Ireland and the Evolution of Tax Competition

Abstract: Ireland has for a long time been at the forefront of tax competition. Since the late 1950s incentives have been used in Ireland to increase industrial development. Prospective investors have been offered a broad range of financial and fiscal incentives, including capital grants, training grants and various forms of tax relief. The groundwork for this strategy was laid with the redirection of economic policy, with a move away from protectionism, import substitution and restriction on foreign ownership of Irish manufacturing industry, which was introduced during the 1930s. This approach helped to foster the recent explosion in the Irish economy, leading Ireland to be dubbed the ''Celtic Tiger'' Recently a new and more proactive stance adopted by the European Commission towards the issue of State aid, together with the current opposition towards unfair tax competition, has, however, meant that Irish tax incentives have come under fire and that some of the tax incentives previously available, are now under the executioners ax. Instead the corporate sector in Ireland as a whole will be tax privileged. This is accomplished with the new 12,5% rate, effective 1 January 2003, applicable to trading profits generally, whether arising from the manufacture and sale of goods or otherwise. With the realisation of the European Monetary Union a new set of rules have been implemented that further restricts the fiscal policies of the Member States. The rules have not been created in order to restrict tax competition but to provide stability for the European Economy and the new EURO currency. The effect of these rules can, however, sometimes lead to restrictions in the fiscal policies of Member States. Ireland is of course once again at the forefront of developments, already with a public reprimand by the European Commission over its budget policy. Despite this increasing pressure on Ireland to change its tax system and abandon its low tax rates, it seems that Irelands love affair with inward investment is likely to persist for the indefinite future and that the ''Celtic Tiger'' will be well placed to pounce on the opportunities being opened up by the new electronic technologies.