This may sound like a relatively gentle readjustment, given the slow pace and complex nature of OECD-led tax talks between 135 countries. But the emergence of two ideas — a fairer allocation of corporate profits to where customers and sales are actually located, and a minimum global corporate tax rate — has rattled the Irish. As a domestic consumer market Ireland is tiny, meaning it would probably get less profit to tax. And with a corporate tax rate that’s lower than that of the G20 and most European Union members, a shift to a minimum global levy would reduce Ireland’s attractiveness to multinational companies.
You’d hope that this might lead to some national soul-searching. Prime Minister Leo Varadkar’s Fine Gael and its historic rival Fianna Fail have spent the past few years ensuring Ireland’s wagon is hitched firmly to a low-tax model — one that, according to one research paper, sucked an estimated $100 billion in corporate profits away from other countries in 2015 alone. Sure, the taxes are lucrative, bringing in 10.9 billion euros last year, and are redistributed fairly. But at what cost?
The Irish economy is increasingly distorted by its dependence on foreign firms, which account for 80% of corporate taxes and some 10.5% of local jobs(2) , and which offer workers generous accommodation packages even as house prices soar. Domestic companies, meanwhile, are seeing their productivity fall. Ireland’s decision to stand with Apple after the European Commission demanded the company pay $14.5 billion in illegally-avoided taxes shows the power and influence of U.S. tech in particular.
Saturday’s election won’t be fought on corporate tax, however. Neither Fianna Fail nor Fine Gael — known as Tweedledum and Tweedledee — see any reason to change Ireland’s economic model, nor its 12.5% rate. Donohoe says careful planning and running a budget surplus is preparation enough. Smaller parties Sinn Fein and the Greens, which have enjoyed a bounce in the polls, are calling for more taxes on property and the rich but would keep the 12.5% levy. Labour, while saying it wants the 12.5% rate to be an “effective” rate (not just a headline one), says it’s open to lowering that rate depending on where companies invest.
The importance of foreign direct investment to Ireland’s economy explains why far-reaching tax reform hasn’t quite reached the Irish Overton window, even as voters get more exercised about inequality. Ireland’s recent history is dominated by booms and busts: Squeezing a source of national wealth and jobs might seem self-harming. Even the do-gooder (and famously tax-efficient) rock star Bono once said: “Tax competitiveness has brought our country the only prosperity we’ve known.”
But there’s something of the boiled frog about Ireland’s stance, where the heat is being turned up so slowly it will only realize what’s happening too late. A structural shift on global tax rules could be accompanied by a worse-than-expected Brexit outcome. The EU has stood by Ireland during the British negotiations, but that may change once they are over: Other member states aren’t thrilled by Dublin’s tax regime.
U.S. President Donald Trump might intensify his trade war on the EU, or pressure American companies to bring jobs and cash back home. The tech firms that populate Dublin might face more EU tax and antitrust rulings. The Irish economy is so dependent on U.S. companies that Goodbody Stockbrokers’ economist Dermot O’Leary calls it “the 51st State.”
What can be done? Dropping the appeal against the Apple fine and bringing those billions into the state’s coffers would be a start — all parties, not just Sinn Fein, should be advocating this. Taking a proactive part in OECD-led efforts to revamp tax rules would also help. And spending more on skills, education and housing might make Ireland more attractive to investors at home and abroad, regardless of where tax rates go. Clearly, Ireland will always depend heavily on the wider world. Yet that world is finally waking up on fair taxation.
(1) This relates specifically to “FDI-assisted jobs,”involvingcompanies that work through Ireland’s FDI agency.
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Lionel Laurent is a Bloomberg Opinion columnist covering Brussels. He previously worked at Reuters and Forbes.
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