Corporate tax cut ‘would harm investment’

Any increase in Ireland’s corporate tax rate would significantly reduce the country’s ability to attract foreign direct investment, according to a new study.

Dr Iulia Siedschlag, an associate professor at the Economic and Social Research Institute, that conducted the study, found that a 1 per cent increase in Ireland’s corporate tax rate — from 12.5 per cent to 13.5 per cent — “would reduce its chance to be chosen as a location for new foreign direct investment [FDI] projects from non-EU countries by 4.6 per cent.”

She said: “On average, all else being equal, lower corporate tax rates increase the attractiveness of EU countries to FDI. However, over and above the effect of corporate tax rates, a number of other location characteristics are found to significantly increase countries’ chances of being chosen, including market size, access to the European single market, low production costs, high R&D capacity, and cultural and geographical proximity relative to investors.”

The criteria for investments changes depending on whether the investment will be made from within the EU or not, the report also found. Those from outside the EU are mainly seeking access to the European single market and are more likely to choose locations with low corporate tax rates, whereas intra-EU investments are more likely to be located in countries where the corporate tax is high but where they benefit from other local advantages such as low production costs.

Successive Irish governments have made the corporate tax rate a key part of the economic development strategy. In last October’s budget, Michael Noonan, the finance minister, said the 12.5 per cent would remain the cornerstone of the country’s fiscal regime.

The 12.5 per cent corporate tax rate has been criticised by other EU member states for fostering unfair competition. In negotiations leading up to the EU/IMF bailout in November 2010, Angela Merkel, the German chancellor and Nicolas Sarkozy, the then French president, demanded that the Irish government increase the corporate tax rate to 15 per cent in return for funding. The government refused to change the rate.

The corporate tax regime remains in the spotlight however, as the EU Commission is close to making a decision on whether Apple broke state aid rules by allegedly negotiating a tax deal with the government. Both Apple and the government deny all charges.

The ESRI paper found that if Britain left the EU in a referendum to be held next week, then Ireland would benefit from increased levels of FDI from companies outside the EU looking for access to the single market.

“Ireland and the UK are perceived to be similar as alternative locations for FDI in particular by investors from outside the EU and for FDI in the services sector. This result suggests that a possible redirection of FDI from the UK to Ireland in the case of Brexit would be more likely by investors from outside the EU and in the services sector,” Dr Siedschlag said.

If Britain remains in the EU and cuts the corporate tax rate it would reduce Ireland’s ability to attract FDI, she said.

“A reduction by one percentage point of the corporate tax rate in the UK — from 20 per cent to 19 per cent — is associated with a reduction of Ireland’s probability to be chosen as a location for new FDI projects from non-EU countries by 4.3 per cent,” she added.

“Taken together, these research results indicate that a competitive corporate tax rate is a significant factor in attracting FDI to Ireland especially from countries outside the EU. It concludes that in addition to maintaining a competitive corporate tax rate, Ireland’s attractiveness to FDI would benefit from policies aimed at maintaining cost competitiveness and enabling further R&D investment.”