Ireland to phase out tax loophole for multinationals

Ireland will phase out a tax loophole that multinationals use to save billions of dollars as part of sweeping changes to its corporate tax structure announced in Tuesday's first austerity-free budget in seven years.

The ailing euro zone has pointed to Ireland's economic resurgence as proof that its austerity policies can work. But Dublin has also faced criticism over the past 18 months from both the European Union and the United States for tax rules that have enabled firms such as Google and Apple to cut their overseas tax rates to single digits.

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Michael Noonan, Ireland's Finance Minister
Anadolu Agency | Anadolu Agency | Getty Images
Michael Noonan, Ireland's Finance Minister

Finance Minister Michael Noonan laid out plans to end these tax arrangements.

With one eye on an election in 18 months' time, he also unveiled plans to cut the income tax burden on low and middle income earners frustrated by an uneven recovery.

He announced changes to the intellectual property tax regime in a bid to keep Ireland an attractive destination for business, while cuts to the level of income tax will benefit workers at foreign as well as domestic companies.

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"I am abolishing the ability of companies to use the 'Double Irish' by changing our residency rules to require all companies registered in Ireland to also be tax resident," Noonan told parliament.

"For over 60 years, foreign direct investment has been a cornerstone of Ireland's economic development... By taking action now, we are giving certainty to investors about corporate tax in Ireland for the next decade."

The change in corporate tax structure will be the country's most significant tax reform since it lowered the corporate tax rate to 12.5 percent in the late 1990s to entice companies to bring jobs to the country.

At risk for Ireland are the 160,000 jobs - almost one in 10 workers in the country - paid for by some 1,000 foreign firms that have set up a base in Ireland to benefit from its tax code and flexible, English-speaking work force.

Among the most criticized parts of the Irish tax code is the complex corporate structure whereby a multinational can channel untaxed revenues to an Irish subsidiary, which then pays the money to another company registered in Ireland that is tax resident elsewhere, usually in a tax haven such as Bermuda.

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From January, Irish-registered firms will automatically be deemed to be tax resident in Ireland, bringing Irish law in line with U.S. and British rules.

Companies already incorporated in Ireland will have until 2020 to comply with the new rules.

Noonan said Ireland's intellectual property offering would be a key element and that following a consultation process, he planned to bring in a "Knowledge Development Box" similar to patent boxes in other jurisdictions in a year's time.

Long road travelled

While the corporate tax changes were watched with interest abroad, workers at home reeling from tax hikes and spending cuts that have taken 30 billion euros or some 20 percent of annual output out of the economy want a reward for their sacrifices.

Ireland originally required tax hikes and spending cuts of 2 billion euros but with unemployment falling, exports rebounding and the economy set to grow by 4.7 percent this year, Noonan instead had money to spend.

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He lowered the top rate of income tax to 40 percent from 41 percent and raised the income threshold, which currently hits middle as well as high-income earners. Employees with annual salaries over 70,000 euros will see no change in their tax burden next year, he added.

After tens of thousands rallied against new water bills on Saturday in the biggest anti-austerity protest for years, there was also relief for those who will struggle to pay the last new charge of an EU/IMF bailout programme that ended last year.

The modest changes mean Ireland's budget deficit, which was set to fall to 2.4 percent of GDP next year if no changes were introduced, is instead expected to hit 2.7 percent, still below the EU limit of 3 percent but a risky strategy, according to the country's budget watchdog.

"The recovery has not spread across the country yet and many families have yet to experience it. The government is fully aware of this fact," Noonan said in his penultimate budget speech before elections due in early 2016.

"We as a country have travelled a long road to get to this point. Without the support and resilience of the Irish people, our economy would not be growing. I believe this budget is the right approach for Ireland.

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