OPINION: The Irish corporate tax regime will come under severe pressure from our EU partners if the fiscal treaty is passed

A MAELSTROM of international events over the last month has dramatically changed the context of the fiscal treaty debate – from France and Greece’s electoral rejection of austerity to the German government saying it will have to delay ratification in the Bundestag because it cannot muster a sufficient majority to pass it.

In this light, it would appear more prudent to vote against the treaty which many in Europe are already turning against.

One consequence of this recent political chaos is that many people sadly missed the pivotal comments of European Central Bank chief Mario Draghi who said that the fiscal treaty was the first step towards a fiscal union.

He elaborated in Barcelona on May 3rd: “If we want to have a fiscal union, we have to accept the delegation of fiscal sovereignty from the national governments to some form of central body, but how do we get there?”

I would argue that Irish fiscal sovereignty regarding the corporate tax issue will be put under severe pressure if the fiscal union treaty is passed.

The European Parliament voted overwhelming for a compulsory common consolidated corporate tax base (CCCTB) across the EU. The Thyssen report, passed last month by 452 votes to 172, proposes an EU corporate tax base, setting out rules for where and how much corporations pay the tax they owe.

Germany and France (which dominate the EU) in February already announced that they will soon have a harmonised common consolidated corporate tax base. So this issue is very much on the EU agenda. New French president François Hollande is also in favour of the common corporate tax base, and as a good socialist, he even wants to raise the corporate tax rate in France.

So the corporate tax issue is very much on the EU’s agenda, contrary to what Lucinda Creighton, Minister of State for European Affairs, said at the last Fine Gael Ardfheis. Given that Enda Kenny has called the corporate tax base “the harmonisation of the tax rates by the back door”, this is very bad for news for Ireland.

Whereas the European Parliament wants the common corporate tax base to be compulsory, the European Commission in 2011 has called for at least nine states to introduce it by “enhanced co-operation”.

Whether it is compulsory or voluntary it will still hurt the Irish economy greatly. Why is that? Because the commission has rules on how the corporate tax base is shared out. From the commission’s own online Q and A: “How did the commission arrive at the apportionment formula?

Under the CCCTB, once the company’s tax base is determined, it will then be shared out (apportioned) to all member states in which the company is active on the basis of a fixed apportionment formula. This formula will be based on three factors, equally weighted: assets, labour and sales.”

The commission wants companies to pay one-third of the corporation tax they owe in the country where their goods are finally sold, (ie sales destination).These rules would mean that companies with headquarters in Ireland must hand over one-third of their corporate tax, not to Ireland but to “enhanced co-operation” countries where the goods are sold, thus leading to a sharp fall in Ireland’s corporate tax take.

What is the advantage of being headquartered in Ireland if you have to pay a portion of corporate tax at a higher rate elsewhere? A multinational’s sales volume would be a factor in apportioning tax, which would not favour export-focused economies like Ireland.

So Ireland (while still retaining a veto on its corporate tax rate), would then freely choose whether to live with a smaller corporate tax take or to voluntarily increase its corporate tax rate to bring in the same money.

Option one means fewer public services, while option two means Ireland Inc can kiss a large chunk of foreign investment and Irish jobs goodbye. Former European commissioner Charlie McCreevy was correct when he said in 2007: “ . . . the claim that the CCCTB would have no impact on tax rates is unsustainable”. Until recently Irish governments have always been completely against the introduction of an EU corporate tax base. It was previously a red line issue which it would not allow the EU to cross.

But now that EU lenders have the Irish Government over a barrel, the stance has changed. Ireland has been bullied into constructively engaging about the corporate tax base in return for lower interest rates on its bailout loan. In July last year, euro zone heads of state issued a statement: “In this context, we note Ireland’s willingness to participate constructively in the discussions on the Common Consolidated Corporate Tax Base draft directive (CCCTB) and in the structured discussions on tax policy issues in the framework of the Euro Plus Pact framework.”

This is a major shift by the Irish Government. Its economic policy seems to be saying Yes to everything that Chancellor Angela Merkel demands. Not a good idea. Indeed, it is so supine to EU demands you could jokingly ask if the Irish Government has been taken hostage by the troika and is now suffering from Stockholm Syndrome.

Being the good little yes men of Europe has got Ireland nowhere. Greece played hardball and got 50 per cent of its debt written off. The Irish Government, on the other hand, did what the ECB demanded, nationalised private bank debt and increased the debt-to-GDP ratio by 40 per cent, a huge €70 billion.

Just before the general election Fine Gael’s Leo Varadkar promised: “The banks aren’t getting another cent. Anglo Irish Bank is not getting another cent of our money.” His promise should be taken with the same pinch of salt as the government promises at the time of the second vote on the Lisbon treaty that “legally binding guarantees” about corporate tax, military neutrality etc would be inserted in a protocol attached to Croatia’s accession treaty. No such protocol was attached at the time of Croatian accession.

Those employed by multinational companies would be better off defending their jobs by voting against this fiscal treaty, the first step to fiscal union. In a weakened state, a supine Irish government would likely cave in on the corporate tax base, leaving inward investment and jobs at risk.

Morten Messerschmidt is a Danish MEP and a member of the Europe of Freedom and Democracy group in the European Parliament. He won his seat in the 2009 European election with 284,500 votes.