The European Commission has said that Ireland needs to improve its fiscal sustainability because it has a relatively low overall tax base and has the potential scope to increase more “growth-friendly” taxes.
Ireland was one of four nations, along with Croatia, Portugal and Slovenia, which were identified as needing to improve their fiscal sustainability in the commission’s latest report, Tax reforms in EU member states 2015.
The report looks at tax policy in the EU through an analysis of tax policy challenges and recent reforms in each member state. It examined each member state’s overall tax take, highlighting the countries where there was a high risk to sustainability because of a relatively low tax-to-GDP ratio.
Britain also has to improve the sustainability of its public finances, and has a relatively low overall tax level, but is a “borderline case” and “has no scope to increase the least distortionary taxes”, the report said.
The Commission noted that in Ireland’s case a relatively low tax-to-GDP ratio was partly due to the high proportion of multinational companies within the economy. “The ratio would be higher were GNI [gross national income] used, although it would still be relatively low compared to the EU average,” the report said.
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Gross national income measures activity in the economy excluding the effects of foreign multinationals.
“In reality, the possibility to raise taxes depends on a wide variety of country-specific factors, including previous tax increases and the expenditure side of the budget. These results are therefore only an initial indication,” the report by the Commission’s directorate-general for economic and financial affairs said.
Commenting on the use of patent boxes — tax reductions on the income earned from exploiting intellectual property — the report said that they had “become more widespread in recent years and has given rise to concerns that they will create harmful tax competition”.
“There is no clear rationale for using patent boxes as a means of stimulating innovation, as they do not appear to address any specific market failure,” it added.
Ireland announced details its own form of patent box, a 6.5 per cent tax break known as the knowledge development box, in the budget last week.
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In November last year, European member states reached a compromise agreement over rules for the future design of patent boxes to ensure they did not increase harmful tax competition between countries.
“In this context, Ireland — like other member states — is entitled to introduce a patent box provided it meets the agreed rules,” an EU spokesman said yesterday. “The new box will be assessed against these criteria in the council’s code of conduct group.”
An investigation into Apple’s Irish tax affairs is also due to be completed soon. The Commission said yesterday that the investigation was “ongoing” but that it could not prejudge the timing or conclusion of its assessment.