Ireland, Still Addicted to Tax Breaks
The Irish government decided last week to get rid of a tax loophole that has helped big multinational companies like Apple and Google avoid paying billions in taxes to any government at all. But hold the champagne: Ireland could well replace one problematic tax policy with another, leaving aggressive tax avoidance pretty much intact.
On Oct. 14, Ireland’s finance minister, Michael Noonan, said the country would get rid of the “double Irish” — a provision that allows companies doing business in the country to avoid taxes by making royalty payments to an affiliated firm that is registered in Ireland but has its tax home in another country, often a tax haven like Bermuda that has no corporate income taxes. The provision will disappear for new companies in January, but businesses already using it can continue to do so until 2020.
Still, Ireland, which for years used policies like the double Irish to attract multinational businesses, appears uninterested in true reform. It will create a new provision known as the Knowledge Development Box that will allow technology, pharmaceutical and other companies that make money from patented products and services to pay a discounted tax rate. Officials haven’t said much about what kinds of profits will qualify for the lower rate or what it will be. Experts expect it to be lower than the already low standard corporate tax rate of 12.5 percent.
Ireland is not alone in trying to lure tech companies with very low tax rates. Since last year, Britain has been phasing in what it calls the Patent Box. By 2017, the country will have just a 10 percent tax on profits from “patented inventions and certain other innovations.” That will be less than half its standard corporate tax rate of 22 percent.
There are numerous problems with such policies. For starters, they leave one group of businesses — those that are not fortunate enough to make money with the help of patented products — at a significant disadvantage. Is it fair to have a much higher tax on the profits of, say, a modestly profitable restaurant business than on a highly prosperous technology giant?
These tax policies also create a dangerous race to the bottom, with each nation trying to outdo the others in tax giveaways. If left unchecked, this could make it impossible for any nation to tax profits from a fast-growing part of the economy. Governments, of course, must still pay for public services, so they will have to levy higher taxes on individuals, which will fall most heavily on the middle class and the poor.
It is particularly depressing that countries like Britain and Ireland are engaging in such beggar-thy-neighbor policies given their public commitments in international forums to behave differently. For instance, the Group of 20, of which Britain is a member and at which Ireland is represented through the European Union, has made ending tax avoidance a priority. If even G-20 countries cannot resist the temptation to create giant loopholes, how can the international community ever hope to persuade other nations that are tax havens to change? Getting countries to cooperate with one another on tax policy is beginning to seem like a far-fetched idea.
