Ireland unlikely to modify its business model

The Irish government’s decision to do without the handsome windfall payment in the form of back taxes to the tune of up to EUR 19 billion from the US corporation Apple has triggered political controversies in Ireland and further afield. Given that this windfall payment would be of a huge magnitude by Ireland’s standards, the country is passing up an opportunity to reduce its debt level very considerably at one fell swoop as well as to engineer an immediate improvement in its rating and debt sustainability.

There are probably both political and economic motives behind the Irish government’s refusal to succumb to temptation. For one thing, the administration fears that the ruling could call the country’s fiscal sovereignty into question and entail an attack on tax rates which are low by EMU standards. For another thing, the pro-business government is concerned about the Emerald Isle’s economic model.

Over the past few years, Ireland has succeeded in luring many international corporations by means of tax rates which are low on an EMU comparison. Above all US corporations, which contribute one-quarter of Irish aggregate economic output, are responsible for the extraordinarily high level of foreign direct investment into the country. Such companies therefore now constitute a key mainstay of the Irish economy. Were only some of these international corporations to turn their backs on Ireland, the economic knock-on effects could be substantial. This reveals both a one-sided dependence on tax policy and a macroeconomic risk. As a consequence of this, the country’s economic structure needs to be diversified even better than is currently the case. In view of its dependence on the tax front, Dublin is apprehensive above all about its rival in Britain, which is already wooing foreign investors with the prospect of more favourable tax rates ahead of the UK’s exit from the EU.

In view of the low level of yields on Irish government bonds and of the predominantly favourable terms applying to the bailout loans still outstanding, the annual fiscal opportunity costs of the tax decision will be limited. According to our calculations, Ireland will forego interest savings of some EUR 70 million next year which could rise to EUR 300 million per year assuming there is no general rise in yield levels. Nevertheless, by declining to take advantage of this extraordinary windfall profit, Ireland is shifting repayment of a considerable portion of its debt into the future as well as transferring the tax burden to the Irish population as a whole – something which has implications from the point of view of both social policy and distribution policy. Elsewhere in the EU, something else is also thought to be problematic: the fact that the entire European Community is indirectly co-financing Ireland’s tax concessions through the bailout funds which have been paid out whereas the Emerald Isle is continuing to stubbornly insist on its comparative tax advantages to the detriment of neighbouring states.

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