Ireland Is The Filling In Unappealing Tax Sandwich

Irish politicians vigorously argue that the country’s investment appeal goes far beyond its attractive 12.5 percent corporate tax rate. They will soon have a chance to prove it. Ireland, whose leader Enda Kenny meets British Prime Minister Theresa May on Monday, faces a huge challenge on tax and trade, coming from both east and west.

The island state is the biggest potential loser from the United Kingdom’s withdrawal from the European Union. Britain is the country’s biggest trade partner outside the EU. One risk is that trade flows get snared up with tariffs and onerous bureaucratic checks; another is that Britain forges new trade deals and buys goods elsewhere.

Take beef. Ireland sends half of its exports to Britain. But a United Kingdom freed from the EU could also strike accords with other huge producers like the United States or Argentina. Sausages, for example, are made in Britain with Irish beef and then shipped back to Irish consumers. That could spell double tariffs.

Ireland’s best defence – short of leaving the EU itself – is attracting investment. The lowest corporate tax rate in the bloc helps a lot, and partly offsets less than stellar infrastructure, and a chronic shortage of urban housing. Companies like Airbnb, Apple and Yahoo have set up shop in the country. Dublin hasn’t yet put the hard sell on financial companies looking for an alternative to London, but the ruling Fine Gael party is now starting to get its act together.

Were Britain to slash its own rate of corporation tax, though, Ireland’s relative appeal would erode. And that’s before any similar moves in the United States, where President Donald Trump has vowed to cut companies’ taxes, as well as slapping new taxes on imports. Then there’s Europe. The bloc’s tax tsar, Pierre Moscovici, used a trip to Dublin last week to raise the spectre of a common European tax base. Ireland has strongly rejected the idea of such meddling.

Companies have other reasons to choose Ireland besides its tax appeal, like access to the single market, and an English-speaking workforce. The actual value of such soft benefits has never been truly tested. It soon could be.

Request a free trial of Breakingviews here.