Should the U.S. Follow the Irish Tax Model?

NEW YORK, Dec. 12, 2011 /PRNewswire/ -- As U.S. lawmakers debate the future of the country's corporate tax rate, Brian Purcell of WTP Advisors Ireland sheds some light on the benefits of Ireland's low rate (12.5 percent) and what lessons the U.S. can learn from such a system. The article appears in the Dec/Jan double issue of International Tax Review.

Purcell believes the Irish experience offers compelling evidence that moving to a lower corporate tax rate attracts more foreign investment, which in turn benefits a country's overall economy. In addition, a lower rate can actually create an efficient tax system. His reasons and evidence are outlined below:  

A lower corporate tax rate is attractive to foreign investment:

• An unconditional low tax rate is a headline attraction for multinationals considering Foreign Direct Investment (FDI).  In Ireland, previous low rate incentive regimes were contingent on the destination of sales (for export), or the nature of the trading activity, or the eligibility for employment grant aid.  A low corporation tax rate eliminates this red tape.
• The U.S. attracts 25 percent of all worldwide foreign direct investment (FDI). A lower corporate tax rate in the U.S. would enable businesses to maintain shareholder value while reducing the incentive to locate elsewhere. 
• A country with a favorable tax policy is more likely to be short-listed by corporations seeking to expand into foreign jurisdictions. 
• Capital investment, employment and research and development commitments flow to an environment where successful effort is rewarded by lighter taxation, without the need for additional incentives or direct funding. 

A lower corporate tax rate benefits a country's overall economy:

• Perhaps the most compelling evidence that Ireland's 12.5 percent corporation tax rate is helping the economy move in the right direction is that despite the worst global downturn in living memory, over 60 new Foreign Direct Investment (FDI) projects have been announced in Ireland since January 2010. 
• Germany -- a strident critic of tax competition -- has a corporate tax rate around 30 percent, but it collects only 1.1 percent of GDP in corporation tax. Ireland, by contrast, with its 12.5 percent tax rate, collects 2.9 percent of GDP.   
• The overseas corporations that have chosen Ireland as their European base now number approximately 1,000.  These are involved in a wide range of activities in various sectors, from pharmaceuticals to medical technologies, from finance and insurance to international services and from e-business to information communications technologies.  This diversity of activity has made the economy more robust in the downturn.
• The corporation tax yield in Ireland has held up during the downturn.  Despite some payment timing issues, corporation tax was the only tax yielding ahead of target in Ireland in 2010.
• Ireland has been hit hard by rising levels of unemployment.  However, various authorities claim that every one FDI job supports two more jobs in the locality, leaving no room for doubt about the important contribution of FDI to the preservation of indigenous employment. 

A lower corporate tax rate creates an extremely efficient tax system:

• A low rate of corporation tax has another virtue: it is almost impossible to avoid.  Low headline tax rates discourage the widespread use of planning techniques to avoid tax. 
• Firstly, a low corporation tax rate leads to reduced tax avoidance on the consumption side.  Tax planning often involves incurring expenses to obtain a tax deduction.  The deduction reduces taxable profits, and therefore, the amount of tax paid.  If the deduction to be secured is valued at only one eighth of the value of the expenditure, as is the case with Ireland's 12.5 percent corporation tax rate, very large amounts of money have to be involved to make the planning worthwhile. 
• Following the introduction of the 12.5 percent rate in Ireland, tax allowances and tax breaks shrunk.  When they shrink, so do tax expenditures.  For example, in Ireland, for every US$100 a corporation spends on an item of equipment, say a computer, it receives tax relief of US$1.56 per annum for 8 years, a total of just US$12.50. 
• Low corporation tax rates are an extremely efficient method of collecting taxes. The low rate/low expenditure approach offers a government increased certainty when it comes to estimating Exchequer receipts for a year.  While the rate may be low, corporations cannot avoid it, and any reliefs that still exist cost the bare minimum. 

"While businesses might not regard corporation tax as anything more than a cost, politicians and governments think otherwise.  However, a low corporation tax rate is not a giveaway.  Based on the example of Ireland, a lower corporation tax rate could prove more efficient and advantageous to the U.S. government," Purcell writes.

Brian Purcell is co-founder of WTP Advisors Ireland, the Irish affiliate of WTP Advisors, the New York-based tax and advisory firm.  Brian is also co-founder of Purcell McQuillan Tax Partners, the Dublin specialist tax consultancy firm.  Brian advises clients on inward investment into Ireland and lectures extensively on taxation for professional bodies and to business people.

WTP Advisors is a leader in tax and business advisory services for a global marketplace. Our highly skilled professionals equipped with years of industry experience, coupled with our cutting-edge technologies, make substantive and long-term differences to an organization's profitability. WTP Advisors is headquartered in White Plains, N.Y., with offices across North America, Asia and Europe.

SOURCE WTP Advisors