Belfast Telegraph

Corporation tax rise 'won't hurt Republic'

By Emmet Oliver

The Republic of Ireland could raise its 12.5% corporation tax rate by a "moderate" amount and not hurt multinational investment, the largest bank in the US has claimed.

If the Republic raised the rate by a small amount it could also lead to a reduction in interest on the country's €85bn bailout package, Bank of America's Merrill Lynch claimed in a note.

The bank, the result of a merger at the height of the financial crisis, said simply saying multinational investment would flee from the Republic because of any change was "premature".

"In the very short run, a moderate increase in the corporate tax rate can have the advantage of increasing tax revenue,'' its analysts said.

"In 2010, revenue from corporate taxation was €4.2bn (2.6% of GDP). An increase in the corporate tax rate from 12.5% to 20% (still below the average of the Eurozone top statutory rate equal to 26%) would allow the Irish government to raise an additional €2.5bn in revenue,'' it explained.

The bank admitted its analysis showed more negative results when assessed over a longer period. But it maintained that there were a host of reasons for multinationals to locate in overseas locations, not just tax.

"Firms care about the entire tax burden, not only the corporate tax rate.

"Ireland's implicit tax rates on corporate and labour income (the tax rate that firms end up paying after accounting for tax credits and deductions) are among the lowest in Europe and firms pay very low social security contributions,'' it pointed out.

"A modest increase in the corporate tax rate would not erode Ireland's favourable tax environment. Second, a friendly business environment and a well-functioning judicial system count too - the cost of doing business is among the lowest in the entire world."

Merill Lynch's analysis also said the Republic's labour market was "far more competitive" than many of its neighbours, with wages falling "substantially" from 2008 to 2010.

"Also, the level of human capital and skills offered by the labour force in a particular country are not always easy to find in another,'' the bank added.

Falling property prices were another boon, as firms would find it "relatively cheap" to move to a new facility in the Republic.

The Republic's low rate has been cited as a factor in the one-time Celtic Tiger economy and has also been cited in the long-running argument in favour of lowering Northern Ireland's corporation tax rate.

Former Taoiseach John Bruton said in recent days that there would be "no change whatsoever" in the country's corporate tax rate. The battle on the Republic's tax rate was now "won" and "over", he said.

He added that the Republic's low corporate tax rate was older than French President Nicolas Sarkozy himself and was an issue that the state had pursued to attract Foreign Direct Investment since 1956 - long before it joined the European Union.

"I am absolutely sure we will get through this with not only our corporation tax rate untouched but also our system of corporation tax unchanged," he said.