Ireland continues to be one of the most competitive locations for businesses in the world from a tax perspective – new report confirms

Ireland is the easiest country in Europe to pay business taxes for five years running and the fifth easiest country in the world. This is according to a new report issued by PwC, the World Bank and the IFC entitled ‘Paying Taxes 2012 – The global picture’. The report covers 183 countries worldwide and looks at all taxes paid by businesses, using broad principles from PwC’s Total Tax Contribution Framework.

The ranking by PwC/The World Bank is unique as it looks beyond corporate income tax to all of the other business taxes paid and is a measure of effectiveness of tax systems around the world. The Paying Taxes 2012 report measures the ease of paying taxes by assessing the administrative burden for companies to comply with tax regulations, and by calculating companies’ total tax liability as a percentage of pre-tax profits. Taxes and contributions measured include the profit or corporate income tax, social contributions and labour taxes paid by the employer, property taxes, property transfer taxes, dividend tax, capital gains tax, financial transactions tax, waste collection taxes, vehicle and road taxes, and other small taxes or fees.

It shows how businesses are affected not only by tax rates, but also by the procedural burden of compliance. The report focuses on three indicators which are used to determine the overall ease of paying taxes which are:

The time it takes to comply (Ireland ranked 2nd in Europe with 76 hours)
The cost of taxes, which is measured by the total tax rate (Ireland ranked 3rd in Europe with 26.3%). The range of total tax rate for Europe varied from the lowest of 20.8% for Luxembourg to the highest of 68.6% for Italy. The total tax rate covers five types of taxes that organisations pay: profit, social security, property, turnover, and other taxes such as fuel taxes etc
The number of tax payments made

The table below shows how Ireland compares to some of the other countries in the EU in terms of total tax rate (from left to right; Profit tax; Labour tax and other taxes) showing France’s profit tax of 8.2% compared to 11.9% for Ireland and 23.1% for the UK

Speaking about the Irish results, Feargal O’Rourke, Head of Tax, PwC Ireland said:

“Ireland continues to be the shining star in Europe where ease of paying taxes is concerned and also continues to score excellently for the time taken to comply being second in Europe. All of this is great news particularly given the ongoing financial and economic uncertainty. Ireland is firmly in a leadership position in this area when attracting Foreign Direct Investment. The survey demonstrates that, having simpler tax systems with competitive business tax rates, gives Ireland a real advantage in the market for attracting direct investment.

“One of the reasons why Ireland leads in Europe as the easiest country in which to deal with taxes is due to the Revenue continuing to make substantial advances in the area of electronic filing and payments and taking a proactive approach to making it ‘easier’ for companies to deal with their obligations.

“Our transparent tax regime and low corporate tax rate together with the relative ease to pay tax is vital in continuing to underpin the positioning of Ireland as a location of choice for foreign direct investment. This transparency and relative ease to pay taxes is an even more important element in providing us with an opportunity to help multinational corporations establish operations in Ireland”.

According to the study, a typical Irish company spends just over a quarter of its commercial profit in taxes, spends two weeks dealing with its tax affairs and makes a tax payment nearly every seven weeks. Globally this compares to the typical company paying nearly half of its commercial profit in taxes, spending over seven weeks dealing with its tax affairs and making a tax payment every 13 days.

Top 10 rankings for the EU on ease of paying taxes are, in order, are: Ireland, Luxembourg, Denmark, UK, Finland, Netherlands, Cyprus, Spain, Sweden and Estonia.

The top 10 worldwide economies for ease of paying taxes are, in order: Maldives, Qatar, Hong Kong, Singapore, Ireland, United Arab Emirates, Saudi Arabia, Oman, Kiribati*, Mauritius* (Kiribati and Mauritius are joint 9th)

ENDS

Notes to editor:

How does Ireland do?
The report finds that profit taxes in Ireland are typically 11.9% of the commercial profit, labour taxes are 11.6% and other taxes add a further 2.8% adding up to 26.3% of the profit of the company going in taxes. This is similar to last year, as there has been little change in the taxes levied on enterprise.

How does Ireland compare to some of our competitors?
Many people will focus on the rate which Ireland charges on corporate profits which is a statutory rate of 12.5%. In the case study, this converts to an effective rate of 11.9%. Interestingly, this is very close to the average for the EU which is actually 12.1%. Many countries in the EU have lower effective rates including France which has a rate of 8.2%.

In discussions on corporate tax rates, there is often a lot of focus on the statutory rate of tax which is 12.5% in Ireland and on average much higher across the EU. Of course, the rate that really matters is the amount of corporate income tax actually paid. In calculating the amount of corporate income tax due, adjustments are required to the company’s commercial profits to calculate the taxable profits. These will include adding back business expenses which are not deductible for tax purposes, and deducting tax depreciation for qualifying capital expenditure. These will be required by tax law and will differ between economies. The required tax adjustments mean that there will be a difference between the statutory rate of corporate income tax and the rate of tax that is actually paid by a company on its commercial profits.

For example, in Ireland, the statutory rate of 12.5% is below the average for our company in the EU of 21.8%. However, taxes paid on profits in Ireland are 11.9% which is close to the EU average of 12.1%. Tax depreciation is less generous in Ireland than in some other EU countries, and the capital gain is taxed at the higher rate of 25%.

Both Luxembourg and Cyprus are more competitive but it does rank third in terms of the total tax rate in the European Union. Many other countries in Europe put a significant burden of labour taxes onto the company, an average of 28.3%.

The table below shows how Ireland compares to some of the other countries in the EU in terms of total tax rate (from left to right; Profit tax; Labour tax and other taxes)

Why is this important?
The size of the tax cost of businesses matters for investment and growth. A recent study shows that higher tax rates are associated with fewer formal businesses and lower private investment. A tax increase equivalent to 1% of GDP reduces output over the next three years by nearly 3%. It also finds that a 1% increase in the effective corporate income tax rate reduces the likelihood of establishing a subsidiary in an economy by 2.9%.

European Union – Key findings:

Four economies in the EU implemented reforms to make paying taxes easier in 2010/11. (Czech Republic, Greece, Finland, Romania)
The Paying Taxes results for the EU are lower than the world average across all three sub-indicators. The average Total Tax Rate is 43.4% (compared to the world average of 44.8%), the average time to comply is 207 hours (world average: 277), and average the number of payments 17.0 (world average: 28.5)
The number of taxes levied on the company averages 9.3 globally. The average in the EU is 10.7, ranging from 5 in Sweden to 17 in Italy
Labour taxes and social contributions make up the biggest part of the tax burden in the EU – they account for 65% of the TTR compared to the world average of 36%
Many EU economies have multiple labour taxes and social contributions and this adds to the compliance burden
While VAT stems from a common framework in the EU, the number of hours required to comply with VAT varies due to different administrative practices used, from 24 in Finland and Luxembourg to 195 in Bulgaria

Note: European Union: Austria, Belgium, Bulgaria, Cyprus, Czech Republic Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Netherlands, Poland, Portugal, Romania, Slovak Republic, Slovenia, Spain, Sweden, United Kingdom.

About the World Bank Group
The World Bank Group is one of the world’s largest sources of funding and knowledge for developing countries. It comprises five closely associated institutions: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA), the International Finance Corporation (IFC); the Multilateral Investment Guarantee Agency (MIGA); and the International Centre for Settlement of Investment Disputes (ICSID). Each institution plays a distinct role in the mission to fight poverty and improve living standards for people in the developing world.

For more information about Paying Taxes, visit www.pwc.com/payingtaxes

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