Minimum Effective Rate of Corporation Tax would increase the fairness and sustainability of tax regime

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In January of this year, Social Justice Ireland made our submission to the Department of Finance on the implications of the recently published Review of Ireland’s Corporation Tax Code. Our original submission at the beginning of the process is available here.

On the issue of taxation, Social Justice Ireland’s contributions are guided by a core policy objective for the entire taxation system:
To collect sufficient taxes to ensure full participation in society for all, through a fair tax system in which those who have more, pay more, while those who have less, pay less.

With this in mind, our submission advocated for the introduction of a Minimum Effective Rate of Corporation Tax. We believe this should be set provisionally at 6 per cent per annum.

The Context
We welcome the renewed focus on the international corporate tax system in recent years, albeit at the behest of the OECD and more recently the European Union and not – as it should have been – as a result of a pro-active approach by by government.

The context for Ireland’s corporation taxation system and policy has changed dramatically in the last couple of years. Among the many reasons for this is the way in which the 2015 national income figures for Ireland highlighted, in a very public international way, the fact that the Irish corporate tax system has been, and is being, exploited by a number of companies who are strategically managing their international activities and tax affairs via Ireland at a cost for many other countries. This was being reported upon as recently as yesterday.

Social Justice Ireland believes there is a short-term bubble in corporate tax revenue driven by the shifting structures of multinational companies (MNCs) and the way some are using Ireland to manage their tax and intellectual property affairs. This is not a sustainable source of revenue; it may last for a number of years, but it is a clear issue for the sustainability of both the tax system and the revenue from it.

A Minimum Effective Rate
As we have pointed out several times in the past, the amount of tax that many large MNCs are paying is unacceptably low. (The most recent Social Justice Ireland analysis of the Irish taxation system, including an examination of the policy areas where we believe reform should occur, is available here as Chapter 3 of our 2017 Socio-Economic Review ‘A New Social Contract for a New Century’.

In our pre-Budget submissions over recent years, and in our core analysis and policy document the annual Socio-Economic Review, we have called for the establishment of a minimum effective tax rate for corporations. This approach (though far from perfect in design) works well for high earners and there is no reason it should not work for corporations.

A Minimum Effective Rate of 6 per cent would only affect companies who are currently availing of effective rates lower than that on a regular basis; something that we consider quite unacceptable.

Ireland’s headline rate of 12.5% is already low by international standards and means that the extent to which the corporate sector contributes to government revenue is far lower than it might otherwise be. Aside from lowering Ireland’s (already extremely low) tax to national income ratio, this places an additional burden on other areas of revenue generation such as personal income tax and VAT.

While a report from the Department of Finance in 2014 suggested an average effective rate of corporation tax of 11.9% on ‘taxable income’, it is unsurprising that the measure is close to the headline rate as ‘taxable income’ excludes income removed or offset from taxation through various tax breaks.

In practical terms, the provision of tax breaks and exemptions implies that corporations enjoy a substantial reduction in their tax liability. Data from Eurostat estimate an implicit corporate tax rate on business income of between 6% and 8.6%, although we believe it is likely to be as low as 3% for many large corporations while Small and Medium Enterprises (SMEs) pay close to 12.5% for the most part. A recent report from the C&AG report (2017) highlighted similar outcomes.

According to Revenue, “the effective tax rate for companies is always lower than statutory rate due to the application of certain reliefs and credits… ‘Tax Due’ as a proportion of taxable income from Revenue’s Corporation Tax statistics data provides one of the best estimates of the effective rate of CT on the total profits that are subject to Irish tax"

However, this approach reduces the denominator (tax base) by deducting tax reliefs from company profits. Company profits should be the denominator, and we do not believe that the Revenue approach stands up to economic scrutiny. We take this opportunity to reiterate our call for a Minimum Effective Rate of Corporation tax of 6% on profit. Social Justice Ireland believes that the issue of corporate tax contributions is principally one of fairness. Profitable firms with substantial income should make a contribution to society rather than pursue various schemes and methods to avoid these contributions.

The consultation document published in October 2017 notes several instances in which Ireland is taking a leadership role in areas of global tax reform. It also notes that Ireland “remains committed” to the BEPS process and to playing our full part in its implementation. The introduction of a minimum effective corporate tax rate would serve as another opportunity for Ireland to take a leadership role in implementing progressive moves relating to the international corporation tax system.