Corporation tax in the Republic of Ireland

Corporation tax in the Republic of Ireland

Corporation tax in the Republic of Ireland is a levy on a company’s profits. The tax is charged on both a company's income and chargeable gains. The corporation tax in Ireland is quite low, and is often cited as an example of tax competition, as it is used as an incentive for foreign companies to invest in the state.

Contents

Tax rates

There are three rates of corporation tax in the Republic of Ireland:

  • 12.5% for trading income
  • 25% for non-trading income

History

Over the past decade, Ireland’s corporate taxation system has been a source of controversy with some of Ireland’s fellow-member states in the European Union. The French government has over the past decade, most particularly during the premiership of Lionel Jospin, consistently condemned and criticised the Irish corporation tax system. This criticism is based on the belief that the low corporation tax rates enabled Ireland to compete unfairly in attracting international investment. However, despite the French critique of the Irish corporate tax system, the Irish example has won many followers, with many ‘emerging’ and Eastern European economies following the Irish example.

Post-independence under Cumann na nGaedheal

It was only with the acceptance of the Anglo-Irish Treaty by both the Dáil and British House of Commons in 1922 that the mechanisms of a truly independent state begin to emerge in the Irish Free State. In keeping with many other decisions of the newly independent state the Provisional Government and later the Free State government continued with the same practices and policies of the British administration with regard to corporate taxation.

This continuation meant that the British system of corporate profits taxation (CPT) in addition to income tax on the profits of firms was kept. The CPT was a relatively new innovation in the United Kingdom and had only been introduced in the years after World War I, and was widely believed at the time to have been a temporary measure. However, the system of firms been taxed firstly through income taxed and then through the CPT was to remain until the late seventies and the introduction of Corporation Tax, which combined the income and corporation profits tax in one.

During the years of William Cosgrave's governments, the principal aim with regard to fiscal policy was to reduce expenditure and follow that with similar reductions in taxation. This policy of tax reduction did not extend to the rate of the CPT, but companies did benefit from two particular measures of the Cosgrave government. Firstly, and probably the achievement of which the Cumann na nGaedheal administration was most proud, was the reduction by 50% in the rate of income tax from 6 shillings in the pound to 3 shillings. While this measure benefited all income earners, be they private individuals or incorporated companies, a number of adjustments in the Finance Acts, culminating in 1928 , increased the allowance on which firms were not subject to taxation under the CPT. This allowance was increased from £500, the rate at the time of independence, to £10,000 in 1928. This measure was in part to compensate Irish firms for the continuation of the CPT after it has been abolished in the United Kingdom.

A measure which marked the last years of the Cumann na nGaedheal government, and one that was out of kilter with their general free trade policy, but which came primarily as a result of Fianna Fáil pressure over the ‘protection’ of Irish industry, was the introduction of a higher rate of CPT for foreign firms. This measure survived until 1948, when the Inter-Party government rescinded it, as many countries with which the government was attempting to come to double taxation treaties viewed it as discriminatory.

Fianna Fáil under Éamon de Valera

The near twenty years of Fianna Fáíl government between from 1931 to 1948, cannot be said to have been a time where much effort was expended on changing or analysing the taxation system of corporations. Indeed only one policy sticks out during those year of Fianna Fáil rule; being the continued reduction in the level of the allowance on which firms were to be exempt from taxation under the CPT, from £10,000 when Cumman na nGaehael left office, to £5,000 in 1932 and finally to £2,500 in 1941. The impact of this can be seen in the increasing importance of CPT as a percentage of government revenue, rising from and less than 1% of tax revenue in the first decade of the Free State to 3.64% in the decade 1942-43 to 1951-52. This increase in revenue from the CPT was due to more firms being in the tax net, as well as the reduction in allowances. The increased tax net can be seen from the fact that between 1932-33 and 1938-39, the number of firms paying CPT increased by over 33%. One other aspect of the Fianna Fáil government which bears all the fingerprints of Seán Lemass, was the 1946 decision to allow mining companies to write off all capital expenditure against tax over five years.

Seán Lemass and after

The period between after the late 1950s and up to the mid-1970s can be viewed as a period of radical change in the evolution of the Irish Corporate Taxations system. The increasing realisation of the government that Ireland would be entering into an age of increasing free trade encouraged a number of reforms of the tax system such as the Free Movement of Cows Act 1965. By the mid-1970s, a number of amendments, additions and changes had been made to the CPT, these included fifteen year tax holidays for exporting firms, the decision by the government to allow full depreciation in 1971 and in 1973, and the Section 34 of the Finance Act, which allowed total tax relief in respect of royalties and other income from licenses patented in Ireland.

This period from c.1956 to c.1975, is probably the most influential on the evolution of the Irish corporate taxation system, and marked the development of an ‘Irish’ system, rather than continuing with a British model.

This period saw the creation of Corporation Tax, which combined the Capital Gains, Income and Corporation Profits Tax that firms previously had to pay. Future changes to the corporate tax system, such as the measures implemented by various governments over the last twenty years can be seen as a continuation of the policies of this period. The introduction in 1981 of the 10% tax on manufacturing was simply the easiest way to adjust to the demands of the EEC to abolish the export relief, which the EEC viewed as discriminatory. With the accession to the EEC, the advantages of this policy became increasingly obvious to both the Irish government and to foreign multi-nationals; by 1982 over 80% of companies who located in Ireland cited the taxation policy as the primary reason they did so.

Corporation tax was reduced to 12.5% on trading income,[citation needed]. This is generally believed to have been an important stimulus for the Celtic Tiger.

In the 1998 Budget (in December 1997) Finance Minister, Charlie McCreevy[citation needed]introduced the legislation for a new regime of corporation tax that led to the introduction of the 12.5% rate of corporation tax for trading income from 1 January 2003. The legislation was contained in section 71 of the Finance Act 1999 and provided for a phased introduction of the 12.5% rate from 32% for the financial year 1998 to 12.5% commencing from 1 January 2003. A higher rate of corporation tax of 25% was introduced for passive income, income from a foreign trade and some development and mining activities. Manufacturing relief, effectively a 10% rate of corporation tax, was ended on 31 December 2002. For companies that were claiming this relief before 23 July 1998 it would still be available until 31 January 2010. The 10% rate for IFSC activiites ended on 31 December 2005 and after this date these companies moved to the 12.5% rate provided their trade qualified as an Irish trading activity.

Inward investment

The low corporate tax rate in Ireland has contributed to inward investment in Ireland and the Celtic Tiger phenomenon.[2] The low tax rate and Ireland's relaxed transfer pricing rules have also encouraged the use of Ireland in international tax planning, for example the use of the Double Irish Arrangement.

Yearly returns[citation needed]

Year Corporation Profits Tax Corporation Tax Total Tax Revenue Total Revenue
1922-23 254,050 30,017,372 30,017,372
1923-24 358,000 31,414,255 31,414,255
1924-25 248,000 26,948,114 26,948,114
1925-26 488,000 25,439,097 25,439,097
1926-27 400,000 25,060,379 25,060,379
1927-28 273,000 24,123,270 24,123,270
1928-29 239,000 24,221,046 24,221,046
1929-30 220,000 24,172,640 24,172,640
1930-31 288,000 24,365,197 24,365,197
1931-32 246,000 25,496,420 25,496,420
1932-33 460,000 29,990,935 29,990,935
1933-34 467,000 30,229,181 30,229,181
1934-35 481,000 28,770,689 28,770,689
1935-36 513,000 30,601,620 30,601,620
1936-37 535,000 31,034,710 31,034,710
1937-38 635,000 31,208,583 31,208,583
1938-39 591,000 31,883,864 31,883,864
1939-40 524,000 32,388,747 32,388,747
1940-41 552,000 34,637,659 34,637,659
1941-42 910,000 36,979,659 36,979,659
1942-43 2,760,000 39,728,365 39,728,365
1943-44 3,781,000 43,779,733 43,779,733
1944-45 4,042,000 46,175,493 46,175,493
1945-46 4,475,000 50,812,167 50,812,167
1946-47 4,536,000 54,352,865 54,352,865
1947-48 4,667,000 65,197,845 65,197,845
1948-49 3,450,000 71,691,728 71,691,728
1949-50 2,260,000 74,025,758 74,025,758
1950-51 2,533,000 67,718,000 77,356,608
1951-52 2,660,000 73,161,000 83,905,311
1952-53 2,921,000 84,120,000 95,918,809
1953-54 2,646,000 87,845,000 102,802,908
1954-55 2,944,000 89,876,000 106,727,534
1955-56 3,200,000 94,258,000 111,675,488
1956-57 3,075,000 98,818,000 117,663,725
1957-58 2,930,000 102,653,000 122,920,560
1959-60 3,031,000 107,328,000 129,855,578
1960-61 3,284,000 114,890,000 138,839,495
1961-62 3,667,000 126,152,000 151,685,670
1962-63 4,516,000 136,160,500 163,477,738
1963-64 7,710,000 155,034,000 184,419,459
1964-65 8,439,000 183,410,343 219,045,333
1965-66 9,320,000 203,716,748 240,761,328
1966-67 9,430,000 231,978,491 272,843,217
1967-68 12,076,000 259,579,621 305,408,793
1968-69 12,828,000 294,998,218 345,479,707
1969-70 14,876,000 350,982,121 411,012,014
1970-71 20,342,000 414,094,697 481,505,952
1971-72 21,097,000 486,754,000 569,401,402
1972-73 21,151,000 559,858,729 659,069,627
1973-74 22,750,000 689,670,989 792,913,481
1974 18,979,000 542,254,126 651,407,032
1975 26,530,000 926,657,767 1,091,227,078
1976 13,746,000 15,898,000 1,265,622,855 1,470,197,180
1977 8,039,000 69,644,000 1,481,671,796 1,756,883,362
1978 4,334,000 101,509,000 1,727,820,027 2,023,351,982
1979 2,283,000 128,064,000 2,008,495,043 2,383,919,283
1980 1,425,000 138,418,000 2,619,658,820 3,155,265,174
1981 26,000 199,995,000 3,314,532,886 3,972,706,450
1982 231,778,000 4,053,258,119 4,908,165,606
1983 214,988,000 4,681,436,610 5,711,024,846
1984 209,674,000 5,303,979,384 5,952,268,820
1985 217,203,000 5,581,085,997 6,330,865,381
1986 257,970,000 6,095,589,524 6,709,018,274
1987 257,549,000 7,151,846,053 7,151,846,053
1988 333,674,000 7,689,618,436 7,689,618,436
1989 303,017,000 7,442,621,000 7,755,742,000
1990 474,071,000 7,902,651,000 8,268,799,000
1991 593,395,000 8,357,194,000 8,775,659,000
1992 739,131,000 8,910,299,000 9,360,138,000
1993 951,700,000 9,704,435,000 10,435,748,000
1994 1,139,999,000 10,834,959,000 11,202,092,000
1995 1,145,761,000 11,334,626,000 11,666,874,000
1996 1,425,855,000 12,520,241,000 12,954,399,000
1997 1,698,708,000 14,273,726,000 14,619,166,000
1998 2,064,933,000 16,129,527,000 16,503,181,000
1999 2,709,719,000 18,559,254,000 18,993,427,000
2000 3,061,473,000 21,320,959,000 21,741,171,000
2001 3,273,155,000 21,993,011,000 22,632,862,000

Notes:

  • 1958-59 unavailable
  • 1922-23 - Accuracy of the figures uncertain due to the changeover in government 1922-23
  • All years until 1974, go from 1 April to 31 March.
  • After this, the figures follow the calendar year.
  • 1974 - Only counts March 31 to December 30
  • All subsequent years 1 January to 30 December
  • All figures, pounds

2001 to present (Euro bn)

Year Corporation Tax Total Tax Revenue Total Revenue Reference
2001 4.16 27.93 28.74 [3] (restated)
2002 4.80 29.29 31.53 [4]
2003 5.16 32.10 33.16 [5]
2004 5.33 35.58 36.38 [6]
2005 5.49 39.25 39.85 [7]
2006 6.68 45.54 46.14 [8]
2007 6.39 47.25 47.89 [9]
2008 5.07 40.78 41.62 [10]
2009 3.90 33.04 33.88 [11]
2010

Sources

  1. ^ http://www.revenue.ie/en/business/incentives/tax-incentives-investors-ireland.html
  2. ^ "Low-tax policies created the Tiger (Ireland's Economy)". http://www.independent.ie/opinion/editorial/lowtax-policies-created-the-tiger-485406.html. Retrieved November 2, 2006. 
  3. ^ http://www.finance.gov.ie/documents/publications/other/financeaccounts2002.pdf
  4. ^ http://www.finance.gov.ie/documents/publications/other/financeaccounts2002.pdf
  5. ^ http://www.finance.gov.ie/documents/publications/other/financeaccounts_2003.pdf
  6. ^ http://www.finance.gov.ie/documents/publications/other/finnacc2004.pdf
  7. ^ http://www.finance.gov.ie/documents/publications/other/financeaccounts2005.pdf
  8. ^ http://www.finance.gov.ie/documents/publications/other/financeaccounts2006.pdf
  9. ^ http://www.finance.gov.ie/documents/publications/other/finacct2007eng.pdf
  10. ^ http://www.finance.gov.ie/documents/publications/reports/2009/finacct2008.pdf
  11. ^ http://www.finance.gov.ie/documents/publications/reports/2010/Finacct1.pdf
  • Stewart, JC, Corporate Finance and Fiscal Policy in Ireland, Aldershot, England, 1987
  • O’ Malley, Industry and Economic Development, Dublin 1989
  • Proposals for Corporation Tax, Dublin, 1974
  • Quigley, Dermot, The Impact of EU Membership on Taxation in The Fiscal Impact of EU Membership on *Ireland, Proceedings of the Tenth annual Conference of the Foundation for Fiscal Studies, Dublin 1997
  • White Paper on Industrial Policy, Dublin, 1984
  • Telesis, A review of Industrial Policy, Dublin, 1982
  • Second Report of the Commission on Taxation – Direct Taxation and the role of Incentives, Dublin, 1984
  • Company Taxation in Ireland, Dublin, 1972
  • Programme for Economic Expansion, Dublin, 1958
  • Revenue Commissioners
  • Finance Accounts 1922-2002
  • OECD Papers:
  • Taxing Profits in a Global Economy – Domestic and International Issues, Paris, 1991
  • Company Tax Systems in OECD Countries, Paris, 1973
  • Harmful Taxation Competition, An Emerging Global Issues, Paris, 1998

See also


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