Minister for Finance Brian Lenihan was quoted this week as saying that “….. there is nothing in the Lisbon Treaty that diminishes our sovereignty in fiscal matters….. the government secured a protocol confirming this position in advance of the second Lisbon referendum.  To suggest ….. that our corporation tax rate is threatened by proposals announced today is highly irresponsible and certainly not in the interests of this economy which depends so much on foreign direct investment.   As I said in my Budget speech: ‘The 12.5% Corporation Tax rate will not change. It is here to stay.'”

I think he is whistling in the graveyard.  He is right in saying that the Corporation Tax rate in Ireland will remain at 12.5%.  But that’s not going to matter, because what’s really going to happen is that the EU, or a large subset of its member states,  will introduce a new tax system allowing them to tax companies, irrespective of where they are incorporated or are resident, largely on the basis of the proportion of sales made in each country.   That system is part of proposals for what’s known as a Common Consolidated Corporate Tax Base (CCCTB).

So if you have a company resident and managed in Ireland, the current system means that all its profits are taxed in Ireland at 12.5%.  But let’s say that 40% of that company’s sales in the EU are made into France.  What’s likely to happen when CCCTB comes into force is that France will levy Corporation Tax (at their, higher, rate) on 40% of the Irish company’s EU-wide profits.  That’s a bit simplified, and of course credit will be given for Irish tax already paid on those profits, to avoid double taxation, but it indicates the nature of the problem.

Since Ireland is a very small country, most sales by multinational companies are made outside the country.  The danger of CCCTB is therefore very real and very large.

But doesn’t Ireland have a veto on changes such as this?  Well, we have a veto on any direct challenge to the actual rate at which we charge Corporation tax, but we may not be able to stop other EU member states from pressing ahead and changing their tax systems to one based on CCCTB.   The responsible EU Commissioner (who has the cumbersome title of Commissioner for Taxation and Customs Union, Audit and Anti-Fraud) is of a mind that CCCTB should be implemented by means of the “enhanced cooperation procedure”  of the EU Treaty.  This procedure would only require that one-third of all EU member states agree to implement CCCTB in their territories, and they could go ahead.  

The enhanced cooperation procedure is the means by which the concept of a “two-speed Europe” will come into being, and Ireland’s corporation tax advantage could be its first victim.