Dara Calleary (Mayo, Fianna Fail)

I join my colleagues in welcoming the opportunity afforded by this debate to endorse Ireland's position with regard to our 12.5% corporate tax rate. I affirm there will be no change to our corporation tax. It is an absolute red line in terms of any discussions that have taken place. Our corporate tax rate is critical to supporting our economic recovery and employment growth and is a cornerstone of our industrial policy and an integral part of our international brand.

Since the 1950s, Ireland has used its corporate tax strategy to encourage the growth of domestic business and attract foreign direct investment. In 1956, Ireland introduced a zero rate of corporation tax on income from export sales of manufacturing goods. In 1973, Ireland joined the then European Economic Community and maintained its 0% export sales relief until 1980. This was then replaced by a low corporate tax on the manufacturing industry of 10%. In the mid 1990s, the European Commission raised concerns regarding Ireland's corporation tax rates in terms of them being regarded as a state aid. We then instituted a single corporation tax rate of 12.5% on all corporate trading income from January 2003, with a transition period up to this year for existing manufacturing firms to retain the 10% rate.

Our corporate tax system is open and transparent. While there are currently three corporate tax rates, one of which, the 10% manufacturing rate, will be phased out at year end, the clear headline rates of 12.5% for trading income and 25% for non-trading income makes our corporate tax system extremely transparent to those wishing to establish here. Our low corporate tax system does not discriminate based on company size or ownership. It features a low tax rate applied to a wide base and remains a key policy tool for Ireland. Its importance is likely to grow given the weakness of other factors due to Ireland's loss of competitiveness in the boom years and the fiscal constraints imposed by the recession. It is also important to remember that Ireland is geographically and historically a peripheral country in Europe. A low corporate tax rate is a tool to address the economic limitations that come with being a peripheral country, as compared to core countries. Based on the many discussions the Department has with multinational corporations, we believe it is likely that if much of the foreign direct investment that comes to Ireland went elsewhere, it would be lost to Europe in its entirety.

The recent independent commission on taxation recommended that a low stable corporation tax rate should remain a core aspect of Irish tax policy to support economic activity in the long term. Furthermore, recent research by the OECD also points to the importance of low corporate tax rates to encourage growth. The OECD, in ranking taxes by their impact on economic growth, found that corporate tax was the most harmful. In other words, governments seeking additional tax revenues would be advised to consider increasing all other types of tax before increasing corporate tax rates.

It is important to dispel some of the myths surrounding our corporation tax regime. The effective rate of corporation tax is difficult to calculate or compare across countries, but studies indicate that Ireland is one of the few countries in the European Union with an effective rate above the statutory corporate tax rate. The level of corporate tax revenue in Ireland is similar to other EU countries. Corporate tax revenue in Ireland in 2008 was equal to 2.9% of GDP, just above the average for the European Union as a whole, 2.7%, and has been consistently higher over the last decade.

We are committed to doing everything possible to attract and assist foreign direct investment to Ireland. As mentioned, Ireland now has 61 bilateral tax treaties in place, a system of full exchange of tax information and proper regulation of activities to the highest standards. Taxation agreements seek to eliminate and minimise double taxation that might arise for companies operating cross-border. The agreements cover direct taxes, which in the case of Ireland are income tax, corporation tax and capital gains tax. These agreements are also key instruments for developing and strengthening economic and trade relations between countries. They reduce tax impediments that might otherwise deter the development of bilateral trading and investment activities. The recent signing of our 61st agreement with Singapore represents a significant milestone and is a reflection of the priority the Government has afforded to the role that international business will play in aiding our economic recovery.

Foreign direct investment in Ireland is significant and substantial and is of critical importance to the economy. In 2008, Ireland was ranked fifth in the OECD in terms of inward investment stock as a percentage of GDP. Equally important, Ireland ranked seventh in the OECD in terms of the relative size of its outward investment. Foreign investment in Ireland is substantial. A recent report ranked Ireland as the top creator of employment, relative to population size, from foreign direct investment. IDA supported companies alone sustain over 135,000 jobs. Multinational companies, both Irish and foreign owned, account for approximately 75% of corporate tax revenue paid in Ireland. This share has been rising during the recession as the domestic focused companies are more severely affected by economic conditions.

The foreign-owned sector is the key growth engine of the economy in 2010. Exports jumped by 7% year-on-year in the first half of the year. The census of industrial production shows that 88% of Irish goods exports are from foreign-owned companies, while the annual services inquiry indicated that 77% of service exports arise from multinational companies. Approximately 255,000 people are directly employed by foreign-owned firms in Ireland. Indirect employment is difficult to quantify because of the knock-on multiplier to consumer spending and suppliers but the statistics suggest it could be as many as 100,000 jobs. As a result, foreign-owned firms account for almost 20% of employment in the economy.

Given Ireland's strong and long-standing commitment to the 12.5% rate, any movement away from it would impact negatively on investment and employment. Certainty is a key desire for investors and any change of policy would result in increased uncertainty about the future direction of the Irish economy and its attractiveness to foreign investment. Changes to the corporate tax would be likely to have negative long-term consequences.

Estimating the size of the behavioural effects is very difficult but they are significant. An OECD multi-country study found that a 1% increase in the corporate tax rate reduces inward investment by 3.7% on average. In other words, it would take only a 2.5% increase in the rate to decrease Ireland's inward investment by nearly 10%. As the 3.7% figure represents an average across a number of countries, it is likely that the effect on Ireland would be greater in magnitude. Several important factors in the Irish economy influence this figure. The impact of a rate increase would be likely to be greater if the baseline tax rate is low initially. Research on this topic suggests that corporate tax rate increases would have the largest impacts on investment in low tax locations. The asset mobility of companies is an important determinant of responsiveness to tax changes. Companies in Ireland that have invested in mobile assets are more likely to react to tax rate increases. In general, companies involved in services production tend to be more sensitive to tax changes because they have lower capital requirements. A rate increase would, therefore, more severely impact services than manufacturing. Services companies are more likely to generate jobs in the future as Ireland moves towards a knowledge economy but these jobs would be endangered by an increase in the corporate tax rate. All the evidence on the corporate tax base in Ireland suggests that the responsiveness of Irish-based companies is probably greater than the 3.7% average figure presented by the OECD.

Our 12.5% rate is our salient competitive advantage. Meddling with it would reduce potential GDP growth, adversely affect employment and reduce the economy's debt servicing capacity. Corporation tax has been the best performing portion of Irish tax revenue this year. It is 22%, or €473,000, ahead of target and it has accounted for 11% of total tax revenue thus far this year. Multinational companies account for at least half of total corporation tax receipts. Ireland proved that by dropping the rate and providing certainty that it was fixed, we could attract further investment and boost revenue. By changing the rate, even slightly, investment would quickly depart and revenue would fall.

I do not believe that our European partners see our recourse to the programme of support from the EU and IMF as an opportunity to exploit control over what are essentially domestic issues. A number of European prime ministers have already acknowledged the impact such a move would have on our long-term recovery. Ireland's historic, cultural and demographic ties with the US and other markets are key compensators for our peripheral disadvantage. To meddle with the 12.5% rate would be counterproductive and deny us a key plank of our recovery strategy. That is why this Government is committed to its retention and I appreciate and welcome the cross-party support for this position.

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