Can a lower tax bring more money to the budget? Oddly enough, it is possible: a vivid example can be the low corporate tax of a small European state, which has become a magnet for transnational corporations and brought the country to the top of economic growth. Where are the others? raise rates, losing its investment attractiveness because of it, Ireland reaps a rich fiscal harvest by playing by different rules.
Ireland has shown the world how low corporate tax can turn into an engine of economic growth. The 12.5% rate has been a key factor in attracting such multinational giants as Apple, Google, Pfizer and Microsoft, which have shifted their international revenues to this fiscal eldorado. Thanks to this, the island state strengthened its position as a global economic center.
The attractiveness of the country’s tax policy consisted in creating conditions for reducing the costs of companies, which contributed to a massive inflow of investments. The difference in tax rates from the US, where the tax has long exceeded 20%, and many countries in the Eurozone allowed Ireland to win the competition for the placement of profits. As a result, this stimulated the growth of budget revenues, which reached a record 37.5 billion euros last year, compared to only 4.6 billion a decade ago.
In addition, the economic strategy of the “Celtic Tiger” contributed to the development of such highly profitable industries as technology and pharmaceuticals. Tax treaties, in particular the mechanism of “Double Irish”, which was in force earlier, allowed corporations to optimize global tax costs, increasing interest in the country. (Reference: “Double Irish” is a tax scheme that allowed multinational corporations to minimize taxes by taking advantage of differences between jurisdictions. Companies set up two Irish entities: one incorporated in Ireland but managed offshore, and the other operating in Ireland. the company paid royalties to the former for intellectual property, reducing taxable income were transferred to low-tax jurisdictions.The scheme was closed in 2015 under pressure from the EU because it significantly reduced tax revenues from other countries.)Although these practices are now banned, they played a role in building Ireland’s reputation.
However, the challenges have not disappeared. The global initiative to introduce a minimum corporate tax of 15%, which came into force last year, is changing the conditions of competition. Moreover, a potential reduction in U.S. tax rates could make it less profitable for U.S. companies to place earnings overseas. In response, Ireland focuses on other advantages: a highly skilled workforce, developed infrastructure and access to the European market.
The effect of scale at the service of the “Celtic Tiger”
In the 1990s, Ireland lowered corporate tax to 12.5% to deal with the economic crisis of the 1980s. At the time, the country was burdened by unemployment, emigration, a weak economy and significant debt. The idea was to attract foreign companies that would invest in the economy and create jobs.
By 2015, almost 4/5 of the economy depended on money invested by international companies. Such giants as Intel, Dell and Microsoft opened their offices and factories in Ireland, creating thousands of jobs. They were attracted by low taxes, government support and access to the EU market. This helped to reduce unemployment and develop other industries related to their activities.
At first, it seemed that low taxes could reduce state revenues, but economic growth compensated for this. Thanks to investment and new jobs, the budget received more taxes, which allowed the country to invest in social programs and infrastructure.
Thanks to the low tax, large businesses, especially technology and pharmaceuticals, began to open offices and factories in Ireland. This led to job creation, increased exports and increased government revenues. In addition, Ireland has used EU aid to improve roads, schools and other infrastructure, making it even more attractive to investors.
People found work not only in Google or Apple, but also in the industries that served them, for example, in transport, cafes or construction. This reduced unemployment and increased taxes on workers’ wages and their purchases.
In addition, foreign investment has made Ireland an important center for the production of technology and medicines, which has boosted exports. As a result, even with a low tax, the state began to earn more, because companies and their incomes became much larger.
Ireland’s low corporate tax policy has helped technology, pharmaceuticals and finance the most.
In the technology sector, such giants as Google, Apple, Facebook and Microsoft opened offices and research centers. Low taxes and an English-speaking environment made Ireland an attractive place for their activities. It provided thousands of jobs and made the country one of the leaders in IT and innovation.
Pharmaceutical companies Pfizer and Johnson & Johnson saw this as an opportunity for profitable production and research. They opened factories that produced medicines and medical equipment that were exported all over the world. It became the basis of the country’s exports and an important source of income.
The financial sector also developed rapidly. International banks and insurance companies, in particular, Citibank and JP Morgan, relocated their European offices specifically to Ireland. Dublin has become a major financial center.
Why did other states try to apply similar models, but did not succeed
Hungary, Cyprus and Panama tried to repeat the success of Ireland by introducing low taxes for business, but did not achieve such results.
Yes, Hungary has established one of the lowest taxes in Europe – 9%. However, it failed to attract many technology companies. Weak infrastructure, insufficient support for innovation and the language barrier were evident. Although the country has developed the automotive industry, it has lagged behind in the field of high technology.
In turn, Cyprus, like Ireland, proposed a tax of 12.5%, and focused on the financial sector. But large corporations have been deterred by money laundering allegations and the instability of the economy. As a result, Cyprus remained mostly an offshore zone, rather than a modern business hub.
Panama attracted companies with favorable conditions, but it was harmed by a reputation as a place for money laundering and weak technological development. The main income of the country still depends on financial services and transport.
In contrast to these unfortunate cases, Ireland has managed to combine low taxes with other important factors: an English-speaking environment, investment in education, transparent laws and stability. Probably, the attempts of other countries did not bring similar results, because they did not provide such conditions.
The potential impact of the minimum corporate tax
If the introduction of a moderate minimum corporate tax becomes a common practice around the world, it could take away the competitive advantage of low-tax countries like Ireland. If companies are forced to pay the same tax regardless of the country of registration, the advantage of low rates will disappear and some businesses may move to other countries.
For Ireland, this would be a real challenge, because its low tax was an important factor for foreign investors. However, the country has other strengths: skilled workers, strong infrastructure, stability and access to the EU market. Thanks to this, it can remain attractive for companies even without tax benefits.
A global minimum tax would also reduce competition between countries that have been lowering taxes to attract business. This will force governments to invest more in education, technology and innovation to create a favorable business environment.
Ireland is already adapting to new conditions. She agreed to raise the tax to 15% for large companies and at the same time invest in education, research and infrastructure development. Thanks to strong economic foundations, the country has every chance to remain successful even in new conditions.
How tax revenues affected the development of infrastructure, education and the social sphere
The taxes that Ireland began to receive through economic growth and foreign investment greatly improved life in the country. This money made it possible to build new roads, schools, hospitals and support people who needed help.
In transport, modern roads, bridges and updated airports appeared. which made the country more convenient for business and tourism. For example, the airport in Dublin became a major international hub, and new roads connected the cities, making travel and business easier.
They invested in education so that people could study and work in well-known companies. Universities created new programs in technology, science and engineering, producing specialists who were readily hired by companies like Google and Pfizer.
The social sphere also received more funding. Hospitals were built, medical services were improved, the state supported citizens with low incomes, thanks to which the standard of living in the country increased.
These changes have made Ireland even more attractive to investors. Modern infrastructure, quality education and social welfare created favorable conditions for business, which in turn brought even more taxes. This approach has provided Ireland with lasting success and development worthy of its legacy.
Tetyana Viktorova
