in Germany and France, about Ireland's low CPT rate. My idea is that an increased rate would help Angela Merkel and Nicolas Sarkozy, Chancellor of Germany and President of France respectively, to "sell" such a deal to their sceptical electorates. 

This entry discusses the Irish CPT issue under the following headings:

      1. Importance of Corporation Profts Tax Rate
      2. Consequences of Increasing the Rate
      3. Threat = Opportunity
      4. Stop Kicking the Can

 1. Importance of Corporation Profts Tax Rate

To put Ireland's CPT rate in context:

  • The value of CPT to the Irish Exchequer in 2010 was €3.92 billion. The key purpose of Ireland's low rate is to help make Ireland attractive to Foreign Direct Investment (FDI). If we compare Ireland's GDP (€153.9 billion in 2010) and GNP (€124.8 billion), it could be surmised that most of the difference (€29.1 billion) could be attributed to the profits of FDI companies and, on this basis, they might account for the bulk of Ireland's CPT receipts.

  • Based on data compiled by Ireland's Industrial Development Authority (IDA) which is responsible for attracting FDI to Ireland, the IDA was supporting companies with approximately 136,000 employees in 2009. The US accounted for 48% of supported companies and 70% of supported employment.

  • If it is accepted that there is a close correlation between Ireland's attractive CPT rate and FDI employment then an increase in the rate would result, over time, in substantially lower FDI employment and reduced economic activity. It is noteworthy that notwithstanding a low CPT rate and many other attractions and incentives, net employment in FDI companies located in Ireland fell by 21,000 (13%) between 2000 and 2009.

2. Consequences of Increasing the Rate

If the Irish CPT rate was, for argument's sake, doubled to 25% in response to external pressures, there is little doubt that there would be a gradual but massive loss of FDI employment in Ireland. And it is unclear whether a higher CPT rate would lead to an overall increase in CPT receipts when the law of diminshing returns kicks in.

Only a proportion of these "lost" jobs would move elsewhere within the EU as many FDI companies locate in Ireland to avail of non-tax advantages which are unique to Ireland - highly educated workforce, English-speaking, favourable entrepreneurial and corporate environment, clustering etc.

The overall impact of an increased CPT rate would be devastating for the Irish economy in terms of reduced trade and lower direct/indirect employment which no increase in CPT receipts could possible compensate for. The likelihood of sovereign default would be greatly increased. 

At the same time, the resultant gain in employment and tax receipts for France and Germany would be very marginal when their combined population (144.5 million) is compared with Ireland's (4.5 million). In addition, there could be a substantial loss of jobs and trade to the entire EU.

3. Threat = Opportunity  

This assessment highlights the folly of Ireland's EU partners demanding an increase in Ireland's CPT rate as the precursor to agreeing a minimal reduction (say 1%) on the interest rate (currently 5.8%) applicable to the EU/IMF/ECB bailout loans. This approach would push Ireland even closer to involuntary sovereign default.

So, I repeat Help us or We Default with adverse consequences for the entire EU and EZ which would totally overshadow the marginal benefits accruing to France and Germany from jobs and tax revenues that might transfer from Ireland.

The Irish Government holds some powerful cards and must adapt a much more robust negotiating position by highlighting to the EU, IMF and ECB the consequences of pursuing MAD (Mutually Assured Destruction - with apologies for Cold War jargon) if they fail to help Ireland.

The threat of default should become an opportunity to prevent default. 

4. Stop Kicking the Can

Demands by some EU partners for Ireland to change its CPT rate as a precondition to additional EU/IMF/ECB support are red herrings. They are really intended to:

  • Boost the standing of ruling political parties within some member states.
  • Deflect attention from the ECB's unaccountable overexposure to Irish banks.
  • Distract from deep-seated EU- and EZ-wide problems and weaknesses.
  • Facilitate the EU strategy of continually kicking the can down the road and thereby lurch from one unresolved crisis to to an even bigger one. 

Nonetheless, Ireland should be willing to alter its stance on CPT* in order to help secure EU-wide support for a "rescue" plan based on the existing EU/IMF/ECB bailout terms but incorporating a restructuring some of its bank bonds and slashing of the interest rate on bailout loans. Only in this way can sovereign default be avoided and contagion across the EU prevented. 

* Introduce a levy on top of the current 12.5% CPT rate of, say, 3% to apply for the duration of the EU/IMF/ECB deal. Offer additional tax credits and allowances for R&D and non-EU export marketing, sales and support undertaken from Ireland to mitigate the impact of the CPT levy while stimulating incremental innovation and exports outside the EU. See Banking Crisis: Help us or We Default for further discussion a possible "rescue" package which could head off sovereign default.

No TrackBacks

TrackBack URL:

Monthly Archives

Powered by Movable Type 4.38

About this Entry

This page contains a single entry by Brian published on April 21, 2011 11:51 AM.

One Letter & One Month was the previous entry in this blog.

Nyberg Report is the next entry in this blog.

Find recent content on the main index or look in the archives to find all content.