Wednesday, 31 August 2016

Is the race-to-the-bottom over for Ireland?

In ECON110 this week, we talked about the debate over globalisation. One aspect we discussed (albeit briefly as I was running out of time) was the 'race to the bottom'. This is a form of Tiebout competition (though Tiebout was writing about local governments rather than national governments). National governments want to attract multinational corporations to locate their production (or other) activities in their country rather than other countries. This creates jobs and keeps the population happy, and increases the chances that the government gets re-elected (if the country is democratic). Alternatively, it offers the chance for corrupt politicians to enjoy kickbacks and place their cronies in positions of power in the local subsidiary firm. Either way, there are incentives for the government to attract multinationals to locate in their country.

But, lots of countries have the same incentives here. They need to compete for the attention of the multinational. In order to ensure that the factory (for example) is built in their country, the government will need to offer a more attractive package than other countries. This package might include tax breaks, priority access to land, generous subsidies, and so on. Once one country starts to offer these inducements, other countries will need to do so to have any chance of attracting the factory to locate in their jurisdiction. This is the 'race to the bottom' - essentially a race towards zero corporate taxes (or even negative corporate taxes, if subsidies are eventually included in the offers).

And so, we end up with the situation where Apple apparently pays a 0.0005 per cent tax rate in Ireland. As reported in Stuff yesterday (and widely reported elsewhere):
The European Union says Ireland has given illegal tax benefits worth up to 13 billion euros (NZ$20.08bn) to Apple and must now recover the unpaid back taxes from the US technology company, plus interest.
EU Competition Commissioner Margrethe Vestager said: "Member states cannot give tax benefits to selected companies - this is illegal under EU state aid rules."
The announcement was made on Tuesday night, NZ time.
She said a three-year investigation found Ireland granted such lavish tax breaks to Apple over many years that the multinational's effective corporate tax rate on its European profits dropped from one per cent in 2003 to a mere 0.0005 per cent in 2014.
The race-to-the-bottom may have reached its limits. The big question for me is now: will the EU also take a closer look at the tax arrangements in Luxembourg as well? Watch this space.

[HT: David in the Waikato EDG Facebook group]

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