A corporate tax is incurred on an organization’s profit earned. Money collected by the government through this levy system is mostly a nation’s source of income. A company’s operating income is usually calculated by deducting expenses, adding the cost of goods sold, and revenue depreciations. Tax rates apply to the legal obligation a business owes to the government. Regulations governing corporate tax varies widely across the globe but are voted as well as approved by a state’s government. Corporate tax policy differs across states. In the US, for example, there is a tax rate of 35%, while in some countries like Ireland, the corporate tax rate is 12.5%. The latter is significantly low compared to other countries, and this depends on the various factors or policy objectives. The paper will try to answer a question about what exactly is the impact of Ireland’s corporation tax regime.
While Answering the research question, overall, this paper will focus on some factors that relate to the corporation tax regime in Ireland. Some of these factors include employment issues, the country’s economy, foreign direct investment (FDI), and its relevance, as well as risk and opportunities for the country in the tax policy. From a background, corporate tax in Ireland is cited as a critical element and a pillar of growth in the Irish economy. The corporation tax system in Ireland has garnered publicity in recent times. The attention raises the question of what purpose does this system intends to serve in the country and whether it is fit the objective.
Since the year the 1950s, the corporation tax has aimed to address challenges that come along with the country’s geographical position. As part of policy suits, the tax system has been designed to allow foreign investment and promote domestic entrepreneurship, while it generates revenue that funds public services. Mainly, three key objectives underpin Irish corporation tax, and this includes to encourage economic growth, enable job markets, and fun country’s public services. Suggestively, anyone would infer that the objective of a tax regime is to create employment while generating revenues for an economy in ethical and consistent ways that abide by international commitments. Similarly, this is taken to be the purpose in the Irish case scenario, but the major one appears to be the attraction of foreign investors.
Attraction of FDI
Ireland has turned out successfully in attracting foreign direct investment. Perhaps this, in turn, was the most vital factor that saw the transformation of the country’s economy. Thanks to corporate tax rates, which necessitate business to thrive effectively. Corporate tax in this country is competitive and stable, thus giving companies certainty to carry out business operations within. Also, people in these organizations are assured of job positions. Many firms have relocated to Ireland, especially as part of the Brexit plan, to enable continuous trade into the European Union. Studies reveal multiple companies adapting to select Ireland as a valuable location.
As a small economy open to foreign investment, Ireland is accustomed to external battle issues that revolve around the corporation tax. While international tax policy is due to see changes that might negatively affect the corporation tax regime in Ireland, Investment in the country will continue. As such, this may question whether Ireland’s tax system was deliberately designed to attract FDI. The answer is no, and the only way to understand this is by looking back at the rules that played in the year 1950. Restrictions were enacted on foreign ownership of a business, and substantial quotas applied to protect manufactures in the country. About 90% of the country’s export was destined for experts to states like the UK. As such, the protectionist policy resulted in limited economic growth, and the 1960s, Irish government that took over, started to cut unilateral tariffs. A free trading area was decided with the UK, and Ireland joined to form what EEC was in the year 1973. By the year 1980s, the Irish tax regime sought to attract some manufacturing operations domestically and internationally; it traded financial services to specific zones. In that way, it aimed at attracting foreign investment when the country experienced a worse scenario of unemployment and slow economic development. Even though the approach was successful, they impacted some limitations as they were limited to particular sectors and only allowed growth only to designated zones. Following pressure from the EU and OECD, Ireland decided against applying a 12.5% tax rate of a corporation to trading incomes for activities carried out anywhere in the country. The introduction of this flat tax rate was a game-changer in that it opened up doors to other sectors that are outside financial services and manufacturing processes. Therefore, it can be inferred that the move to attract FDI was not a deliberate effort but a measure to support and revive other sections of the country’s economy like boosting employment.
Growth of Economy and Employment
FDI in Ireland continues to grow, which an increase of about 20% of investments. Of the new ventures, a significant proportion is from new foreign investors, along with the attraction of foreign investment necessitated by low corporation tax increases in the employment rate. About ten thousand people are currently hired in construction projects. The country’s economy is healthy, as noted by the rise in export rate by 2%. Spending in the country has gone up by 8% while research and development expenses rise by 7%. The number of individuals working in the research center has also gone up. Ireland has been a destination of choice for many countries and many years. The primary sources of foreign investments are from countries like the US-whose investment is not less than $160billion. Such a level of investment reflects higher investment than that in nations like Russia or China. The reason why Ireland secures such investments is because of factors that contribute to the nation’s attractiveness, such as low corporate tax rate on trading activities. The taxation system in Ireland offers significant incentives for firms to invest in innovative ideas.
Recent economic potentials like the announcement of a prominent company- Apple, to invest in Ireland is a positive indicator that the country will continue to grow and attract direct investors. To make sure that the country has seen continued growth, it is paramount that Ireland continues to devise the strength of availing skilled labor force as ease of doing business with foreign investors. Over the decades, Ireland has transformed itself from primarily rural to a dynamic economy and a business-oriented environment that is perfect for firms to thrive. Undoubtedly, businesses are in a period of significant global change such that it was unexpected that states like the US would introduce a corporate tax of 21%. With that, the corporation tax regime in Ireland on the other and remain competitive, and although there might be changes in the future, it is unlikely that the tax rate will hike more than in other states. As such, it implies that Ireland will retain its economic performance for an extended period while enjoying the benefits of growth and employment. The country needs to protect the reputation of its regime even amid criticism of flat corporation tax. The country’s external threats include the OEDC, EU, UK, and the US. The UK’s exit from the UE, for instance, does not affect the relationship Ireland has with the EU membership and will remain committed. Undoubtedly, disruption and uncertainty are brought by Brexit and can be unwelcoming of the economy of Ireland at a macro level. However, the country has had good impacts on investment in particular regulated sectors, mainly in financial services. A number of UK regulated corporations established parallel hubs in Ireland and seek authority from Irish financial regulators. The authorization would enable regulated organizations with a contingency plan and assurance that they may continue selling products and services in the Eu markets during the departure of the UK.
In conclusion, this paper sought to address the impacts of Ireland’s corporation tax regime. As such, it has been identified that increase the corporation tax regime in Ireland affects increased employment, economic growth, and majorly attraction of direct foreign investments. For a long period, Ireland has relied on trading ties with the UK. The country has demonstrated that its commitment to a corporation tax rate of 12.5% enabled solidification in industrial performance. As noted from such information, tax is the number one factor that determines the location of corporate investments.