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What Will Happen To Ireland (And Various MNCs) When Ireland Is Finally Forced To Hike Tax Rates?
One of the sad conclusions about today's Irish bailout is that despite numerous lies to the contrary, the country's corporate tax rate, that staple which has allowed so many corporations to skirt the record US corporate tax rate, is about to be hiked. The bailout ink on Irish pre-foreclosure mortgage note was not even dry (and you bet Bank of America is not going to lose this one) and already the European Commissioner for Economic and Monetary Affairs Olli Rehn showed the now insolvent island who's boss: "When asked in an interview with RTÉ News if the corporate tax rate was
now off the table for good, Mr Rehn said that by Ireland's ceasing to be
a low tax country this did not imply specific measures, but 'it is
likely unfortunately to imply tax increases." Ironically, the biggest losers in this transition to a higher tax rate would be various multi national corporations, as was observed yesterday, while the biggest gainers would be other European states, which would be on a more competitive footing with Ireland when it comes to attracting foreign direct investment and new business domiciles. And since banks such as Bank of America and Citigroup would be among some of the legal tax evasion losers, it was only a matter of time before Citi provided the following reasoning for why Ireland would either not allow a corporate tax hike (we are confident this is inevitable), or why any benefits from such an action would be de minimis (this appears far more reasonable).
First, here a chart showing comparative tax rates among the OECD countries. It becomes obvious why the Irish tax rate is its primary trump card when it comes to attracting foreign business:
Next, Citi's Michael Saunders lays out his case why a corporate tax increase in Ireland would not be pursued.
Ireland’s corporation tax rate is currently 12.5%, the lowest among OECD countries. Despite (or perhaps because of) the lower corporate tax rate, corporation tax revenues in Ireland (3.4% of GDP in 2007, before the recession) are not low as a share of GDP, but similar to the OECD average (3.5% of GDP) and above Germany (2.2%). Of course this comparison is also affected by the scale of deductions and allowances. But, it appears that corporate tax revenues gained from the expansion of FDI and the ‘headquarters’ industry in Ireland roughly offsets the revenue lost from the lower rate, even before one counts the other extra tax revenues (income tax, VAT, etc) that flow from the high level of inward FDI. Of course, other high-tax EU countries doubtless are aggrieved at the erosion of their own tax revenues as companies shift to Ireland. But, we doubt that Ireland’s corporate tax revenues would rise much, if at all, if Ireland’s corporation tax rate were to rise significantly because of the risk that Ireland’s high level of inward FDI would suffer. The pressure from other EU countries for a higher corporate tax rate in Ireland seems to be an attempt to use the current crisis to stem leakage from their own tax systems rather than a genuine attempt to restore Ireland to fiscal sustainability.
Citi continues with a largely irrelevant empirical analysis of why a tax hike makes little sense from an overal economic standpoint:
Tax is not the only factor that affects FDI decisions. But it is an important factor. The World Bank “Doing Business” study ranks Ireland as the 9th most attractive business location in the world for companies (and the only euro area country in the top 12). Ireland is ranked as the 7th best country in terms of a business-friendly tax system. The next highest EU country is Denmark, at 13th. In turn, the stock of inward FDI equals 83% of Ireland’s annual GDP, the thirdhighest among EU-15 countries, exceeded only by Belgium and Luxemburg.
In our view, it is not at all clear that a higher corporate tax rate would help return Ireland to a sustainable fiscal path. This is not to deny that the tax burden probably has to rise, including perhaps the corporate tax burden. But, in our view, the emphasis should be on measures that do least long-run damage to Ireland’s growth prospects – because without a significant pick-up in growth amidst fiscal consolidation, the country’s medium-term fiscal prospects will worsen.
In other words, based on empirical evidence and a rational analysis, a tax hike will not lead to an improvement in Ireland.
Well, of course. To claim that what is happening in Ireland is in any way following the "book" is beyond naive. Which is why we completely disagree with Citi's (conflicted) opinion: after all MNCs such as Citi would be the first who will have to come up with novel ways to avoid paying Uncle Scam a tax that is closer to what the US peasants pay. Citi of course is correct that in the long-run all the policies now pushed upon Ireland by its new continental master will be destructive, but what is new? Once again, we believe the biggest impact will be felt by corporations such as Google, which are now faced with two choices: i) repatriate cash back to the US and take an immediate ~30% hit or ii) spend material capex (for non-US expansion) to relocate elsewhere. Either of these options will have a negative outcome to corporate cash flows and EPS in the short term, and in the case of i), to the balance sheet as well (in the case of Google potentially costing the firm up to $100/share in embedded benefits as discussed elsewhere). We are just surprised that so far the market has been rather oblivious to the possibility that Ireland will have to ultimately cave the interests of its new banking overlords.
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They won't do it now.
Funny thing is there would be a revolution.
It's now part of the folklore.
They will wait in the long grass and then pounce.
Tyler, there's a big methodological error in this article.
What attracted big corporations to Ireland wasnt the 15% corporate tax rate - no big corporation pays so high taxes! What attracted the likes of Microsoft, Apple and Google to have an accounting presence in Ireland was the 'double Irish' accounting loophole that allows them to effectively have a corporate tax rate of zero percent. (Many big US oil companies pay near zero percent corporate taxes as well, in similar accounting schemes.)
Here's a summary of the 'Double Irish' scheme:
https://secure.wikimedia.org/wikipedia/en/wiki/Double_Irish_Arrangement
Yes, if you as an individual did this you'd be rightfully labeled a tax evader. Ireland allows corporations to do it.
You are showing and talking about the hypothetical maximum corporate tax rate in this article, but that rate is totally meaningless - and that's why the 'tax rate / tax revenue' scatterplot is so around the place as well. It's random data in essence.
What matters is the bottom line, the effective corporate tax rate, which is a combination of tax deductions, the definition of what constitutes taxable income in that country and industry specific tax rules and tax loopholes. For example in the US corporations end up paying something around 2% tax rate ... much less than individuals do.
Nobody but small business cares about the theoretical 'corporate tax rate' - and small foreign businesses do not migrate to and do not get attracted to Ireland for tax purposes, only big corporations do.
So you are comparing apples to jellyfish here really.
Of course OECD does not offer statistics on corporate tax loopholes but you can estimate it broadly, based on the pure revenue numbers. (Although even the revenue numbers are skewed, as income in the EU by these big companies does not count into the Irish GDP AFAIK - it counts in the US GDP in the end - while they are routing the revenue flow through Ireland to avoid US corporate taxes.)
It does not help that in the US public companies are not obligated to report how much corporate taxes they pay. (It would be way too embarrasing to see that some of the most profitable US companies pay near zero percent corporate taxes.)
All in one, Ireland is indeed a tax haven for corporations - but not for the reasons you think it is, and as a result I think you have come up with a somewhat confused conclusion as well.
Great work and thanks!
I wonder if the governments and corporations do not take it easier, they will both get killed. Oh well.
Buy silver.
Ah, lemme guess.
There will be a direct positive, statistically significant cause and effect relationship between taxes (independent variable) and migration/expatriation (dependent variable) as business slows, jobs become more scarce, deflationary pressures mount and austerity becomes the watchword in both the public and private sectors; not to mention that there are a large number of "patriots" in the Emerald Isle who believe they and their predecessors have fought valiantly over numerous generations for their country's freedom, probably bear a somewhat significant rekindling resentment towards the new conquerers (aka bankers) whilst retaing access to probably more than ample supplies of firearms, ammunition and explosives.
Jus' got this really bad feeling about it.
naw, it'll be all peace happiness and love..that with the unicorns, hand holding, chris dodd has some spare leprechauns..FTW
Meet the new boss, same as the old boss - it's just more out of the closet now than it has been. Ireland was made a bitch and there is nothing the populace will do to change it. They got the Mel Brooks History of the World Biggus Dickus and it's a CondomNaton now. Spain, you're next up.
I cancelled a trip to Portugal for 11/29. My Uncle still going. The situation is bad. All bridges have some sort of Graffiti regarding the collapse or communism as the answer. We are on the water. Somewhat safe. Cities will burn first. Blow up the E80 bridge. Pretty safe.
http://www.bing.com/maps/default.aspx?q=aveiro&mkt=en-US&FORM=BYFD#JnE9LmJhcnJhK3BvcnR1Z2FsJTdlc3N0LjAlN2VwZy4xJmJiPTQwLjY3ODc4MDczNDAwODIlN2UtOC42NjY0Mjc4ODA1MjQ4MyU3ZTQwLjU4NDU5MTM4NzE0MDklN2UtOC44MjUzODYzMTU1ODM0Mg==
I'd certainly rather see companies like google get stuck paying fair share of taxes than the people footing the bill for the banksters.
Funny how all the cash on the sidelines that analysts and stock whores talk about is tied up in tax havens and can't be used for them US jobs they keep promising us.
Where do you think Google gets the money to pay taxes, Einstein?
Tax rate don't mean diddly.
One must define it by dollars paid vs revenue in order to be clear.
I read that Google pays about 12%, and GE pays zip.
Statutory, Average, Marginal and Effective Tax RatesWhat do you, oh wise one, define as a "fair share" of taxes? My definition is "what is required by law" ... and that includes taking advantage of every single legal deduction and loophole that a good accountant can find!
They're not spending the present collections from their protection racket so wisely that I should volunteer to send them more than that! My employees, wife and children would like me to keep some, too, to spend on them.
Google is not running a freaking charity!!
Fucking socialists! Always making new rules and always with their hands in someone else's pockets.
And since banks such as Bank of America and Citigroup would be among some of the legal tax evasion losers
The definition of irony. Bankers screwing bankers.
Could we put them all on a plane and crash it in the Andes?
Hang Seng, Italy and Spain markets getting Hammered !!
http://www.sgxniftydowfutureslive.com/index_files/DOWFUTURES.htm
http://www.youtube.com/watch?v=VRWed_9U3w4
What will happen to Ireland when they raise taxes to pay for the bailouts?
Their standard of living will decrease. Just like Iceland and Greece. Just like the UK, Portugal, Spain and the USA, and the rest of the West which are all regressing.
Ireland went first.
.
Wait until the Bush tax rate reductions are not renewed. Can we say S&P 6 handle boys and girls?
Thus will begin the protectionist policies; the circle shrinking ever smaller until it is ally against ally, at least until the World War breaks out.
Increased corporate tax rates to chase manufacturing and employment out of the developed economies where people have homes and mortgages.
How else to restore the banks? Why, debase the middle class by forcing them to expend all assets to compensate for the excesses of government and banks and markets. Yes...some leveraged homeowners out there, but the majority responsible and doing their best.
What to do with no job and losing your home? Plenty of time to riot; which leads to politicians listening (really listening) for the first time in...55-75 years? (maybe more).
Politicians (and by extension Lawyers and Judges) don't REALLY listen until their necks are at risk of the noose, the real noose. Then...they vote protectionist; tariffs, taxes on imports and foreign corporations, and defending the nation.
Big, long, cycle. We haven't seen this point for a LONG time (e.g. - Civil War).
Poland would most likely be the beneficiary of Ireland's demise, in the last 3 years majority of new foreign corps have been opening new offices in Warsaw anyhow, if this tax thing gets forced on Ireland, Dublin is history for sure.
I dont think anyone will be complaining, when comparing all kinds of talent on the ground in both places Warsaw is light years ahead :D
"Oh, thank God...the police." Fletch.
"Say good night, Gracie."...."Good night, Gracie."
Wouldn't it be a lot easier to just default Ireland? My cousins, why did you let your d-bag PM sell you out. The downward spiral is here and no tax increase is going to fix that when you GDP vanishes quicker that coke with Lindsay Lohan.
You sound surprised! Yet, under the "democracy scam", once you vote the bastards in, they can do whatever the fcuk they like. They can break election promises, they can do things they didn't even promise, or even hint at. It's part of the scam. Witness Bush and the Patriot Act, or going to war against the wishes of the majority of the population ... or Obama and "First thing I'll do is close down Guantanamo and bring all the troops home from Iraq and Afghanistan". Public 90% against TARP? Never mind, they'll do it anyway.
If you do object, they can taser you at an "illegal" assembly, jail you as a dangerous dissident -- or even execute you as a treasonous terrorist! That's the way it works.
Enjoy your democratic "representative government" and "freedom of speech" ... but Don't Touch My Junk! :)
Fuck multinational corporations. If they want a favorable business environment, they should have to pay for it. If they want something for nothing, they should kiss the world's collective ass. For fuck's sake.
You're not seeing all of the picture.
Ireland having a 12.5% corporate tax rate makes it harder for other western countries with rates 2-3 times as high to raise their tax rates. These other countries want to be rid of the competition so that they can screw over every single business within their borders a little worse than they already do. Leviathan wants to eat more.
"Leviathan" indeed...and "i think the commentaries here show "the folks" have gotten the message all too loud and all too clear."
Oh please, businesses are getting screwed by governments all over the OECD? When the share of Net Profits and dividends accrued or paid to business owners and shareholders has not stopped increasing during the last 30 years, from 25% of GDP to 35% of GDP while conversely the share paid to salaries and wages of workers who actually make those businesses turn has not stopped decreasing. When Net profits have increased all over the OECD at a rate much higher than the economies themselves while salaries and wages of the "little people" have actually stagnated? When 63% (Yes, sixty three percent) of all business equity is owned by the top 1% wealthiest families?
So governments are screwing businesses and their mega wealthy shareholders? You must be joking. Governments work for them.
PS/ I'm a small business owner. I can't afford to have the kind of financial montage in the Netherlands Antilles / Ireland / Bermuda a big business like Google does. The net result is that I end up paying more than 30% taxes on the profits my business makes while Google only pays 2%.
So please, don't tell me big businesses like Google are getting screwed or that these kinds of irish tax loopholes are a benefit to the little people like me. Please don't.
There might not be big tax increases in Ireland.
The Irish are well aware it would screw their economy. They need the jobs the MNCs provide. They are also in uproar about ceding sovereignty to the EU having so recently won independence from Britain.
There is a high risk that the Irish government might not exist for long enough to complete the bail-out negotiations. A junior coalition partner has already called for a general election and most of the independent who supoprted the government have also pulled out.
They will try to complete the negotiations before a January election so as to tie the hands of the next government. But its going to be a race between the disintegrating government and their growing opposition.
Gotta love this cartoon
http://www.telegraph.co.uk/comment/cartoon/
Maybe Ireland can legalize counterfeiting.
I'm not a vindictive person by nature, but I have had enough of the fraud, schemes, injustice and economic/property crimes perpetuated by central banks and minion investment/global bankers.
Here's a toast to the Irish: May they dig deep, return to their roots as a no-nonsense people, and extract many pounds of flesh, by any means necessary, from the banksters and fraudsters who sold their nation, their pride and their childrens' futures out.
There is a very serious possibility we have a BANK RUN December 7th. Please watch and share this video with the people you care about (http://youtu.be/U0KGv3Xw0KY).
Anonymous-
This is really scary guys, people are already talking about it and it has spread from France to the UK and now coming to the United States.
Those who hide assets in offshore bank accounts know full well what they're dong. Respect for the law clearly has failed to work. It's time to try fear. And create fear by stringing up enough violators from the lamp poles that the rest get the message. Let's pay IRS agents bonuses for catching these criminals.
http://www.financemetrics.com/list-of-tax-haven-countries/