Corporation tax in the Republic of Ireland is a levy on a company's profits. Up until the abolition of the "double Irish" system in 2015 (phased out by 2020), the tax was levied on where the company was "managed and controlled" (as opposed to where it was legally registered). The corporation tax rate in Ireland is one of the lowest tax rates in Europe (at 12.5%, from the 1999 Finance Act), and is often cited as an example of tax competition, as it is used as an incentive for foreign companies to invest in the Irish State (at the expense of other EU States). This assertion is disputed by the Irish government, and even the EU Commission.
Since the mid 2000s, Irish corporate taxation has become associated with US multinationals using Ireland as a base to shield non-US profits from the US "worldwide tax system", and paying effective Irish corporate tax rates approaching 0%. These arrangements have names such as "double Irish", "single malt" and "capital allowances for intangible assets". These corporate tax schemes have so materially distorted Irish National economic statistics (the famous leprechaun economics affair from Apple), that the Central Bank of Ireland created a new metric in 2017, Irish GNI* (30% below Irish GDP), to measure "true" Irish economic activity.
The US Tax Cuts and Jobs Act of 2017 ("TCJA") moves the US to a modern "territorial tax system". It includes specific provisions (esp. the FDII and GILTI taxes) which may reduce the effectiveness of these Irish arrangements, and thus Ireland's attractiveness to US multinationals (in contrast, non-US multinationals rarely use Ireland as a substantive base, as their home countries have territorial tax systems, with lower rates on foreign income). In addition, the EU's drive to introduce an interm "digital tax" (and ultimately a Common Consolidated Corporate Tax Base ("CCCTB")) is also seen as a major threat to these Irish arrangements.
Ireland's transition to being a "zero corporate tax" economy was noted in a seminal analysis of offshore financial centres "Uncovering Offshore Financial Centers: Conduits and Sinks in the Global Corporate Ownership Network" Ireland was identified as one of 5 global Conduit OFCs (along with Netherlands, United Kingdom, Singapore and Switzerland) being countries of high financial reputation (i.e. not formally labelled "tax havens"), but who have "advanced" corporate legal and tax structures (i.e. "Irish section 110 spvs") that can legally route funds to the 24 tax havens (called Sink OFCs), without incurring corporation taxes in the Conduit OFC.
These Irish corporate tax strategies have narrowed the Irish corporate tax base in recent years to a small number of Irish and US multinational firms. The Irish Government in 2016 commissioned a major study of the sustainability Irish Corporate taxation by University College Cork economist Seamus Coffey which recommended scaling back some schemes (i.e. "capital allowance for intangible assets") to give effective Irish corporate tax rates of at least 2-3%.
Video Corporation tax in the Republic of Ireland
Tax rates
There are two rates of corporation tax in the Republic of Ireland:
- 12.5% for trading income
- 25% for non-trading income
A special rate of 10% for companies involved in manufacturing, the International Financial Services Centre (IFSC) or the Shannon Free Zone ended on 31 December 2003.
A special rate can be applied to certain companies by way of an Advance tax ruling although such ruling may be classified as an illegal State aid by the European Commission.
Maps Corporation tax in the Republic of Ireland
History
Over the past decade, Ireland's corporate taxation system has been a source of controversy with some of Ireland's fellow-member states in the European Union. The French government has over the past decade, most particularly during the premiership of Lionel Jospin, consistently condemned and criticised the Irish corporation tax system. This criticism is based on the belief that the low corporation tax rates enabled Ireland to compete unfairly in attracting international investment. However, despite the French critique of the Irish corporate tax system, the Irish example has won many followers, with many 'emerging' and Eastern European economies following the Irish example.
Post-independence under Cumann na nGaedheal
It was only with the acceptance of the Anglo-Irish Treaty by both the Dáil and British House of Commons in 1922 that the mechanisms of a truly independent state begin to emerge in the Irish Free State. In keeping with many other decisions of the newly independent state the Provisional Government and later the Free State government continued with the same practices and policies of the iriash administration with regard to corporate taxation.
This continuation meant that the British system of corporate profits taxation (CPT) in addition to income tax on the profits of firms was kept. The CPT was a relatively new innovation in the United Kingdom and had only been introduced in the years after World War I, and was widely believed at the time to have been a temporary measure. However, the system of firms being taxed firstly through income taxed and then through the CPT was to remain until the late seventies and the introduction of Corporation Tax, which combined the income and corporation profits tax in one.
During the years of William Cosgrave's governments, the principal aim with regard to fiscal policy was to reduce expenditure and follow that with similar reductions in taxation. This policy of tax reduction did not extend to the rate of the CPT, but companies did benefit from two particular measures of the Cosgrave government. Firstly, and probably the achievement of which the Cumann na nGaedheal administration was most proud, was the reduction by 50% in the rate of income tax from 6 shillings in the pound to 3 shillings. While this measure benefited all income earners, be they private individuals or incorporated companies, a number of adjustments in the Finance Acts, culminating in 1928, increased the allowance on which firms were not subject to taxation under the CPT. This allowance was increased from £500, the rate at the time of independence, to £10,000 in 1928. This measure was in part to compensate Irish firms for the continuation of the CPT after it has been abolished in the United Kingdom.
A measure which marked the last years of the Cumann na nGaedheal government, and one that was out of kilter with their general free trade policy, but which came primarily as a result of Fianna Fáil pressure over the 'protection' of Irish industry, was the introduction of a higher rate of CPT for foreign firms. This measure survived until 1948, when the Inter-Party government rescinded it, as many countries with which the government was attempting to come to double taxation treaties viewed it as discriminatory.
Fianna Fáil under Éamon de Valera
The near twenty years of Fianna Fáíl government between from 1931 to 1948, cannot be said to have been a time where much effort was expended on changing or analysing the taxation system of corporations. Indeed, only one policy sticks out during those year of Fianna Fáil rule; being the continued reduction in the level of the allowance on which firms were to be exempt from taxation under the CPT, from £10,000 when Cumman na nGaehael left office, to £5,000 in 1932 and finally to £2,500 in 1941. The impact of this can be seen in the increasing importance of CPT as a percentage of government revenue, rising from and less than 1% of tax revenue in the first decade of the Free State to 3.64% in the decade 1942-43 to 1951-52. This increase in revenue from the CPT was due to more firms being in the tax net, as well as the reduction in allowances. The increased tax net can be seen from the fact that between 1932-33 and 1938-39, the number of firms paying CPT increased by over 33%. One other aspect of the Fianna Fáil government which bears all the fingerprints of Seán Lemass, was the 1946 decision to allow mining companies to write off all capital expenditure against tax over five years.
Seán Lemass and after
The period between after the late 1950s and up to the mid-1970s can be viewed as a period of radical change in the evolution of the Irish Corporate Taxations system. The increasing realisation of the government that Ireland would be entering into an age of increasing free trade encouraged a number of reforms of the tax system. By the mid-1970s, a number of amendments, additions and changes had been made to the CPT, these included fifteen-year tax holidays for exporting firms, the decision by the government to allow full depreciation in 1971 and in 1973, and the Section 34 of the Finance Act, which allowed total tax relief in respect of royalties and other income from licenses patented in Ireland.
This period from c.1956 to c.1975, is probably the most influential on the evolution of the Irish corporate tax system and marked the development of an 'Irish' corporate tax system, rather than continuing with a version of the British model.
This period saw the creation of Corporation Tax, which combined the Capital Gains, Income and Corporation Profits Tax that firms previously had to pay. Future changes to the corporate tax system, such as the measures implemented by various governments over the last twenty years can be seen as a continuation of the policies of this period. The introduction in 1981 of the 10% tax on manufacturing was simply the easiest way to adjust to the demands of the EEC to abolish the export relief, which the EEC viewed as discriminatory. With the accession to the EEC, the advantages of this policy became increasingly obvious to both the Irish government and to foreign multi-nationals; by 1982 over 80% of companies who located in Ireland cited the taxation policy as the primary reason they did so.
Charles Haughey low tax economy
The Irish International Financial Services Centre ("IFSC") was created in Dubin in 1987 by Taoiseach Charles Haughey with an EU approved 10% special economic zone corporate tax rate for global financial firms within its 11-hectare site. The creation of the IFSC is often considered the birth of the Celtic Tiger and the driver of its first phase of growth in the 1990s.
In response to EU pressure to phase out the 10% IFSC rate by the end 2005, the overall Irish corporation tax was reduced to 12.5% on trading income, from 32%, effectively turning the entire Irish country into an IFSC. This gave the second boost to the Celtic Tiger from 2000 up until the Irish economic crisis in 2009.
In the 1998 Budget (in December 1997) Finance Minister, Charlie McCreevy introduced the legislation for a new regime of corporation tax that led to the introduction of the 12.5% rate of corporation tax for trading income from 1 January 2003. The legislation was contained in section 71 of the Finance Act 1999 and provided for a phased introduction of the 12.5% rate from 32% for the financial year 1998 to 12.5% commencing from 1 January 2003. A higher rate of corporation tax of 25% was introduced for passive income, income from a foreign trade and some development and mining activities. Manufacturing relief, effectively a 10% rate of corporation tax, was ended on 31 December 2002. For companies that were claiming this relief before 23 July 1998, it would still be available until 31 January 2010. The 10% rate for IFSC activities ended on 31 December 2005 and after this date, these companies moved to the 12.5% rate provided their trade qualified as an Irish trading activity.
The additional passing of the important Irish Taxes Consolidation Act, 1997 ("TCA") by Charlie McCreevy laid the foundation for the new vehicles and structures that would become used by IFSC law and accounting firms to help global multinationals use Ireland as a platform to avoid non-US taxes (and even the 12.5% Irish corporate tax rate). These vehicles would become famous as the Double Irish, Single Malt and the Capital Allowances for Intangible Assets tax arrangements. The Act also created the Irish Section 110 SPV, which would make the IFSC the largest securitisation location in the EU.
Post crisis zero tax economy
The Irish financial crises created unprecedented forces in the Irish Economy. Irish banks, traditionally the largest domestic corporate taxpayers, faced insolvency, while Irish public and private Debt to GDP metrics approached the highest levels in the OECD. The Irish Government needed large amounts of foreign capital to re-balance their overleveraged economy. Directly, and indirectly, they amended many Irish corporate tax structures from 2009-2015 to effectively make them zero-tax structures for foreign multinationals and foreign investors.
They materially expanded the "Capital Allowances for Intangible Assets" scheme in the 2009 Finance Act. This would encourage US multinationals to locate "intellectual property" assets in Ireland (as opposed to the Carribean, as per the "double Irish" scheme), which would albeit artificially, raise Irish economic statistics to improve Ireland's "headline" Debt to GDP metric. They also indirectly, allowed US distressed debt funds to use the Irish Section 110 SPV to enable them to avoid Irish taxes on the circa EUR100bn of domestic Irish assets they bought from NAMA (and other financial institutions) from 2012-2016.
While these schemes proved to be successful in producing an economic recovery, they had downsides. The distortion of Irish economic data from US multinational tax schemes led to large divergences between GNI and GDP. This reached a climax when Apple "onshored" their ASI subsidiary in January 2015 causing Irish GDP to rise 26.3% in one quarter (the "leprechaun economics" moment). This led to a revision of Irish economic statistics and the introduction of "modified GNI" (or GNI*) in 2017 (which was circa 30% below Irish GDP).
There was also a concern that while "headline" economic growth was strong, the recovery in Ireland's "true" solvency was slower. The Irish Government commissioned a major study of the sustainability Irish Corporate taxation by University College Cork economist Seamus Coffey which recommended scaling back of some corporate tax incentive schemes (i.e. reducing "capital allowances for intangible assets" to an 80% cap so that an effective Irish Corporation tax rate of 2-3% is paid).
Internationally, Ireland's "zero corporate tax" strategy began to attract concerns that Ireland was becoming a tax haven/offshore financial centre. A major study on the global offshore financial centre published in Nature in 2017 on the analysis of offshore financial centres "Uncovering Offshore Financial Centers: Conduits and Sinks in the Global Corporate Ownership Network" identified Ireland as one of 5 global Conduit OFCs (Ireland, Netherlands, United Kingdom, Ireland, Singapore and Switzerland) that use advanced legal structuring to route funds to the 24 Sink OFD tax havens.
Multinational tax schemes
All of the tax planning schemes multinationals use in Ireland require substantial amounts of intellectual property ("IP"), which is converted into "royalty payments" schemes in order to move the profits around. "Capital allowances" schemes additionally allow IP to be converted into intangible assets ("IA"), which can be written off against Irish tax.
This requirement for high levels of IP effectively limits the use of these Irish corporate tax avoidance schemes the four main industries that produce the most "IP" in the world, namely, technology, pharmaceutical, medical device and specific Industrials (who have valuable patents on specific machines).
In addition, non-US multinationals tend to have "territorial tax systems" in their "home" country which can apply lower separate tax rates on foreign sourced income (to incentivise these companies to stay "home"). Prior to the Tax Cuts and Jobs Act of 2017, the US was one of the last jurisdictions to operate a "worldwide tax system" which applied a single high rate of tax on all income.
This is why the main foreign multinationals in Ireland are (a) US multinationals and, (b) from these four industries.
Royalty payment schemes
"Double Irish arrangement" is a structure used by US corporations (Apple, Google, Microsoft and Oracle) to shield non-US income from all tax. As the conduit by which US corporations built up offshore reserves of almost $1trn the double Irish is the largest recorded corporate tax avoidance structure in economic history.
IFSC PwC Partner, Feargal O'Rourke (son of Minister Mary O'Rourke, cousin of Finance Minister Brian Lenihan Jnr) is regarded as its "grand architect".
From the mid-2000s, US multinationals have materially increased their use of the Irish "double Irish" tax avoidance scheme (see table for Apple's ASI).
In 2015, after EU and OECD pressure, the Irish Government shut-down the double Irish by preventing an Irish registered company to be tax resident elsewhere (i.e. IRL2). Existing double Irish structures could continue until 2020. Despite this, US corporate activity in Ireland increased post shut-down.
It since emerged that a new "single malt arrangement" replaced the double Irish in 2015 (IRL2 is instead re-located to Malta, with same effect). It is contended that the Irish Government's June 2017 decision to opt out of Article 12 of the OECD Multilateral Convention was to protect single malt.
Capital allowances schemes
The 2009 Irish Finance Act, materially expanded the range of intangible assets that could attract Irish capital allowances which are fully deductible against Irish taxable profits. These "specified intangible assets" cover more esoteric intangibles such as types of general rights, general know-how, general goodwill, and the right to use software. It includes types of "internally developed" intangible assets and intangible assets purchased from "conntected parties". The control is that they must be acceptable under GAAP (old Irish GAAP is accepted) and thus approved by an IFSC accounting firm.
Instead of the double Irish arrangement where IP assets are charged to Ireland from an offshore location (or Malta location for single malt), the Irish subsidiary can now buy the IP assets, using an inter-company loan, and then write-off the acquisition cost over a fixed period (5-15 years) against Irish pre-tax profits to give a 0% Irish corporate tax rate over the period. As the "product cycle" of the IP develops, new IP is created and then purchased by the Irish subsidary, keeping the scheme going in perpuity
When Apple, one of the largest users of Irish tax structuring arrangements in the world, was re-structuring its controversial Irish subsidiaries in January 2015 (from the EU Commission ruling, see above), it chose the Irish capital allowances arrangement rather than use a double Irish arrangement (which it could have legitimately done in January 2015).
Distortion of GNI/GNP/GDP
The "royalty schemes" distort both Irish GDP, and even Irish GDP.
By 2011, Ireland's ratio of GNI to GDP, had fallen to 80% (only Luxembourg was lower at 73%). The EU27 average is closer to 100% (see table).
An EU Commission report showed that from 2010 to 2015, over 23% of Ireland's GDP was represented by untaxed multinational net royalty payments.
Irish financial commentators note how difficult it is to draw comparisons with other economies. The classic example is the comparison of Ireland's indebtedness (Public and Private) when expressed "per capita" versus when expressed "as % of GDP". On a 2017 "per capita" basis, Ireland is one of the most leveraged OECD countries (both on a Public Sector and on a Private Sector Debt basis). On a 2017 "% of GDP" basis, however, Ireland is deleveraging rapidly.
However, "capital allowances" schemes have an even more profound effect on GNI/GNP/GDP, as the IP asset is brought into the Irish economy (i.e. front loaded).
Leprechaun economics
The distortion of Irish GNI/GNP/GDP came to a climax when Apple restructured its controversial ASI subsidiary (which EU Commission had judged as illegal State Aid) in January 2015, and brought it "onshore" to Ireland via a "capital allowances" scheme.
It led to 2015 Irish economic growth rates of 26.3% (GDP) and 18.7% (GNP) respectively.
This led to widespread Irish and International riducle, and was labelled by Noble Prize economist Paul Krugman as "leprechaun economics".
Finance Minister Michael Noonan was prepared to "pay" EUR380m in additional annual EU GDP levies (he had made Apple's 2015 new Irish "capital allowance" scheme free of Irish taxes in the 2015 Budget by lifting the cap to 100%), to generate "artificial" increases in the Irish GDP, GNP and GNI economic statistics.
Noonan's reasons have never been formally disclosed for doing this. His predessor, Finance Minister Paschal Donohoe immediately closed the 2015 Budget loophole to ensure that "capital allowances" schemes would at least pay effective Irish corporate tax rates of 2-3%. However, he only applied this to new schemes.
While financial markets had always been wary of Irish economic data, Noonan's actions severaly damaged their confidence.
Introduction of GNI*
In response to the collapse in condifence, the Governor of the Central Bank of Ireland convened a special steering group (Economic Statistics Review Group) to recommend new economic statistics that would better represent the true position of the Irish economy.
The result was the creation of a new metric, "modified Gross National Income" (or GNI* for short). The difference between GNI* and GNI due to having to deal with two problems (a) The retained earnings of re-domiciled firms in Ireland (where the earnings ultimately accrue to foreign investors), and (b) depreciation on foreign-owned capital assets located in Ireland, such as intellectual property (which inflate the size of Irish GDP, but again the benefits accrue to foreign investors).
Post "leprechaun economics", 2016 Irish GNI* (EUR190bn) is 30% below 2016 Irish GDP (EUR275bn) and Irish Debt/GNI* goes to 106% (Irish Debt/GDP was 73%).
Given that pre "leprechaun economics", Irish GNI (which is affected by the "capital allowances for intangibles" scheme), was more than 20% below Irish GDP, commentators expected post "leprechaun economics", Irish GNI* would be circa 40% below Irish GDP.
Even with GNI*, a material level of "distortion" remains in Irish National Accounts (i.e. gap between GNI* and "true" GNI) from US multinational corporate tax schemes.
Corporate tax inversions
Ireland is a centre of corporate tax inversions, a common strategy in which a United States-based company takes over a foreign company and shifts its entire headquarters overseas to a country, such as Ireland, with low corporate tax rates. Such corporate inversions were performed by medical device manufacturer Medtronic (which bought Covidien and reincorporated in Ireland) and Johnson Controls (which merged with Tyco International and moved to Cork, Ireland).
This strategy has helped Ireland bolster its GDP growth, but is politically controversial in the U.S. because it lowers U.S. tax revenue. In April 2016, the U.S. government announced new rules in a bid to reduce the economic incentives to perform corporate tax inversions. The changes in U.S. policy caused a planned merger between the U.S. pharmaceutical company Pfizer and the Irish pharmaceutical company Allergan to be dropped.
Apple tax ruling controversy of 2016
There is an ongoing dispute between the European Commission, the Government of Ireland and the Irish branch of Apple Sales International, a subsidiary of Apple Inc. The European Commission found out that because of two tax rulings granted by the Irish government, Apple only paid an effective corporate tax rate that declined from 1% in 2003 to 0.005% in 2014 on the profits of Apple Sales International. The European Commission declared those rulings illegal State aid and ordered the Government of Ireland to recover from Apple EUR13 billion, plus interest as unpaid taxes.
The Government of Ireland appealed against the decision and as of December 2016 the case is still open.
Yearly returns
2001 to present (Euro bn)
See also
- Taxation in the Republic of Ireland
- Economy of Ireland
- Double Irish, Single Malt, Capital Allowances for Intangible Assets
References
Other sources
- Stewart, JC, Corporate Finance and Fiscal Policy in Ireland, Aldershot, England, 1987
- O' Malley, Industry and Economic Development, Dublin 1989
- Proposals for Corporation Tax, Dublin, 1974
- Quigley, Dermot, The Impact of EU Membership on Taxation in The Fiscal Impact of EU Membership on *Ireland, Proceedings of the Tenth annual Conference of the Foundation for Fiscal Studies, Dublin 1997
- White Paper on Industrial Policy, Dublin, 1984
- Telesis, A review of Industrial Policy, Dublin, 1982
- Second Report of the Commission on Taxation - Direct Taxation and the role of Incentives, Dublin, 1984
- Company Taxation in Ireland, Dublin, 1972
- Programme for Economic Expansion, Dublin, 1958
- Revenue Commissioners
- Finance Accounts 1922-2002
- OECD Papers:
- Taxing Profits in a Global Economy - Domestic and International Issues, Paris, 1991
- Company Tax Systems in OECD Countries, Paris, 1973
- Harmful Taxation Competition, An Emerging Global Issues, Paris, 1998
- IDA Ireland - Tax
Source of article : Wikipedia
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