Effective Rates of Corporation Tax in Ireland

Abstract

This Technical Paper considers the effective tax rate on corporate profits in Ireland. It will be appreciated that this apparently straight-forward concept generates significant confusion. There is no single best measure of the effective tax rate and this Paper presents and examines eight different calculations for an effective tax rate on corporate profits in Ireland under three broad headings: using model companies; using official national statistics; and using company financial reports.The spread of estimates ranges from 2.2 per cent to 15.5 per cent for the most recent data available. Different approaches are relevant depending on the specific nature of the question being addressed. Some approaches are better at measuring the complexity and breadth of corporate tax. Other approaches are better at measuring the effective tax rate of companies. In attempting to assess the effective corporate tax rate that is applied to the aggregate total of corporate profits in Ireland, this Paper has concluded that the approach based on national aggregate statistics is the most suitable.The data from the Central Statistics Office and the Revenue Commissioners provide the best estimates of the effective rate of Irish Corporation Tax on the total profits that are subject to Irish tax but even within that there remains a choice of measures. This Paper has put forward the thesis that the measures based on Net Operating Surplus and Taxable Income best represent the effective Corporation Tax rate in Ireland.Much lower effective tax rates can be identified, notably the effective foreign tax rate for US-owned, Irish-incorporated companies, in the direct investment data produced by the Bureau of Economic Analysis. These show how MNCs can structure their activities to generate very low effective tax rates but it is not possible to achieve such low rates for profits earned in Ireland.The most appropriate effective tax rates identified in this Paper are below the headline 12.5 per cent rate and the reasons for this are the inclusion of foreign-source profits in the case of Taxable Income, and the exclusion of the interest cost of financing in the case of Net Operating Surplus. The impact of these factors is relatively small and the analysis presented here has shown that, since 2003, the effective Corporation Tax rates on Net Operating Surplus and Taxable Income have averaged 10.9 per cent and 10.7 per cent respectively.