Tax Trends EU
The advantage Ireland has in attracting foreign companies as a result of its low corporation tax rates may have a limited time to run, a report on taxation in the EU has warned.
While the country’s 12.5% tax on companies has been undercut by Cyprus and Bulgaria with an unadjusted rate of 10%, it is still proving very attractive to foreign direct investment.
The country’s corporate tax take of 2.9% is less than the EU average of 3.3%. But the problem for Ireland may not just be pressure from other EU member states that want to see Ireland’s rates increased closer to their own, but falling income from companies.
The Tax Trends report shows that corporation income tax rates have been cut from an average of 35.5% in 1995 to 23% now, and despite the financial crisis five more countries cut their rates recently.
Countries are experiencing high levels of income from company tax, but the report says, this is unlikely to remain at this level in the next few years as the economic downturn hits profits.
The measures taken at EU level to limit harmful tax competition may have resulted in less erosion of the base for capital taxes, it says and added, “This has its limits, the decline will take place in the coming years”.
The take from companies has also been artificially boosted by workers forming themselves into companies – a trend that will reach its limits too, the report adds.
The strong economic growth up to 2007 offset the effects of the cut in corporation tax and taxes on capital. The increased revenue from taxes on capital was however due to soaring receipts from the capital gains tax and stamp duty that rose to reach 500% and 337% respectively of their 2002 level in 2007 thanks to the building boom.
The country’s current total tax-to-GDP ratio is now slightly below the 2000 level as the economy contracts. In 2008 the total tax take at 29.3% was the fourth lowest in the EU.
Ireland and Estonia have experienced the greatest drop of more than 2.5 points in consumption taxes such as VAT and excise duties as spending by households fell.
The biggest change to the country’s tax system will be the Carbon Tax that is estimated to bring in €330 million a year. This is on foot of the decline of environment taxes from being above average to below EU average as tax on energy was the third lowest in the EU in 2008.
The report points out that the EU as a whole is a high tax area with the average tax and social security contributions amounting to just short of 40% in 2008 – more than a third above the levels in the US and Japan and higher than Ireland’s 29%.
The differences however also reflect social policy choices where states provide services such as health care and pensions directly or via tax reductions.
It concludes that EU tax systems have been doing better than thought overall as despite the high tax system, GDP growth was healthy between 2004 and 007 and this rather than increased taxes led to increased state revenues.
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Jul 13, 2010Posted By
Sanjay MisraHere is a video created by Dr. Dan Mitchell, a senior fellow at the Cato Institute, to inform viewers about tax competition. Please consider posting and discussing this video.
youtube.com/.../nJWLemN29Wc
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