Angela Merkel's comments on our CT rate

censuspro

Something which seemed to go largely unnoticed on this forum was when Angela Merkel stated last week that our low CT rate was a key reason for the Irish banking crisis??? I think even the most staunch Europhiles would find it hard to find a connection between our CT rate and our banking crisis.

ro09

Angela Merkel also said she thinks band limits should be placed on corporation tax rates
accross the EU which is another way of affecting our own powers to decide our own corporation tax rates.

pwwillia

I think Merkel is under huge pressures at home so these comments are more for the german voters who are getting more and more frustrated with her. It just seems to me that a lot of the european decisions at the moment are very reactionary, as nobody seems to have a clue of how to get europe out of its debt problems.

later12

pwwillia wrote: »

I think Merkel is under huge pressures at home so these comments are more for the german voters who are getting more and more frustrated with her. It just seems to me that a lot of the european decisions at the moment are very reactionary, as nobody seems to have a clue of how to get europe out of its debt problems.

I don't think it is Germans themselves who are particularly interested in Ireland's woes and Germany's responsibilties. As far as I can see the German public, by and large, are disinterested as (I would deduce) their own economy is positively flying. As Walter Steinmeier, leader of the SDP (German Opposition) said in the FT last week, the next round of elections will not be decided by European issues.

The people that Markel is really concerned about are her coalition partners, the Free Democrats who are realistically described as mildly Eurosceptic, certainly moreso than the main Bundestag parties. They do not represent German voters generally, and we shouldn't see their concerns as being representative of the German voting public who overwhelmingly in favour of Europe - certainly those voters who remember the period prior to unification.

McDave

censuspro wrote: »

Something which seemed to go largely unnoticed on this forum was when Angela Merkel stated last week that our low CT rate was a key reason for the Irish banking crisis??? I think even the most staunch Europhiles would find it hard to find a connection between our CT rate and our banking crisis.

There's a clear link between our low CT rate and the practices of European banks in avoiding tax in other jurisdictions. Our CT rate (coupled with our, ahem, 'light touch' regulation) helped cause crises in other European banks which got themselves involved in unorthodox and unsustainable practices.

I wouldn't be so sure that our CT rate didn't have any effect on Irish banking practices. It probably had a more indirect impact inasmuch as our CT in the financial sphere contributed to the bubble that affected practices in many EU banks including Anglo, and at a later stage our so-called 'systemic' banks when they lost their sense of prudence.

professore

McDave wrote: »

There's a clear link between our low CT rate and the practices of European banks in avoiding tax in other jurisdictions. Our CT rate (coupled with our, ahem, 'light touch' regulation) helped cause crises in other European banks which got themselves involved in unorthodox and unsustainable practices.

I wouldn't be so sure that our CT rate didn't have any effect on Irish banking practices. It probably had a more indirect impact inasmuch as our CT in the financial sphere contributed to the bubble that affected practices in many EU banks including Anglo, and at a later stage our so-called 'systemic' banks when they lost their sense of prudence.

This is just wrong. It was the lack of regulation that caused the problem not the CT. The CT was something that helped the real economy to work when we had a real export led boom up to 2001, and is one of the only reasons we still have as much FDI as we do. Take it away and the economy will collapse completely.

later12

McDave wrote: »

There's a clear link between our low CT rate and the practices of European banks in avoiding tax in other jurisdictions. Our CT rate (coupled with our, ahem, 'light touch' regulation) helped cause crises in other European banks which got themselves involved in unorthodox and unsustainable practices.

There's a clear link between light tough regulation generally and the banking crises; but corporation tax?

Where's the clear link? You can have extremely low ct rates all around the continent or you can have large spreads in ct rates across the European union without ever causing a banking crisis to emerge.

Ireland's corporation tax was indeed attractive to international financial services providers (it still is) but to say that it caused a huge or detrimental groundswell of money and contributed to our crisis is pretty strange - the money would simply have been created elsewhere be that onshore or offshore; it doesn't make a huge difference. Money markets are extremely fluid by their very definition, drowning out the relevance of CT or where finds are sourced, held, and managed. The central issues are of regulation and private diligence in my opinion, CT doesn't even come into it.

McDave

professore wrote: »

This is just wrong. It was the lack of regulation that caused the problem not the CT. The CT was something that helped the real economy to work when we had a real export led boom up to 2001, and is one of the only reasons we still have as much FDI as we do. Take it away and the economy will collapse completely.

It's clear that a combination of our low CT rate and our light touch regulation were significant factors in distorting the behaviour of financial institutions in the EU. Our economic environment turned a blind eye to the behaviour of European and Irish banks.

It is simply facile to deny the role of low CT as applies to financial organisations in the breakdown of order in both our hosting of non-domestic service providers and among Irish banks. While our CT rate was clearly not intended to undermine the Irish banking system, its needless application to financial services in the IFSC helped spread the virus of avoidance and irregularity undermining responsible bahaviour across the board.

There's something truly narcissistic about the way we generally obsess about CT and how we somehow portray it as a right. I'm personally of the view that corporations should pay tax like other entities and individuals in society. Exceptionally low rates distort tax policies and beggar neighbours to a ridiculous extent. The case for a low CT rate in Ireland for manufacturing of goods is justified by our peripheral location. The same reasoning does not apply for services. We really need to start addressing the reality of our industrial policy and CT's position in it. When we systematically deprive member states of revenue due from their own domestic companies, we needlessly make powerful enemies for marginal actual gain. And we're certainly not developing sustainable service activities which will provide meaningful employment for the next generation of Irish graduates.

A crucial question in this regard is do we really want to carry on stiffing neighbours through facilitating financial tax avoidance, or do we want to keep our powder dry for services traded internationally outside the EU which will be untouched by CCCTB? I'm pretty sure key policy-makers understand precisely these kinds of issues. Public opinion is just a bit slower catching up on what is admittedly a technical enough issue. But it's one we as reasonably informed citizens should be paying close attention to.

McDave

later10 wrote: »

There's a clear link between light tough regulation generally and the banking crises; but corporation tax?

Where's the clear link? You can have extremely low ct rates all around the continent or you can have large spreads in ct rates across the European union without ever causing a banking crisis to emerge.

Ireland's corporation tax was indeed attractive to international financial services providers (it still is) but to say that it caused a huge or detrimental groundswell of money and contributed to our crisis is pretty strange - the money would simply have been created elsewhere be that onshore or offshore; it doesn't make a huge difference. Money markets are extremely fluid by their very definition, drowning out the relevance of CT or where finds are sourced, held, and managed. The central issues are of regulation and private diligence in my opinion, CT doesn't even come into it.

I'd personally tend to blame the light touch regulation more, or more importantly the political decision to use the IFSC to facilitate tax avoidance. Once we decided to go down that route, our low CT rate was part of the marketing armoury which distorted our position in the financial world, and also our own domestic environment. It's an indirect and unintended effect. But not an irrelevant one.

As I alluded to in my previous post, we need to distinguish between CT as it applies to various economic activities. Lower CT for manufacturing activities can be justified by our geographic peripherality. But, much as it has served us well, basically this is a declining part of our economy.

We attempted to diversify into financial wheezes by extending our policy to include financial services. And with catastrophic consequences, both for us and others.

Perhaps our most imaginative use of CT has been our diversification into IT services - Google, Facebook and so forth. As regional and even global headquarters we can position ourselves in activities that do not directly affect our EU partners. Let's not lose sight of this. Taxation sovereignty is worth protecting to ends such as these. But not to fight pointless losing battles for little tangible gain.

The upshot? Don't cede on CT. Concede on CCCTB. And continue to foster a policy which attracts international service providers. Which the IDA is doing anyway.

beeftotheheels

I'm sorry if the following analogy offends anyone but I had to think of something deserving of the level of emotion discussion of the CCCTB raises in Ireland. Say tomorrow the Commission suggested legalising the pill, the morning after pill (but in a manner that opened the door for chemical abortions) and Ireland stood up and said "We hate this because it is opening the door for euthanasia". It is a stupid and excessive response and self defeating into the bargin.

The CCCTB is aimed at reducing red tape and compliance costs for small and medium companies operating within the EU. This facilitates cross border trade (although of limited benefit to us as our nearest neighbour won't join) and as such is within the spirit of the EU. In this regard we're okay with the pill and morning after pill being legal, we all favour helping small businesses grow by minimising compliance costs.

Now on to euthanasia. Creating a pan european corporation tax flies in the face of the aims of the EU. It is not about facilitating trasde but could disrupt trade. It would be flagrantly illegal under current EU law and we would have the opportunity to veto the treaty changes required to allow it. So let's stop shouting about it.

The bit we should be shouting about is the "chemical abortion" i.e. the method for allocating profits to states. While we agree that we need a simple (and voluntary) system to allow SME's expand outside their home state without creating huge compliance costs, we have serious concerns about how that is done. The consumer based model favored by the commission flies in the face of international norms.

If you're a jam maker and you make and sell jam in Ireland, and you then make and sell jam in France a consumer based model is okay. It is very simple, and the cost divergences between production in Ireland and production in France would not be expected to be huge so simplicity gets favoured, divide the profit between the states based on how many pots are sold in each state.

However, if you're a software developer and you spent years developing your software in Ireland but then start selling to French customers it is clearly not right. All the hard work was done in Ireland, initial losses incurred in Ireland, and then France would get a free ride by getting to tax profits with limited associated costs. So, simplicity has to be weighed up against economic realities e.g. intangible assets. As we can all see now from BL's guarantee, we are stuck with the huge losses of the banks because we underwrote their risks. Profits and losses follow risk.

So let's engage on the CCCTB, lets work within the system to ensure that the profit allocation mechanism is not only simple but fair and reflecting of economic realities. This would be a positive step.

Increasing our tax rate would not only be wrong because it encroaches on our sovereignty (FF & co sold that to the EU/ IMF), but it would be wrong because (see UK budget) if the aim of a government is stimulate business growth and grow our way out of a recession, most economists agree that taking cash out of businesses in the form of taxation would be counter productive.

rumour

Good post and in real terms do we have any other option other than throwing a tantrum:rolleyes:

Solair

Well, if that's what she thinks, then I think we can safely conclude that all politicians are nothing more than opportunist spinners who will say anything to get a few awl votes and know about as much about economics as that guy who props up the bar in the pub.

As far as I can see the EU Governments are running around like headless chickens and haven't a clue what they're doing. The crisis is getting worse and worse and nothing's being done to stop it.

If this is the best that Merkel can come up with, then I'm afraid we're all doomed.

beeftotheheels

rumour wrote: »

... in real terms do we have any other option other than throwing a tantrum:rolleyes:

I think what we need is a charm and information offensive. Most Europeans are unaware that we have a 25% corporate income tax for passive income and gains and that the 12.5% rate is only applicable to "active" trading profits which result from real activities and real jobs. 25% is an average CT rate by European standards and higher than the UK rate will be in a couple of years.

Lets start telling people about our 25% rate which we apply to passive income and "brass plate" companies and make clear that the 12.5% rate cannot apply to such entities which are simply engaged in tax rate shopping. Unless you put substance here, create jobs here, and actually add value here, the rate is 25% and not 12.5%.

If a German company wants to set up a manufacturing facility in Ireland to avail of our 12.5% rate, and employ Irish people to make those widgets, then they are clearly entitled to do so in accordance with EC law. Angela Merkel cannot stop them doing so.

The Germans are all caught up with the notion of our FS industry (which may have been a bit of a disaster) so lets remind the Germans and French about our pharmaceuticals industries which employ very many people. Yes, Big Pharma (incl German and French pharma) are here because of our competitive tax rate, but if we didn't have the universities and Institutes of Technology churning out bucket loads of industrial chemists they couldn't be here regardless of our tax rate. With both IT and pharma our skilled workforce is as important as our tax rate. German taxpayers cannot object to our skilled workforce.

We need to refocus the debate by making clear we do not want, nor offer beneficial tax treatment, to brass plate companies. Furthermore, in terms of companies with substance our tax rate would be irrelevant without the support of a skilled workforce.

In relation to our FS industry (which we would struggle to defend), some of the worst culprits were the "conservative" German Landesbanki. If German banks chose to set up Irish SPVs to engage in reckless behavior that is a problem with the German management of those banks, we are only responsible for the reckless behavior of our own bankers and we have more than enough penance to deal with because of the likes of Seanie Fitz...

sargito

Meh, Merkel and Sarko are bleating for their national electorate. the real test will come at the ECOFIN meeting.

pragmatic1

German Finance Minister has said he is against a cut in our bailout interest rate without looking at our corporation tax rate. This is not on. The Germans are really taking the piss at this stage. If FG dont stand up to them maybe its time to give up on this country.

Scofflaw

pragmatic1 wrote: »

German Finance Minister has said he is against a cut in our bailout interest rate without looking at our corporation tax rate. This is not on. The Germans are really taking the piss at this stage. If FG dont stand up to them maybe its time to give up on this country.

That doesn't seem to be what he actually said, although I appreciate the Irish papers are reporting it as that. Here's what he said:

'If Ireland wishes to change the conditions, which was an issue discussed at the meeting of the heads of government on 11 March, then Ireland must, in a similar way to Greece, make suggestions as to what it can do for its part.

'If Ireland, for its part, doesn't want to make any changes, then there is no willingness on the side of the governments to make changes.'

He added: 'It is an important step that we in Europe, also on the basis of the proposals of the German chancellor, try to establish a common approach to calculating corporation tax. It's a step in the right direction.'

The reference is pretty clearly to CCCTB, not rate.

cordially,
Scofflaw

McDave

pragmatic1 wrote: »

German Finance Minister has said he is against a cut in our bailout interest rate without looking at our corporation tax rate. This is not on. The Germans are really taking the piss at this stage. If FG dont stand up to them maybe its time to give up on this country.

In the end, we'll have to render unto Caesar, what is Caesar's. IMO this ultimately means being prepared to consent to CT being apportioned according to EU country of sale (CCCTB). This will impact on us as a base for MNCs of manufactured products and services. But on the bright side it won't apply to sales (mainly of services) outside the EU.

We can (and probably should) retain our domestic CT rate. It probably won't yield the results we have witnessed up to now. But while it adds to our economy, we shouldn't be depending on it to the extent we do. And we shouldn't be prepared to go to any lengths to attract MNCs, especially where blatantly undermining the revenues of their countries of origin. Which, in the end, will only serve to raise the ire of those countries internationally as well.

beeftotheheels

McDave wrote: »

In the end, we'll have to render unto Caesar, what is Caesar's. IMO this ultimately means being prepared to consent to CT being apportioned according to EU country of sale (CCCTB). This will impact on us as a base for MNCs of manufactured products and services. But on the bright side it won't apply to sales (mainly of services) outside the EU.

I know I am being a pedant (and indeed in my own previous post on the CCCTB I intentionally simplified to the point of misleading) but the profits don't go to the country of sale.

The profits get divided into 6 equal pots (or 3 pots one of which is split again) which get split as follows.

Pots 1 & 2 get allocated based on where the assets are. The Major issue here is that the Commission cannot come up with a way to deal with intangibles and risk than is economically reasonable.

Pots 3 & 4 get allocated based on where the sales are

Pot 5 gets allocated based on number of employees in the various jurisdictions, and

Pot 6 gets allocated based on salaries in the various jurisdictions.

The issues are that

a) Intangibles and Risk generate profits, not location of sales, or location of employees. The fact that there is a pot that takes into account salaries is a nod to this as you'd expect the IP and Risks to be where the high paid employees are.

b) only half the pot of profits (pots 1, 2 and 6) take this into account, and depending on the business a commercial split might allocate 70% of the profits to these three pots, in some instances it might allocate 10% of the profits to these three pots.

We need to engage on this to see if we can help allocate the profits between pots in a sensible, yet still simple manner for SMEs.

There is NO CHANCE that an MNC would opt into the CCCTB if it increased their effective tax rate. There is NO CHANCE that this formula could be applied to MNCs. International norms and best practice are laid out in the OECD transfer pricing guidelines http://www.oecd.org/document/24/0,3746,en_2649_33753_1915490_1_1_1_1,00.html

As the MNCs can afford to comply with these, and have structured their businesses to comply/ benefit from these, there is no reason for departing from these rules. If you look at the OECD membership you will find that the backbone is made up by us Europeans. The French and Germans and Dutch and Brits were the ones who came up with, and agreed to, the OECD guidelines as best practice for MNCs. They are just way too complicated for a little widget maker thinking about dipping their toe in a market in a neighboring Member State hence the fudge formula above.

The Commission is really not trying to suggest a common base across the board, it is suggesting trying to cut down red tape for SMEs.

beeftotheheels

On an aside, lets think about a German MNC dealing with Poland (which has almost half the population of Germany). If every Poish person and every German person bought one German MNC manufactured widget the pure sales pot (pots 3&4) could allocates 1/3 of the sales profits to Poland. A disproportionately large amount of the profit under international norms when all the risk and IP is in German HQ.

Germany is probably okay with this when you are looking at an SME with profits of €200k. Do you think for one moment they would be happy with Poland getting to tax a huge chunk of the Deutsche Bank, or Volkswagon, or Siemans profit pie?

No chance, for MNCs we default to the existing norms which allocate profits based on the economic realities.

Germany, France etc who have big populations, each have less than 20% of the total EU population. The CCCTB ratio could allocate up to 80% of pots 3&4 to other states when dealing with French and German MNCs - not something either the MNCs or the countries who have big MNCs would want! Risk and IP tends to be in the HQ or regional HQ company, and our European colleagues are well aware of this and will be keeping an eye on their own MNC profits.

We have the regional HQ of a lot of US MNCs, France and Germany have the global HQs of their MNCs.