Irish reject rate cut call
France and Germany pressurise EU over corporation tax
Published 11/05/2011 | 08:00
Demands for higher corporation tax in the Republic won't impact the future of Northern Ireland's company tax rate.
Most experts reckon the Republic will stand firm in defending its notoriously low 12.5% tax rate despite calls from France and Germany for a level playing field.
The two countries have been putting pressure on the European Union to demand an increase in the Republic's corporation tax rate in exchange for a decrease in the rate of interest Ireland pays for its bailout package of €85bn.
Ministers from both countries have expressed concern that the Republic unfairly attracts overseas investment and have refused to consider reducing the 5.8% interest it is currently paying on its rescue loan until Enda Kenny's government gives way on corporation tax.
But local experts don't think it will give ground.
Eamonn Donaghy, head of accounting firm KPMG's tax practice in Belfast, said that the countries are "playing to the gallery".
"Sarkozy and Merkel are playing to their home audiences," he said.
"They think that if Ireland raises its corporation tax rate they will benefit. But there is a fatal flaw in their plan, if Ireland raises its corporation tax rate, the jobs will not go to the EU, they will not go to Germany or France, they will go to Geneva and Costa Rica, everyone will lose out.
"It would do much more damage to France and Germany if Ireland were to increase the rate.
"Even when Ireland was on the floor on its knees asking for a bailout, this was one move they resisted so I don't see why they would bend now.
"The Republic have previously been very good at calling the French and German's bluff on this issue and everyone knows that the people who really make the decisions on tax are the people at the European Commission.
"Aside from the banking sector, Ireland is doing really well and that is almost solely because of foreign direct investment, which of course is driven by the low rate."
Mike Smyth, head of the School of Economics at the University of Ulster agreed.
"There is zero chance of it happening," he said.
"Low corporation tax is seen by everyone as being essential to the future of the Irish economy and why Northern Ireland politicians have not woken up to that, I do not know.
"It would be insanity if the Republic conceded on this.
"The only hope the Republic has of getting out of this debt spiral is economic growth and its real advantage is low corporation tax.
"Irish exports are booming, manufacturing is growing rapidly, but the minute any Irish government minister puts corporation tax onto the table for discussion, I fear there will be a huge flight of foreign capital out of Ireland - that would be the very thin end of the wedge."
However, tax commentator Richard Murphy, who runs the website Tax Research UK and has previously argued that a cut in Northern Ireland's tax rate would make it a tax haven, said France and Germany have the right idea.
"Germany and France are completely justified in their demands," he said.
"For years the Republic received EU subsidies and stole the tax revenues of other member states in return. It's completely fair that in exchange for EU aid the Republic stops its tax abuse.
"And that, of course, means there will be no reason for cutting tax rates in Northern Ireland.
"This is good news for the people of Northern Ireland as a result because cutting that tax rate would have been a disaster."