Ireland is facing pressure from the European Commission over its low tax regime as the country looks to secure a slice of the EU's recovery fund to help its economy bounce back from the Covid-19 pandemic.
Ireland's corporate tax rate is among the lowest in the world at 12.5 per cent, attracting criticism from the European Union for not only taking profits away from other nations but also relying heavily on big tech firms such as Apple and Alphabet’s Google - which have set up operations there - for jobs and investment.
Now the Commission wants Ireland to increase taxes in exchange for its share of the €750 billion ($900bn) Recovery and Resilience Plan.
Late last month, economy commissioner Paolo Gentiloni sent a letter to Irish MEP Chris MacManus stating that it was important “to strengthen the fight against tax avoidance and close loopholes that can lead to situations of double non-taxation”.
"In the Irish context, the high level of royalty and dividend payments as a percentage of gross domestic product suggests tax rules are used by companies that engage in aggressive tax planning," according to the letter seen by The Irish Times.
Along with every EU nation Ireland has been allocated a share of the €750bn Next Generation pot to help its economy rebound from the crisis, with expectations its slice will amount to €900m.
However, to secure that cash, Ireland's economic proposals must be signed off by Brussels and it must also ensure the money is spent on projects that ensure long-term prosperity, such as infrastructure investments with a green or digital tag.
A number of member states have already submitted their national recovery plans, meeting a soft deadline of April 30 to receive the first disbursements from the EU’s recovery plan.
Among them are France and Germany, and Italy, which hopes to repair its economy using €191.5bn from EU funds – one of the largest shares.
As well as committing to using the money for investments, member states can only have their spending plans signed off if they agree to implement long-standing reforms, known as “country-specific recommendations”.
For Ireland that means reforming its tax laws, with the Commission recommending in May last year that tackling aggressive tax planning is key to improving the efficiency and fairness of the tax system across the economic bloc.
“The high level of royalty and dividend payments as a percentage of GDP (gross domestic product) suggests that Ireland’s tax rules are used by companies that engage in aggressive tax planning, and the effectiveness of the national measures will have to be assessed,” the European Commission wrote in its Council Recommendation report for Ireland in May last year.
“The high concentration of corporate taxes, with the top 10 firms accounting for 45 per cent of corporate taxes, their volatility and potentially transitory nature, along with their rising share in total tax proceeds, underlines the risks of relying excessively on these receipts for the financing of permanent current expenditure.”
The Commission also argued that broadening the tax base would make Ireland’s public accounts “more resilient to economic fluctuations and idiosyncratic shocks”.
Ireland’s minister for finance Paschal Donohoe defended Ireland’s taxation record in a speech last week, stating that Ireland's long-established corporate tax rate of 12.5 per cent was "fair" and "within the ambit of healthy tax competition”.
“It is a rate that can contribute to Exchequer revenue for investment in infrastructure and capacity, and one that can also stimulate investment, growth and innovation, which are core to Ireland’s industrial policy,” Mr Donohoe said.
The EU would like to see Ireland’s corporation tax rate move in line with other member states, with rates in France, Germany and Italy all above 25 per cent.
Elsewhere, UK Chancellor of the Exchequer Rishi Sunak increased the country's corporation tax to 25 per cent in his budget statement in March.
In its spring outlook for the UK and Ireland, global consultancy EY said the debate over the level of tax paid by businesses and individuals is “coming to the fore in many markets across the world”.
“Calls for a minimum corporate tax rate and a greater harmonisation of tax rates are growing,” EY said.
President Joe Biden's administration has signalled it is giving more support to an OECD-led crackdown on tax loopholes in the world economy called BEPS, targeting domestic tax base erosion and profit shifting.
The BEPS process, involving more than 135 countries and jurisdictions, focuses on allocating cross-border taxable profits to better reflect where customers and corporate value are located, and setting a minimum rate of tax.
This would level the tax playing field between virtual corporations like Google and Facebook and their bricks-and-mortar competitors.
However, such a move is not in Ireland’s favour, with the Department of Finance already expecting a hit to its annual revenue of up to €2bn by 2025 from BEPS as profits are reallocated elsewhere.
In his speech last week, Mr Donohoe agreed that there is international momentum to achieve international deals on minimum corporation tax rates and digital taxation, and said Ireland “has fully engaged in making massive strides on the broad tax transparency agenda”.
However, he argued that small countries need to be able to use tax policy “as a legitimate lever to compensate for advantages of scale, location, resources, industrial heritage and the real, material and persistent advantage enjoyed by larger countries”.
“At the same time, I fully accept that there need to be clear boundaries to ensure any competition is fair and sustainable,” Mr Donohoe said.
“Today, we have far more robust international tax rules and safeguards to prevent abuse, arbitrage, base erosion and profit shifting than existed a decade ago.”
While the initial deadline for Ireland to submit its national spending plans was April 30, the country has received an extension and is expected to submit its proposal in May.
However, the Department of Finance’s Stability Programme Update (SPU), which was submitted to the Commission on time, offered an increasingly rosy outlook for Ireland’s economy as it emerges from the pandemic, indicating that the government should not come under too much pressure to raise taxes or slash spending.
The Department expects the Irish economy to grow by 4.5 per cent this year and 5 per cent in 2022, driven by a rebound in consumer spending.
However, unemployment is expected to average over 16 per cent this year and more than 8 per cent in 2022, with the outlook also dependent on a gradual reopening of the economy as vaccines roll out.
Ireland has coped comparatively well during the pandemic in relation to its EU counterparts, recording more than 250,000 Covid-19 cases and more than 4,900 deaths.
During the crisis, the Irish government has spent more than €28bn on Covid support measures, nearly half of which has gone on direct income supports, such as the Pandemic Unemployment Payment and Wage Subsidy Schemes.
‘We are projecting an improvement in the public finances next year. There are, however, clear downside risks for the public finances. In particular, international corporate tax reform could weigh more heavily on this revenue stream than is currently assumed,” Mr Donohoe said at the time of the SPU last month.
“Having said that, public finances are in a much better position to absorb the expected shock to corporate tax revenue than, say, a decade and a half ago.