Republic of Ireland’s corporation tax increase to 15% leaves Stormont to consider tax cut to compete for foreign direct investment

That is the analysis of Gareth Hetherington, Director of Ulster University’s Economic Policy Centre.

The Republic is raising corporation tax from 12.5% to 15% for companies with a turnover exceeding 750m Euro. It made the changes after pressure to sign up to the Organisation for Economic Co-operation and Development deal on global tax reform.

Mr Hetherington said: “The decision to increase the tax in the south narrows the competitive advantage that the Republic would have in relation to Northern Ireland in terms of its ability to attract foreign direct investment.”

However he pointed out that the UK corporation tax rate will rise from 19% to 25% in 2023, so the impact of the change in the south “is likely to be minimal” on NI.

“If Northern Ireland opted to set a rate much lower than GB and as low as the Republic’s it would undoubtedly help attract foreign investment,” he added.

He noted that legislation was passed to allow NI to reduce its own corporation tax rate prior to the collapse of the assembly, in order to compete with the Republic, but the pandemic then diverted attention from the matter and no further action was taken.

The Minister of Finance Conor Murphy has tasked an Independent Fiscal Commission for Northern Ireland to review appropriate tax levels for NI, including corporation tax, he said. This is due to report back in March 2022.

“The Executive will not make decisions on individual taxes when this wider piece of work is ongoing. However, ultimately the Executive will need to make decisions on NI’s economic competitiveness and that includes tax policy. Given timelines, those decisions will only be taken after the next Assembly election.”

Dr Esmond Birnie, Senior Economist at Ulster University Business School said encouraging inward investment through low taxes on profits has been in place in the Republic since the mid 1950s.

He says Dublin has long been under pressure internationally to change its corporation tax rate.

“Very importantly, whilst in recent years the official or nominal tax rate in the RoI was 12.5% the actual effective rate was often much lower,” he added. “It is unclear how far the new arrangements will prevent the use of the Republic as a funnel to pass profits through to extremely low tax international tax havens. So, whilst this is a serious shift in southern Irish economic policy, the scale of the impact in terms of competition between Northern Ireland and the Republic of Ireland in terms of Foriegn Direct Investment remains unclear.”