Corporation Tax: If Colm Keena is correct, what's the big deal?

Dionysus

Last month I posted here about Colm Keena's Irish Times article which states that many EU countries, including France, have lower effective corporation tax rates than Ireland. Keena did not define the effective rate, or how it was calculated, but presumably it means the real rate.

Anyway, my question still stands: If Keena is correct, then why on earth would the French and other countries be pushing this demand for Ireland to increase its corporation tax rate? Why has nobody stated that France has an even lower effective corporate tax rate than Ireland?

PS: I see over on the BBC website this evening that the North looks like it's getting a lower corporation tax rate than Britain.

snubbleste

The problem is that German/French/EU companies are making profits in their home countries and paying tax on them in Ireland through a subsidiary company.

Dionysus

snubbleste wrote: »

The problem is that German/French/EU companies are making profits in their home countries and paying tax on them in Ireland through a subsidiary company.

Why would French companies do that if, according to Keena, the effective rate of corporation tax is lower in France?

If that were the case, it might be an argument for tightening the criteria, rather than abolishing the rate, of corporate tax - e.g. link the tax rate to the number of employees the firm has in Ireland.

Nody

Dionysus wrote: »

Why would French companies do that if, according to Keena, the effective rate of corporation tax is lower in France?

I'd guess due to the local rules for taxation (i.e. they can do what Google does with license fees, internal loans or similar to minimize tax in Ireland on their whole profit and move it to Bahamas or similar which they could not do in France).

GSF

Keena never explains the difference between nominal and effective tax rates. I'd guess that in France & Germany you can defer profits for tax purposes but presumably at some point if you want to pay dividends back to your HQ you need to realise the profits and it then becomes taxable. Not much point in generating profits and cash if they cant be remitted by to HQ to pay dividends to shareholders or to pay down corporate debt.

Scofflaw

GSF wrote: »

Keena never explains the difference between nominal and effective tax rates. I'd guess that in France & Germany you can defer profits for tax purposes but presumably at some point if you want to pay dividends back to your HQ you need to realise the profits and it then becomes taxable. Not much point in generating profits and cash if they cant be remitted by to HQ to pay dividends to shareholders or to pay down corporate debt.

Again, though, that's not a problem if effective rates were actually lower in France or Germany.

Keena is citing, I think, a PwC study called "Paying Taxes 2011", which uses something called "Total Tax Rate" - roughly, total tax burdens, which aren't quite the same as ETR (Effective Tax Rate). Under their measures, Ireland has a Profit Tax TTR of 11.9%, France 8.2%, Germany 22.9%, Luxembourg 4.1%, Switzerland 8.9%, the UK 23.2% and so on.

Caveats for that study:

Paying Taxes uses a domestic mediumsize case study company to measure the impact on business of tax systems around the world. The purpose is to provide quantitative data to stimulate and inform discussion on tax policy and tax administration and to inspire tax reform. The Paying Taxes results enable governments to benchmark their tax system with others on a like-for-like basis and to identify best practices.

The use of a case study company with a standard fact pattern brings some limitations. The size of the company may be considered larger in some economies, and modest in others. This could affect how it is taxed in economies with special regimes for small and medium-sized enterprises. The location of the company is in the most populous city which tends to be expensive from a tax perspective. The type of business may have an impact as additional taxes or incentives are often available for specified activities. Also, the fact that Paying Taxes addresses only certain aspects of tax administration and not others (e.g. the approach of the tax authority) could be considered limiting.

Essentially, it's based on a single artificial case-study company, so the results for real companies will vary quite a bit. However, here's the results for some familiar countries, ordered by Profit TTR, which is the closest measure to corporation tax in the study:

|TTR|Profit TTR|Labour TTR|Other TTR
Lithuania|38.70%|0.00%|35.10%|3.60%
Luxembourg|21.10%|4.10%|15.40%|1.60%
Belgium|57.00%|4.80%|50.40%|1.80%
Latvia|38.50%|6.50%|27.20%|4.80%
Iceland|26.80%|6.90%|14.90%|5.00%
Slovak Republic|48.70%|7.00%|39.60%|2.10%
Singapore|25.40%|7.40%|14.90%|3.10%
Czech Republic|48.80%|7.40%|38.40%|3.00%
Estonia|49.60%|8.00%|39.20%|2.40%
France|65.80%|8.20%|51.70%|5.90%
Switzerland|30.10%|8.90%|17.60%|3.60%
Cyprus|23.20%|9.40%|11.60%|2.20%
Romania|44.90%|10.40%|32.30%|2.20%
Ireland|26.50%|11.90%|11.60%|3.00%
Greece|47.20%|13.90%|31.70%|1.60%
Slovenia|35.40%|14.80%|18.20%|2.40%
Portugal|43.30%|14.90%|26.80%|1.60%
Austria|55.50%|15.70%|34.60%|5.20%
Finland|44.60%|15.90%|27.70%|1.00%
Sweden|54.60%|16.40%|36.60%|1.60%
Hungary|53.30%|16.70%|34.40%|2.20%
Poland|42.30%|17.70%|22.10%|2.50%
Hong Kong, China|24.10%|18.70%|5.30%|0.10%
Spain|56.50%|20.90%|34.90%|0.70%
Netherlands|40.50%|20.90%|17.90%|1.70%
Denmark|29.20%|21.90%|3.60%|3.70%
Italy|68.60%|22.80%|43.40%|2.40%
Germany|48.20%|22.90%|22.00%|3.30%
United Kingdom|37.30%|23.20%|10.80%|3.30%
Israel|31.70%|23.80%|5.30%|2.60%
Norway|41.60%|24.40%|15.90%|1.30%
United States|46.80%|27.60%|10.00%|9.20%
Japan|48.60%|27.90%|14.70%|6.00%
Median|43.30%|14.90%|22.10%|2.40%

Same countries, ordered by total tax for companies:

|TTR|Profit TTR|Labour TTR|Other TTR
Luxembourg|21.10%|4.10%|15.40%|1.60%
Cyprus|23.20%|9.40%|11.60%|2.20%
Hong Kong, China|24.10%|18.70%|5.30%|0.10%
Singapore|25.40%|7.40%|14.90%|3.10%
Ireland|26.50%|11.90%|11.60%|3.00%
Iceland|26.80%|6.90%|14.90%|5.00%
Denmark|29.20%|21.90%|3.60%|3.70%
Switzerland|30.10%|8.90%|17.60%|3.60%
Israel|31.70%|23.80%|5.30%|2.60%
Slovenia|35.40%|14.80%|18.20%|2.40%
United Kingdom|37.30%|23.20%|10.80%|3.30%
Latvia|38.50%|6.50%|27.20%|4.80%
Lithuania|38.70%|0.00%|35.10%|3.60%
Netherlands|40.50%|20.90%|17.90%|1.70%
Norway|41.60%|24.40%|15.90%|1.30%
Poland|42.30%|17.70%|22.10%|2.50%
Portugal|43.30%|14.90%|26.80%|1.60%
Finland|44.60%|15.90%|27.70%|1.00%
Romania|44.90%|10.40%|32.30%|2.20%
United States|46.80%|27.60%|10.00%|9.20%
Greece|47.20%|13.90%|31.70%|1.60%
Germany|48.20%|22.90%|22.00%|3.30%
Japan|48.60%|27.90%|14.70%|6.00%
Slovak Republic|48.70%|7.00%|39.60%|2.10%
Czech Republic|48.80%|7.40%|38.40%|3.00%
Estonia|49.60%|8.00%|39.20%|2.40%
Hungary|53.30%|16.70%|34.40%|2.20%
Sweden|54.60%|16.40%|36.60%|1.60%
Austria|55.50%|15.70%|34.60%|5.20%
Spain|56.50%|20.90%|34.90%|0.70%
Belgium|57.00%|4.80%|50.40%|1.80%
France|65.80%|8.20%|51.70%|5.90%
Italy|68.60%|22.80%|43.40%|2.40%
Median|43.30%|14.90%|22.10%|2.40%

Ireland does rather better in the second - we're a cheap location because our overall tax burden on companies is low, not because our CT rate is low.

This table, however, is from a US study specifically on Effective Corporate Tax Rates, and has the advantage that it's the results of a survey of a number of real companies:

Country|No.companies|ETR 2006|ETR 2007|Statutory Rate 2006
Iceland|3|16.07%|5.87%|18.00%
Malta, Republic of|1|6.77%|6.77%|35.00%
Monaco|2|6.93%|6.93%|33.33%
Romania|1|10.24%|10.24%|16.00%
Hungary, Republic of|14|12.59%|11.12%|16.00%
Cyprus, Republic of|2|11.48%|11.48%|10.00%
Hong Kong|136|13.98%|12.50%|17.50%
Ireland|61|15.43%|15.58%|12.50%
Singapore, Republic of|570|17.75%|15.96%|20.00%
Lithuania|1|16.72%|16.72%|15.00%
Estonia|2|16.82%|16.82%|22.00%
Slovenia|5|16.01%|17.61%|22.00%
Luxembourg, Grand Duchy of|25|21.82%|18.58%|22.00%
Poland, Republic of|21|18.79%|19.43%|19.00%
Portugal (Portuguese Republic)|31|17.41%|19.69%|25.00%
Slovakia|1|20.17%|20.17%|19.00%
Switzerland, (Swiss Confederation)|204|21.42%|21.07%|8.50%
Austria, Republic of|56|22.50%|23.63%|25.00%
United Kingdom|1457|21.13%|24.50%|30.00%
Netherlands, Kingdom of|137|23.23%|24.69%|27.55%
Denmark, Kingdom of|132|22.54%|24.87%|26.50%
Norway, Kingdom of|120|24.97%|25.14%|28.00%
Finland, Republic of|145|24.13%|25.89%|26.00%
Belgium, Kingdom of|77|24.67%|26.17%|33.00%
Czech, Republic of|6|28.92%|26.29%|24.00%
Spain (Spanish State)|162|23.98%|26.63%|33.75%
Sweden, Kingdom of|261|23.48%|27.07%|28.00%
Greece (Hellenic Republic)|84|27.60%|28.14%|27.00%
Germany, Federal Republic of|470|27.30%|29.52%|25.00%
France (French Republic)|471|29.42%|31.79%|34.43%
United States of America|3268|29.46%|33.49%|30.00%
Japan|3438|41.85%|41.22%|30.00%
Median||21.28%|20.62%|25.00%

And then again, there's a recent study on the role of US multinationals in Ireland which suggests the average effective corporation tax rate paid by them is 7.7%.

So, you pays your money and chooses your study...

cordially,
Scofflaw