reland’s Corporation Tax Revenue
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% (Iammarino, 2018, 12). The latter is significantly low compared to other countries, and this depends on the various factors or policy objectives. The paper will focus on how the commitment of Irish 12.5% corporate tax rate attracts foreign direct investment in the manufacturing sector.
The 12.5% corporate tax in Ireland’s corporation tax regime applies only to active incomes. The tax rate system is levied on profit from the sale of products and services. An organization that does not reside in Ireland but has a branch is liable a 1.5% of corporation tax on incomes connected with activities of that branch. Provided that a company is a set-up and trade actively in Ireland, it is likely to qualify for 12.5%.
Corporate tax Regime Favor FDI in Manufacturing Sector
Ireland is an unusual state in the extent to which it has consistently enhanced export platform investment into the manufacturing sector. Starting in the year 1970s, the country corporate tax regime has selectively promoted multinational enterprises and sought to improve the industrial cluster on the multinational investments in the high-tech sectors. Due to the favorable corporate tax of 12.5% flat tax rate, the multinational business almost accounts for about fifty percent of manufacturing employment. The manufacturing sector is in Ireland has been growing exceptionally and at a substantial rate primarily due to foreign direct investment afforded by the tax rate.
In as far as foreign direct investment in the manufacturing Ireland is concerned, the industrial incentive is significantly favored by the corporate taxation regime. From the mid-950, firms established in the country were entitled to a tax holiday for fifteen years on export sales profits. Due to export bias, the regime appeared incompatible with the Rome treaty in 1980. A preferential tax rate of 10% on all corporate profits was introduced to replace the system in the manufacturing sector. The operation incentive was under an agreement between the Ireland government and the European Commission. By the year the 1990s, the pro-trade bias in the two-tier tax rate was no longer considered. As such, the essence of a new agreement later came to be a standard of 12.5% to apply for all corporate income. The low corporate tax rate was then broadly known as a vital instrument to attract mobile foreign investment projects to the country. The regime remains so amid the genera reduction of the rate of corporate tax in the EU in recent times.
The corporate tax regime in Ireland is competitive and stable, giving companies certainty to carry out business operations within the environment. Also, people in these organizations are assured of job positions as a result of massive investment platforms that creates job market. The country offers lower-cost labor in the manufacturing field, compared to other states in the EU. As such, there is a privilege to maintain cost advantages- an inward investment or re-investment for manufacturing operations on a large scale.
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 (Barry, 2019, 99). Initially, there were restrictions 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. The protectionist policy resulted in limited economic growth, and the 1960s, Irish government that took over, started to cut unilateral tariffs (Barry, 2019, 97). A free trading area was decided with the UK, and Ireland joined to form what EEC was in the year 1973 (Barry, 2019, 102). By the year 1980s, the Irish tax regime sought to attract some manufacturing operations domestically and internationally; it traded financial services to specific 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 (Iammarino, 2018, 16). 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.
FDI in Ireland continues to grow, with an increase of about 20% of investments (“EC4210,” n.d, slide 10). 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 the manufacturing industry. The country’s economy is healthy, as noted by the rise in export rate by 2% (“EC4210,” n.d, slide 10). Spending in the country has gone up by 8% while research and development expenses rise by 7% (“EC4210,” n.d, slide 10). The number of individuals working in the research center has also gone up (“EC4210,” n.d, slide 11). Such a level of investment reflects higher investment than that in nations like Russia or China. The taxation system in Ireland offers significant incentives for firms to invest in innovative ideas.
Recent economic potentials, like the announcement of a technology company like Apple, investing 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% (“EC4210,” n.d, slide 10). The corporation tax regime in Ireland remains 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 (“EC4210,” n.d, slide 6). 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 how the Irish corporate tax regime attracts foreign direct investment in the manufacturing sector. Manufacturing companies in Ireland are chargeable at a corporate tax rate of 12.5% on the profit they generate from trading activities. Initially, the price was 10%, but it ended in 2010, and the twelve and a half percent applies to such profits. A company that has a taxable presence in Ireland is liable for corporation taxation on its profit sourced in the country. As such, it has been identified that the corporation tax regime in Ireland favors direct foreign investments. For a long period, the country relied on trading ties with the UK. Yet, its commitment to a corporation tax rate of 12.5% enabled solidification in industrial performance. As noted from this work, tax is the number one factor that determines the location of corporate investments.
Reference List
Barry, F., 2019. Ireland and the changing global foreign direct investment landscape. Administration, 67(3), pp.93-110.
EC4210, n.d. Irish Corporation Tax Policy
Iammarino, S., 2018. FDI and regional development policy. Journal of International Business Policy, 1(3-4), pp.157-183.
Mintz, J., 1996. Corporation Tax: A Survey. Fiscal Studies, 16(4), pp.23-68.