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 a company's income. 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.
There are three rates of corporation tax in the Republic of Ireland:
- 12.5% for trading income
- 25% for non-trading income
- A special rate of 10% for companies involved in manufacturing, the International Financial Services Centre (IFSC) or the Shannon Free Zone ended on 31 December 2003.
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 being 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.
In the 1998 Budget (in December 1997) Finance Minister, Charlie McCreevyintroduced 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.
The low corporate tax rate in Ireland has contributed to inward investment in Ireland and the Celtic Tiger phenomenon. 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
|Year||Corporation Profits Tax||Corporation Tax||Total Tax Revenue||Total Revenue|
- 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 31 March to 30 December
- 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|
- "Low-tax policies created the Tiger (Ireland's Economy)". Irish Independent. 24 October 2004. Retrieved 2 November 2006.
- 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