Mr. Michael Taft:

On behalf of Unite, I thank the sub-committee for affording us an opportunity to make a submission on Ireland’s effective corporate tax rate. Our submission will use the official data collected by national statistical agencies. We do not intend to directly address the issue of Ireland's role in the global tax avoidance network, which would have a different impact on any estimates from the macroeconomic data. In providing our estimate of the effective corporation tax, we will also place it in a European and an economic context.

There are two principal measurements of profit at a macroeconomic level. One measures against entrepreneurial income or net operating surplus. The Central Statistics Office and EUROSTAT regard entrepreneurial income as a more comprehensive measure of corporate profitability. According to the technical paper, Effective Rates of Corporation Tax in Ireland, produced by the Department of Finance, entrepreneurial income includes collective investment funds, which are not taxed at source. This becomes a problem for financial companies only as this inclusion makes little difference for non-financial companies. To arrive at a more robust and realistic rate and make it comparable across the European Union, one uses net operating surplus. This figure is produced by deducting depreciation charges and net indirect product taxes and subsidies from gross operating surplus. This is the standard international measurement used by EUROSTAT, the OECD and the United Nations.

Our submission shows a table setting out the effective tax rate of countries based on net operating surplus. This shows that three countries have an effective corporate tax rate of more than 30%.

The mean average among other advanced European economies - namely, the 15 EU economies minus the poorer new member states - is 24%. In Ireland, which lies at the bottom of these, it is 9%. A useful comparison can be made with small open economies, because such economies have a structure very similar to ours. These economies have a small domestic market and, like us, are heavily reliant on export earnings. The IMF has used this benchmark from time to time in papers it published regarding Ireland during its period in the IMF programme. These small economies include Austria, Belgium, Denmark, Finland and Sweden. The effective tax rate of those countries is even higher than ours, at 26%.
Ireland's low effective tax rate is a historical phenomenon and not just something that occurred in the past couple of years because of the recession. The recession will impact sharply on corporate profitability, but over a ten-year period Ireland has consistently been at the bottom of the table of the advanced European economies.
Tax rates, whether headline or effective, are a result of policy. To put them in context, one of the goals of our tax rate policy is to encourage investment. To test how successful this is in comparison with other countries, it is useful to contrast the amount of corporate investment, of both financial and non-financial companies, as a proportion of their profits in net operating surplus. The first table on page 3 of my submission demonstrates that it is not unusual for European economies to have corporate investment that is higher than corporate profits. The average is about 1:1 but, as can be seen, Ireland is once again at the bottom of the table, as corporate investment here is just one-fifth of corporate profitability. Other measurements can be used. For instance, as a measure of GDP, one will find that on average over the last decade, corporate investment in the economy is about one third less than the average corporate investment in the EU 28.
Another stated policy goal is to use the low corporate tax rate to encourage increased expenditure in the domestic economy. Forfás regularly tracks this in its annual business surveys. Direct expenditure refers to two items: payroll, which is wages, salaries and social insurance contributions; and purchases from domestic companies, whether for materials or services. That is the direct expenditure. Forfás estimates that at the beginning of the last decade, over 37% of sales revenue of the current State agencies such as the IDA and Enterprise Ireland in the traded sector was returned to the economy through payroll and domestic purchases. However, this has fallen over the decade to about one quarter. Over that period, in real terms - that is, after inflation - direct expenditure by traded companies has fallen by 17%.
I would like to point out one further thing to the joint sub-committee. It would also be a goal of a low effective tax rate to boost the level of employee compensation. Obviously, if one is encouraging business activity and trying to give it an edge internationally with a corporate tax rate, and also encouraging certain types of high-value-added firm, one would expect that through the trickle-down process, this would impact strongly on employee compensation.
In the graph at the top of page 4, we find that whereas throughout the EU 28 employee compensation makes up nearly three times the level of profits in that operating surplus, in Ireland it is approximately 1:1. Ireland's relative low-wage standing should not come as a surprise. My own union, Unite, recently published an analysis based on EUROSTAT data showing that we lag far behind other European averages in terms of employee compensation. We lag 14% below other advanced European economies.
To come back to the question of small open economies with a structure just like our own, our employee compensation levels are 30% below the average of those economies. There are benefits and costs involved and it is up to the joint sub-committee to tease them out. One of the costs of a low effective tax rate and the negative differential between that and the tax rate of an average European economy is that it imposes higher costs on households. It does so either through higher taxation or through reduced expenditure on public services, social protection and investment.
We hope the joint sub-committee's exploration of the effective corporate tax rate will be just a first step in a wider analysis of its fiscal and economic impact. This would allow us to explore a number of other questions. Is it achieving its stated policy goals, such as encouraging investment, at least in comparison with other European countries? What would be the impact of an alternative system of corporation tax? For instance, what would be the impact of a regime with a higher nominal rate but which rewarded capital-intensive and other key value-added sectors for investment, thus hoping to boost corporate investment in the economy while still yielding higher tax revenues?
Clearly, when we compare ourselves to our peer group of other small open economies, they have a far higher effective corporate tax rate. It is nearly three times higher than Ireland's. At the same time, they have much higher levels of corporate investment and employee compensation. I would submit that, whatever about the successes or failures of the current system, there are other systems that seem to be working. It might be beneficial even to explore those systems to see how, with a higher tax rate, one can still generate considerably more investment and employee compensation or wages in the economy.
There is no doubt about the positive presence of foreign direct investment in key areas of the economy, including those that are in capital-intensive and globally networked sectors. The challenge for the joint sub-committee is to explore the deficits and benefits in order to see if some model comes through. There is a need to study the realistic tax rate in Ireland. We have just dealt with the macro-economic level; we have not dealt with the issues that Mr. O'Brien mentioned in terms of referencing, for instance, the work of Professor James Stewart. His work has identified that US multinationals based here have a tax rate of 2%, which is much closer to economies such as Bermuda and the UK's Caribbean islands than it is to Germany and France. The issue is how to explore that situation to see how we can improve it.
There is highly negative international opinion regarding our tax rates, whether it comes from the US Senate, the House of Commons or the EU investigation into our tax rates. It is also constantly mentioned in articles in prestigious financial newspapers, such as The Wall Street Journal or the Financial Times. This is causing considerable reputational damage to the Irish economy, to the point of ridicule. A recent article in Forbesmagazine suggested that if they could not call Ireland a tax haven, they should call us a bagel. I suggest that is the type of publicity we could do without.