Corporation Tax in Northern Ireland

Written evidence from the Ireland-U.S. Council

This is a submission from The Ireland-U.S. Council to encourage a reduction in the rate of corporation tax on companies operating in Northern Ireland downwards to the 12.5% rate prevailing in the Republic of Ireland.

This Council is a business organization that promotes closer links between the United States and Ireland, North & South. Since its inception, the Council has espoused the adoption of economic policies that favour wealth-creation and economic growth.

HISTORICAL BACKGROUND

At the time of its founding, it is worth recalling, the Republic of Ireland was not a member of the European Union (or the European Economic Community as it was then known).

Its corporate tax policies had evolved from a program of business tax breaks first introduced in 1959, primarily aimed at boosting exports, industrial output and employment. The growing consensus among policymakers in Dublin was that the economic future, whatever it might hold, must lie in open markets, deregulation, freer trade and reduced Government involvement in business in the economy.

This first program of tax incentives, called the Export Profits Tax Relief Scheme, was simple. If 100% of output was exported then 100% of any profits were free from any form of corporate profits tax. The commitment to move to freer trading occurred first with the Anglo-Irish Free Trade Agreement in 1965. Ireland had already attempted but failed to gain entry into the European Economic Community (EEC) in January 1963.

There was nonetheless a strong determination to reshape the Irish economy in preparation for a world of freer trade. In a classic paradox of trade policy, it was the desire to reduce dependence on the British market that led Ireland once again to seek closer ties with Britain. To prepare Ireland for the eventual entry to the EEC to which it aspired, while expanding its markets in Britain, trade talks with the British government resulted in a July 1965 free-trade area agreement between the countries which was signed into effect in December 1965. Its preamble placed its roots firmly within the context of the principles and objectives the General Agreement on Tariffs and Trade (GATT). It sought the harmonious expansion of world trade through the removal of barriers, and the continuing progress toward European economic cooperation.

For industry it was agreed that Britain would abolish all import duties on Irish goods on July 1, 1966. On that same date Ireland would cut import duties on all British goods by 10 percent-and by another 10 percent each successive year until all industrial duties eventually disappeared in 1975.

For agriculture the agreement allowed unrestricted, duty-free access to the British market for Irish store cattle, store sheep, and store lambs, while the Irish undertook to export at least 638,000 head of cattle per annum. In respect of other agricultural products it was agreed that access to the British market would be related to international commodity agreements involving all substantial producers.

This background is important, we believe, because it illustrates the policy connections between taxation incentives and broader Government actions affecting business. The strategy in the Republic of Ireland was not just to offer corporations a break on taxes. It was a thought-out and planned economic policy to foster enterprise through an entire Government philosophy that encourages business, minimizes restrictive rule-making, eases permit approvals, limits bureaucratic barriers to business and generally fosters a positive climate for investment. It is a strategy that embraces a deep commitment to competition-keen free trade with the rest of the world beyond the borders of the country.

TAX COMPETITION

Like it or not, tax competition is a fact of business and political life. In the United States, there is considerable competition between individual states for economic opportunity and growth through shaping tax policies to attract businesses.

We believe today that Northern Ireland would benefit enormously if the Corporation Tax for companies operating there were cut to the 12.5% level prevailing in the Republic of Ireland. This rate should be accompanied by generous write-off allowances to underline the encouragement of business investment in Northern Ireland.

The Council has consistently espoused such a policy for Northern Ireland, most recently in 2007 when the Council wrote to Sir David Varney during the most recent review of this matter.

The Corporation Tax rate in Northern Ireland is currently 28% and although it is scheduled to be further lowered, we believe that the competitive tax disadvantage for Northern Ireland explains the imbalance in heavy capital foreign direct investment inflows to the Republic of Ireland. The tax cut initiative we encourage will redress that imbalance and create a more-level playing field in the campaigns to attract mobile international industrial investment projects.

The Council is aware of the budget implications that this lowered tax rate could imply. However, the experiences in other countries and regions – not just in the Republic – clearly show that the expanded economic activity over time as a direct result of the lower tax rate creates strong exchequer inflows of tax income from all sectors of the economy, not just from corporate income tax.

In an editorial October 4, 2010, America’s largest newspaper, the Wall Street Journal commented on Ireland in this way:

"Since 1995 - even allowing for the recession, which knocked nearly 10% off economic output - GDP per capita has more than doubled in Ireland, to $41,000 from less than $18,000. Since 1983, GDP per capita has quintupled. Also since the early 1980s, Ireland's employment rate has gone from about 50% of the working-age population to between 60% and 70%. Ireland's brightest young people no longer felt they had to flee to America.

In the wake of the financial panic and Ireland's undeniable economic setbacks, it's become fashionable to dismiss the former Celtic tiger as an economic mirage. But Ireland's progress has been real and dramatic and remains a long way from being undone by the events of the past two years.

As for that debt, Ireland's national debt as a percentage of GDP fell to as low as 25% in 2006, largely as a result of 15 years of strong growth, which was in turn largely the result of a supply-side tax revolution starting in the 1990s. The key to escape its current debt trap is a combination of spending restraint and renewed economic growth.

Recovery will take time given the depth of the damage to Ireland's financial system, but it will not be helped by a return to the habits of the 1970s and 1980s, when taxes frequently sucked up close to half of Ireland's output and the economy stagnated."

BACKGROUND ON THE COUNCIL

The Ireland-U.S. Council is a business organization that was founded in preparation for the visit of President John F. Kennedy to Ireland in 1963, as a measure to build institutional form around a structure to improve the relations between America and Ireland. The Council’s mission was aimed at building business bonds between America and Ireland.

Currently, the Council has a membership roster of 450 companies based in the United States and in Ireland who are engaged in transatlantic business connections between the island of Ireland and America. The Council is headquartered in New York City and operates an office in Dublin.

The Council was registered as a not-for-profit corporation in the Fall of 1962 by a group of American and Irish business executives led by John D.J. Moore, the American envoy to Ireland. In those early years, Ireland was not a member of the European Community. Thus, many of the Council's initiatives during the 1960's and early 1970's involved the bilateral relationship between the United States and Ireland in economic, business and commercial matters.

The Council's officers and representatives in those days were heavily involved in various cases before the Federal Trade Commission, committees of the Congress, the Federal Aviation Administration and other Government agencies.

Since, Ireland became a member of the European Union in 1973, the character and nature of the relationship between the two countries has changed quite dramatically. The strict bilateralism of the earlier decade has been replaced, on many issues, by Ireland's interests being served on a pan-European level.

In pursuit of its aims, the Council hosts frequent events in Ireland and in the United States. The Council also operates a variety of scholarship and student internship programs, stages occasional seminars and, from time to time, undertakes various publishing initiatives in national business media in the United States to promote closer commercial connections between Ireland and America.

The Council seeks also to focus on activities that will develop communications, dialogue and improved understanding between leaders in business and government on both sides of the Atlantic. There are many important arenas in which the economic relations between the Emerald Isle and the United States continue to attract the Council's involvement. These range from bilateral taxation treaties to intellectual property accords, aviation agreements, immigration issues and more.

The Council has hosted many trips to Northern Ireland. Council delegations have visited every American industrial facility there during the past three decades. Leaders from Northern Ireland’s Government and business community have addressed Council gatherings in the United States.

26 October 2010