Irish Corporation Tax: How It really works

Sean Kelly

We all know about Irelands’ low corporation tax. It is one of the biggest, if not the biggest factor that attracts foreign direct investment into Ireland. Being an English speaking, highly-educated island on the American side of Europe is already enough to be considered the ideal place to locate a European HQ for many multinational companies. It would seem that our low tax rate of 12.5% on the profits of a company is the icing on the cake for all the sweet toothed global firms. Let’s look at just how many of the worlds’ top companies actually are located in Ireland.

This list of companies includes old favourites such as Apple and Microsoft but also some of the more recent companies like Google and Facebook. For a country with a population of roughly 5 million people this is highly impressive and just goes to show how attractive our rate of corporation tax really is. To put our low corporation tax rate into perspective we can compare it to the rates of other countries within the EU. Ireland has the joint 3rd lowest rate in the EU with Cyprus, following only Hungary and Bulgaria (countries which are all on the far side of Europe and are less likely to attract American companies).
As I’m sure many of you are aware, we can’t simply put multinationals and Irelands’ corporation tax in the same sentence anymore without thoughts coming to mind of the Apple tax case that was ruled upon in 2016. This is the most prominent case that demonstrates that multinationals in Ireland do not necessarily pay the rate that is advertised for all companies (the statutory rate).
In 2016 it was ruled by the EU Commission that Ireland had given the multinational tech giant illegal state aid amounting to a staggering amount of €13 billion in the previous decade. In 2003 Apple paid an effective tax rate of 1% on its’ European profits recorded by its Irish subsidiaries and this had fallen to a rate of 0.005% in 2014. In the second half of last year €14.3 billion (including EU interest) was collected by Ireland from Apple and is now being held in escrow (a financial agreement where a third party holds funds for two parties involved in a transaction) until the Department of Finances’ appeal of the decision is complete.
This effective tax rate paid by Apple is not unusual for multinationals in Ireland however. It was found through a report by PwC that in 2015 in Ireland, 13 of the top 100 companies with the highest taxable income had an effective rate of less than 1% in 2015. Among this cohort, eight had an effective tax rate of 0% on qualifying income. It is important to note that this official report also recorded an estimated effective rate of 12.4%, which is obviously just below our statutory rate of 12.5%, showing little variation between what is advertised and what is paid overall in the country from all firms.
So how and why is it possible for the largest multinationals to pay such low amounts you may ask? As to the how, well this reflects the use of significant tax credits and reliefs, such as double taxation (when tax is levied by two or more jurisdictions on the same income/asset or financial transaction) relief and also research and development tax credits. Companies have been and are still using in particular tax avoidance arrangements provided by the Irish government such as “Double Irish” and “Single Malt” (10/10 for creativity on the names) which basically involve exploiting double taxation agreements Ireland has with other countries. Ireland has received much criticism on how it taxes (or lack thereof) multinationals in this way.
In the case of Apple, they were attributing billions of dollars of profits each year to three Irish subsidiaries that declared “tax residency” nowhere in the world, something which other firms hadn’t been doing. This was one step too far for the EU commission and so they made the subsequent ruling of the €13 billion payment to Ireland.
And why does Ireland allow this to happen? Simple. Having these multinationals located here is nothing but beneficial for Ireland. Our economy benefits, jobs are created and revenue is generated from the tax that is collected. Not to mention that it makes the country look great as well. If the government heavily enforced the 12.5% corporation tax rate on multinationals then they wouldn’t locate here and that to the Irish government would be more costly than taxing them the statutory rate.
So I suppose you could say the government are between a rock and a hard place, just involving billions of euros.

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