Introduction
Ideas are important and they come from somewhere. It is often difficult to work out exactly where they do come from. Good ideas can appear to have a remarkable number of parents. Bad ideas are invariably orphans. The history of tax policy-making is full of examples of both Footnote 1
Jurisdictions considering tax policy changes frequently need to secure the agreement of external agencies such as the European Commission, the International Monetary Fund (IMF), and/or the Organisation for Economic Co-operation and Development (OECD). Most sources that document tax policy changes merely outline their progression through the various stages necessary to introduce them into law. While reference may be made to social and economic objectives, the literature fails to fully explore how authorities approach the complexities involved in negotiating the shape of new tax legislation. Capturing examples of how this has been successfully done may serve to guide other tax administrations in navigating tax policy change in an international domain.
This paper examines the introduction of a specific Irish tax policy that has been the subject of much international attention and that the Irish authorities considered critical to the country’s economic development strategy, i.e., the 12.5 percent corporation tax rate adopted in 2003.Footnote 2 Already by this time Ireland was one of the most foreign direct investment (FDI)-intensive economies in the industrialized worldFootnote 3 and a major FDI export platform for United States (US)-owned multinational corporations (MNCs).Footnote 4 The new rate represented a continuation of the low corporation tax regime that had been in place since the late 1950s and that Padraic White, long-serving Managing Director of the Industrial Development Authority (IDA), describes as “the unique and essential foundation stone of Ireland’s foreign investment boom.”Footnote 5 Given that Ireland’s withdrawal of its opposition to the OECD’s minimum 15 percent global corporate tax (CT) rate tabled in July 2021 may restrict the extent to which the 12.5 percent CT rate applies in the future,Footnote 6 it is timely to examine the background to its introduction.
The primary contribution of the paper is to document the perspectives and lived experiences of key participants in the tax policymaking process of the time, which necessitated extensive engagement with the EU authorities. Our research question is how Ireland managed to navigate a path to a generally low corporate tax rate when faced with EU opposition to its existing corporate tax regime. In capturing the memories and stories of key participants in Irish policymaking who navigated the introduction of the Irish 12.5 percent CT rate, engaging with the EU throughout the process, this paper provides a case study that can guide other tax administrations by showcasing one approach to successfully negotiating tax change.
Our second contribution lies in our use of the oral history method. This method facilitates the creation of a richer and more contextual narrative on the evolution of the relevant tax provision. Despite numerous calls for the utilization of oral history in business history, the method has been employed only infrequently.Footnote 7 Wales and Wales,Footnote 8 for example, point to the dearth of literature on tax policymaking, while Hammond and SikkaFootnote 9 specifically identify tax as an area that might benefit from an oral history approach. Demonstrating how the method can be used to gain a richer perspective on how public policy decisions are arrived at may encourage and assist other researchers in their endeavors.
The paper is organized as follows. The next section provides an overview of the limited literature on tax policymaking in Ireland. We then outline the historical context, focusing particularly on the corporation tax innovations of the 1950s that were crucial to the outward reorientation of the economy and its later emergence as an export platform of significance. Section 4 discusses our research method. Our findings are presented in Section 5. The paper concludes with some final comments.
Tax Policymaking in Ireland
While there is plenty of literature on policymaking more generally, Wales and WalesFootnote 10 point to the dearth of tax policymaking. Their study found that while Ireland did not have a satisfactory consultative process when it came to tax policymaking, interviewees described a positive relationship between the business tax community and the Department of Finance, with the government open to approaches regarding tax issues. There was good access to Department of Finance officials who had a strong commitment to maintaining a constructive relationship with the business community. The authors refer to a “small country effect” when describing the informal relationship between the Irish business community and government, noting that government institutions are small and senior private sector individuals are well known. The study acknowledges that the tax community in Ireland is extremely interconnected, with the authors suggesting that Governments in small countries may have the advantage of being able to hear the views of the people affected by a proposal because they can gather everyone into the same room at the same time.
That said, ChristensenFootnote 11 suggests that the constitution of administration institutions gives rise to profound differences in the identities, expertise, economic ideas, and policymaking approach of Irish tax policymakers compared to those in New Zealand (also a small, open economy with Anglo-Saxon traditions). Christensen argues that different bureaucratic organizations are dominated by different policy ideas (e.g., Keynesianism or neoclassical thinking) and that the substantial ideas of the bureaucracy will influence policy content. He suggests that the generalistFootnote 12 civil service orientation and closed recruitment mechanisms in Ireland created a tax policy bureaucracy that identified as civil servants, had limited economic expertise, was not cognizant of microeconomic ideas about taxation, and took a passive approach to policy advice. He argues that this allowed tax policymaking in Ireland to be dominated by the ideas of politicians rather than technically skilled officials with strong policy ideologies—officials who had the ability to set the policy agenda, evaluate and counter the policy proposals of politicians, and warn them about the deficiencies of existing policies. Christensen suggests that neoliberal tax ideology (low rate, broad base, neutral) was not entrenched among Irish policymakers in the mid-1980s because of the generalist nature of the Irish civil service and a dearth of economic experts. This resulted in high-income tax rates with narrow bases and a plethora of tax reliefs when many other countries were embracing neoliberal policies involving low rates, broad bases, and neutrality-enhancing tax reforms.
Given the dearth of further academic literature on the practice of tax policymaking in Ireland, we were keen to expand our understanding of how Irish authorities approached CT policy when faced with opposition from the EU to the then-existing CT system. We outline below how the CT system in Ireland developed. This enables us to put our findings in context and illustrate how they support or deviate from the documentary evidence.
Historical Background to the Role of Corporation Tax in Irish Economic Development
Ireland was a predominantly agricultural economy at independence in 1922. As in the newly established states on Europe’s eastern peripheries, “lack of self-determination and the impossibility of an independent economic policy were considered the main reasons for previous failures [ … ] The new Zeitgeist of surging nationalism which equated independence with economic self-sufficiency became the cradle of a new modernization philosophy.”Footnote 13
Given the strong export orientation of Irish agriculture, only modest (“experimental”) tariffs were introduced in the 1920s. Trade barriers were raised significantly following a change of government in 1932, though the entire world turned protectionist with the onset of the Great Depression. While Protectionism initially resulted in a massive expansion in Irish manufacturing (the rate of increase in factory employment was three times that of the United Kingdom [UK] over the seven years to 1938), as industry recovered from the Great Depression, Irish labor productivity declined as entirely new industries were conjured into being. The Department of Finance warned—presciently—that the new vested interests that Protectionism would create would make it difficult to reverse course later.
From the foundation of the Irish State, there were major differences in the policy positions advanced by different elements within the civil service bureaucracy. The Department of Finance adhered strongly to the UK’s “Treasury orthodoxy,” which included a belief in the efficacy of free trade, sound money, balanced budgets, and low and non-distortionary taxation.Footnote 14 The other main economics ministry, the Department of Industry & Commerce (forerunner of the Department of Enterprise, Trade & Employment, the line department for Ireland’s industrial development agencies) was more interventionist in its approach, as will be apparent throughout the remainder of the paper.
By the end of World War II, it was clear that the import-substituting industrialization (ISI) strategy had reached the limits of its potential. Ireland’s growth record over the period 1950–1958 was the worst in Western Europe and the emigration-fueled decline in population over these years was nearly twice as great as over the entire preceding period since independence. The two deep recessions of the early and mid-1950s were associated with austerity measures implemented in response to the balance of payments crises.
The volume of Irish exports had fallen substantially since the late 1920s due to the Great Depression, protectionism, a trade war with the UK, and the difficult trading conditions of the World War II era.Footnote 15 Relaxation of the balance of payments constraint necessitated a renewed focus on exports. The Department of Finance advocated trade liberalization, which the Department of Industry and Commerce feared would threaten up to two-thirds of existing manufacturing jobs. Along with the recently established Industrial Development Authority (IDA), it advocated instead for the adoption of financial and tax incentives to increase exports. The victory of the Industry and Commerce camp in the policy battle of the mid-to-late 1950s initiated the strategy of “industrialization by invitation,” which remains a significant component of Irish industrial development policy to the present day.
A decision to introduce export profits tax relief (EPTR) was announced in 1956. The Department of Finance complained that this would further postpone the day “when we can bring farming profits within the income tax net” and argued that “it is production which should be aided rather than exports.” It had earlier made the case that assistance if offered, “should take the form either of a direct subsidy which can be effectively measured or of loans and grants analogous to those in operation in Northern Ireland.”Footnote 16 By confining the tax relief to exports, the policy achieved its objective of promoting the outward reorientation of the economy without triggering the opposition of the protectionist-era industry.Footnote 17 Only in 1960 did the Department of Finance explicitly accept that “tax concessions must continue to play a vital role in our industrial promotion campaign.”Footnote 18 Revenue (the tax collection agency) continued to withhold its support.
Profits in 1956 were subject to a total tax rate of close to 50 percent. The new incentive was to operate for a period of five years and took the form of a remission of 50 percent of the tax on manufacturing profits derived from increased exports over a datum year.Footnote 19 Over the next two years, under a new government, the tax remission was expanded to 100 percent and the period of the exemption was extended from five years to ten.Footnote 20
While UK and Continental European firms, constrained by labor shortages at home, responded enthusiastically to the new incentives, it would take somewhat longer for US firms to follow suit. The Shannon Free Zone initiative of the following years was targeted particularly towards them: Shannon Airport was located within relatively easy reach of the east coast of the United States (US) and Irish labor costs were low not just by advanced economy standards but relative even to those of Puerto Rico, another early export processing zone (EPZ). The Shannon EPZ was established in 1958, with a twenty-five-year tax exemption for qualifying companies (rather than the ten years applicable to the rest of the country).
Manufactured exports increased strongly in 1957 and more than doubled (albeit from a very low base) between 1956 and 1960. The annual reports of the Irish Export Board ascribe the expansion largely to the new financial and tax incentive packages. The new policy regime resulted in a significant diversification in exports and export destinations. By the eve of EEC accession in 1973, post-1955 export-oriented foreign firms accounted for almost 20 percent of manufacturing employment. US firms accounted for at least one-third of the jobs among the group and comprised the bulk of foreign MNC employment at Shannon. As EEC accession approached, however, Ireland was understandably concerned by the prohibition in Article 98 of the Treaty of Rome of export incentives introduced without the prior approval of EEC member-state governments. The agreement was secured with the EEC that the country’s entire industrial incentives package would be adjudicated upon by the European Commission when a review of state aid had been completed. The export profits tax exemption would survive until the end of the decade when it was replaced by a new (low) 10 percent rate of corporation tax on all manufacturing enterprises.
A further subsequent development of importance in the tax landscape was the establishment of the International Financial Services Centre (IFSC) in Dublin in the 1980s. This was backed by a tax incentive that “matched the attractions of established and competing financial centers such as Luxembourg and the Channel Islands.”Footnote 21 The special 10 percent rate of corporation tax for the manufacturing industry was extended to qualifying activities carried out at the IFSC, while most other services activities continued to be taxed at a substantially higher rate. As a form of state aid, the special tax rate required the approval of the European Commission. As the then Irish Finance Minister would explain in 1996:
the IFSC was specifically negotiated in the context of the big bang and deregulation of financial markets and the attempt by the European Union to foster the growth of regional financial centres. It was possible to argue successfully for this concession in the context of a once off window. Footnote 22
The 10 percent rate was also extended to service activities at Shannon.Footnote 23 The result was a complex system under which some companies paid the lowest rate of CT in the EU while others paid one of the highest.Footnote 24
Ireland’s success in attracting foreign direct investment began to provoke claims of unfair tax competition from other EU member states in the 1990s and the government was informed by the European Commission in November 1996 that the preferential rate could not be maintained indefinitely as it had been judged to constitute an anti-competitive state aid.Footnote 25 This gave rise to considerable political disquiet in Ireland.Footnote 26 While the country was anxious to avoid being labeled a tax haven—which would damage its international reputation—it was considered essential to maintain a low CT rate to retain the foreign investment that had been so carefully nurtured over previous decades.Footnote 27 Eventually in 1998 the EU permitted Ireland to introduce a uniform rate of 12.5 percent for all corporates from 2003.
For companies that had paid tax at the 10 percent rate, the increase was delayed until 2005 for services activities and 2010 for manufacturing.Footnote 28 Although 12.5 percent represented a marginal increase for companies that had been paying at the 10 percent rate, the new rate entailed a substantial reduction for all other corporate taxpayers (who were paying a rate of 38 percent at this time). The 12.5 percent rate was recommended by the board of Forfás, the policy and advisory arm of the IDA, but was opposed by the Department of Finance and the Irish Congress of Trade Unions, both of which favored a higher rate.Footnote 29 The Forfás proposal was eventually accepted by the government, and the headline rate was progressively reduced to 12.5 percent over the years to 2003.
Putting the Irish story in the broader international context, from the 1980s onwards there had been a globally widespread change in tax system structures. Following the lead of the UK in 1984 and the US in 1986, there was a movement away from relatively high statutory rates and extensive use of tax incentives to attract investment (albeit the time, pace, and depth of policy reform varied significantly).Footnote 30 While top statutory corporate tax rates in the early 1980s were rarely less than 45 percent, in the five years between 1988 and 1993, the average CT rate within the OECD fell from 41 percent to 33 percent.Footnote 31 By 2011, the OECD average rate was below 26 percent.Footnote 32 Providing a fiscal environment that encouraged investment, risk-taking, and entrepreneurship, while also providing enhanced incentives to work, was widely perceived as being one of the drivers for changeFootnote 33. Lowering the CT rate and broadening the tax base was considered the best way to collect taxes while minimizing the impact of tax on business decisions. Globalization and tax competition were also important factors driving the reduction of CT rates especially in small open economies.Footnote 34
Having set out the historical background to the Irish 12.5 percent CT rate, we now turn to a brief discussion of the oral history research method.
Research Method
As a method, oral history is used to document people’s first-hand experiences, opinions, interpretations, and perspectives—information that might otherwise fade from public memory and be lost forever if not captured and preserved.Footnote 35 While the nature of most documentary records is to reflect the standpoint of those in authority at a particular time, oral history can add the perspective of individuals who have first-hand experience of living through the events being examined—in other words, those on the front line. As such, it provides a more realistic and fair reconstruction of the past, sometimes challenging established accounts. AbramsFootnote 36 urges oral history research to engage with elite groups in positions of authority in government, the economy, and society. She encourages speaking to those who made decisions that impact the many as a means of understanding how power is distributed in society and how those with political, economic, or cultural power use it to their own or others’ advantage or disadvantage. We seek in this study to answer this call.
The role of oral evidence in business history has been relatively limited despite calls for a greater level of engagement between oral historians and business historians.Footnote 37 CoufalováFootnote 38 claims that by giving voice to those involved in business, oral history complements scholarly written literature by filling in the gaps and offering the human dimension of historical business events, often providing information that has been silenced by the official historical narrative. This makes it a critical component of historical discourse with immense potential for enhancing our understanding of business.Footnote 39 As a research method, oral history has been used only infrequently in the realm of tax policy.Footnote 40 We suggest that it offers a promising means of enhancing our understanding of how certain systems and structures have evolved as they have, allowing us new insights and answering several calls in the literature.
While oral history interviews are typically conducted with one person at a time, discussions taking place during a multi-person interview can serve to illuminate participants’ memories, yielding important insights.Footnote 41 Participants may assist each other to remember details or spark responses that otherwise would not have occurred. Individuals within a group will often provide corrections of information and can stimulate each other’s memory, especially when a large group comes together. As they argue and exchange stories, fascinating insights can emerge from this collective memory. As observed, “you can sometimes start several experts arguing among themselves, and in this way you will pick up more information in one hour than you will acquire during a whole day in a series of interviews.”Footnote 42 A group setting can serve to mitigate concerns that individuals may have their own strong sense of the story and be practiced at deflecting difficult questions.Footnote 43 We adopted the group interview approach for these reasons and we outline in the findings section the richness that this contributed to our understanding of the experiences of participants in the tax policymaking process during the period of interest.
To gain a thorough understanding of the arguments and ideas in play during the period leading to the introduction of the 12.5 percent CT rate, in a manner not restricted by existing accounts but rather by harvesting the memories of the people who were directly involved in the process, the authors held a “witness seminar” in Dublin in February 2019 in a premises equipped with unobtrusive audio recording facilities. Approval to carry out this study was granted by the relevant University Research Ethics Committee. For confidentiality reasons the session was not video recorded: two research assistants were in attendance to maintain a record of the identities of those contributing. This is in line with best practiceFootnote 44 to address the problem that many voices sound similar when recorded so transcription of a multivocal interview session can be very difficult.
Consistent with best practice, a briefing document identifying key dates and events pertinent to the topic had been prepared and distributed to participants in advance.Footnote 45 The seminar was facilitated by one of the authors who is from the UK and had limited knowledge of the CT policy change. This is again in line with best practice, as an outsider is more likely to raise questions about what might appear obvious to seminar participants.Footnote 46 The seminar was recorded, transcribed, and proofread. Braun and Clarke’sFootnote 47 six-step thematic analysis (later relabeled “reflexive” thematic analysisFootnote 48) was employed to analyze the transcript. The transcript was reread several times by three of the authors to develop an understanding of the narrative (step 1). Working systematically through the transcripts, an initial list of codes was generated separately by three of the authors (step 2). These codes were then grouped under an initial set of potential themes (step 3). Discrepancies between the three authors were resolved through discussion and eventual consensus. Each theme and all associated extracts were reread to ensure that when read together they cohered in a meaningful way to ensure that the themes and any sub-themes identified accurately represented the view of the interviewees (step 4). Step 5 consisted of further refinement of the specifics of each theme and subtheme and a deeper reflection on the overall story being told. The sixth step involved the final opportunity for analysis before writing up (step 6).
The study used a purposive sampling approach. The seven participants involved in the witness seminar had held the following roles during the relevant period (with some holding more than one role): Chairman of the Irish Revenue Commissioners, President of the Irish Tax Institute, Secretary General of the Department of Finance, advisor to the Minister for Finance, Chief Executive of the IDA, Inspector of Taxes, member of EU working groups on direct taxation, two Principals in the Department of Finance, two members of the 2008–2010 Commission on Taxation, and two Tax Partners with three of the Big 5 accounting firms of the time. As articulated by Blumer, the aim is for validity: therefore, six individuals with in-depth knowledge constitute a far better representative sample than a thousand individuals who are not knowledgeable about the relevant event.Footnote 49 While many of the participants were retired, all had the ability to articulate their memories effectively and were willing to give an account of their recollections of the period in question. The tax partners and the Chief Executive of the IDA would have represented the views of business during the relevant period as well as also holding roles that afforded them the opportunity to influence the debate at that time. Notably, there were no representatives from the nongovernmental organization (NGO) sector influencing tax policymaking at the time and as such, they were not represented at the seminar.
In reporting the findings, we include quotes from seminar participants. We consider it vital that readers “hear” the participants’ voices. Direct quotes allow the richness of the data to shine through.Footnote 50 All quotations are taken directly from the seminar transcript. To maintain the anonymity of the process, quotations are not ascribed to individual participants.
Findings
Background to the Change in CT Rate
Although the 10 percent CT rate for manufacturing activity came under the EU spotlight because it had been identified as a State Aid, participants were keen to stress that this preferential rate had been approved by the EU. It was considered a general tax measure and was initially levied on manufacturing activities and subsequently expanded with EU approval to include service activities at Shannon and in the IFSC. Participants explained that these derogations were granted by the EU on the grounds that certain sectors of the Irish economy required development. The derogations did not initially fall foul of State Aid rules—over time, however, questions began to arise concerning the nature of some of the activities that were being included under the definition of manufacturing. One of the participants explained that to determine eligibility for the 10 percent CT rate, an examination of the final manufactured output was carried out, comparing this to the pre-process state of the product. This examination attempted to establish if “a process” had been applied to the product which could be classified as manufacturing. This inevitably led to a significant level of judgment being required, giving rise to what was described as “a golden age” for tax advisors. The participants reminisced and traded stores about where, due to the ever-expanding definition of manufacturing, court rulings were required to decide whether an activity constituted manufacturing or not for tax purposes.
For example, people were importing Polish coal and because there was dynamite in the coal, the coal had to be sorted out … if you put Polish coal unsorted out into your fire, there was an explosion. So, the coal had to be graded and go through, and the judge decided that what came it out at the other end was a different product than what went in.
Fyffes was importing bananas and … they were putting them under a machine down in Cork and the judge decided that banana ripening was different from unripened [bananas].
Apart from the practical difficulties arising from the expanding definition of manufacturing, risking EU disapproval was a growing concern. As mentioned, Ireland had received approval for its 10 percent manufacturing rate as well as for the Shannon Free Zone and the IFSC, but not for the myriad of activities that were being included under the definition of manufacturing. In other words, “the ambit of what was manufacturing really morphed into something much wider.” It was widely accepted among the group that this was inevitably going to lead sooner or later to confrontation with the EU. Participants recalled how the attitude of the European Commission began to change around 1996 (there was some back and forth between the participants as to the exact date) when it started to raise issues around breaches of State Aid rules.
They decided that it [i.e., the 10 percent manufacturing rate] was State Aid and they were going to shut us down …
Irish relationships with the EU served to slow down the process for a time. Participants unanimously agreed that the EU Commission held an impression of Ireland as a poor but pro-EU country, with the Commission being generally positively disposed towards Ireland.
Now we were lucky that the commissioner in charge of the taxation directorate was an Irishman, [name redacted], so he was able to sort of slow things down at that level …
There was some reference to how the Irish delegation interacted with some of the individuals involved in the State Aid decision—how they tried to engage with the relevant European Commission personnel but also knew when to concede. The Commission nevertheless determined that the 10 percent manufacturing rate amounted to State Aid and withdrew its approval. Even though Ireland accepted that EU support for the 10 percent rate had been lost, participants recalled that the Department of Finance considered it important that it be noted that the preferential rate had initially been approved by the EU.
[name] - very high level in the State Aid part of the Competition Directorate, came over to see us and we laid out a very nice lunch for him, wine, everything, but to no avail. He more or less told us that they had changed their mind. I said “My God,” I said to him “But you approved it in 1990. “Yes, we can change our mind. You want me to retrospectively change it back?,” and I said, “no, no it is all right.”
The “Primarolo Group”Footnote 51 reported in November 1999 and the Irish 10 percent corporation tax was listed as one of the harmful measures, but there is nice footnote which says, “the Irish delegation does not agree that it should be given a positive evaluation.” … I remember drafting that footnote!
One participant stressed (with all the others voicing agreement) that it was important to understand that the Irish rate had not been singled out by the Commission but was part of a wider international examination of harmful tax practices within Europe reflecting an international shift in the attitude towards corporate taxes.
… they weren’t just going for us in isolation … all over Europe, there were various tax arrangements in, in play … which involved the cost-plus base for profits rather than actual profits and that was coming into focus in the early 90s.
Ireland managed to hold onto the preferential rate for a substantial transition period by pointing to the fact that the sunset date on the rate had given companies availing of it a “legitimate expectation.” Participants heralded this as a great achievement by some of the key Irish players at the time.
Now, that was great achievement by, initially by X [referring to another participant] and Y [referring to another participant] who were our negotiators at official level and then, at a political level would have been Mary Harney, Minister for Industry and Commerce, Charlie McCreevy, Minister of Finance, aided by Padraig Flynn … who was the Commissioner. They pushed very hard at the Commission level, so we got quite a deal, we got until four years.
Arriving at the 12.5 Percent Rate
Having lost EU approval for the 10 percent preferential rate, Ireland now had to consider its response. Participants recalled that there was always good national debate about CT because of the needs of the economy. Forfás, which advised the Minister for Industry and Commerce, produced a report in 1996 on how Ireland might proceed.Footnote 52 Stressing the importance of certainty and stability, it identified three possible options: to continue with the 10 percent rate without EU approval, to introduce a single low rate of CT, or to switch to a system of administrative rulings. Participants agreed that the first and third options were seen as impracticable from the outset. At the international level, the EU Code of Conduct on business taxation had clearly set out that a generally low rate of tax per se, was not a harmful tax instrument, and the OECD had arrived at a similar conclusion.
That is the most important thing that happened during that period because it meant that the … 12.5 percent rate was not an infringement of the generally internationally agreed codes and then to cap it, the commission … revised their State Aid rules and … made clear that a general non-discriminatory, non-selective rate of corporation tax was okay vis-a-vis the State Aid rules.
The path towards a general low CT rate had now been laid. However, arriving at a specific rate was not without difficulties, with many voices involved in the debate. The Department of Finance, for example, favored a higher rate while the IDA wanted the lowest rate possible. Seventeen percent was considered a good mid-point, lying between the 10 percent rate and the 32 percent standard rate at the time, but the IDA and the Department for Industry and Commerce felt that it would result in an outflow of FDI.
The Minister for Industry and Commerce proposed to government … that 12.5 percent be introduced … the Department of Finance was opposed to it thinking it was too drastic and that it would be regarded without favour by France and Germany. … we wanted to say maybe 20 percent, maybe 17.5 percent maybe 15 percent but the IDA and Industry and Commerce … felt that that was too big a step from 10 percent and up to 15 percent.
There was widespread agreement among all participants that the rate was not arrived at using a mathematical or scientific process.
… there is nothing magic about 12.5 percent … I mean, it couldn’t be 13 because that was seen as unlucky. It couldn’t be 10, you know, 12.5 almost was, it’s an eighth, it’s an easy thing …. It is fair to say it wasn’t a mathematical …. Optimum point or anything …
Instead, it was decided upon based on two primary considerations: the need for certainty and the impact on foreign direct investment. The overriding concern finally uniting all stakeholders was what would best serve the country’s interests.
It is fantastic to see, especially … in the early days where we needed everybody to come together and particularly, Finance and Revenue … to actually buy into the fact that the core, the core objective, is inward investment and foreign direct investment.
While the idea of a general low tax rate was accepted by all stakeholders, participants recalled a general sense of unease about the rate being available across all sectors. There was concern that the financial services sector located outside the IFSC would be benefiting from a massive decrease in corporation tax due to the change in the rate, to the detriment of the exchequer.
… when you moved to the 12.5 percent rate, the point … that the domestic service companies, the banks, the insurance companies, were getting this massive windfall and the exchequer was having a massive cost. So, the sums had to add up when you, when you pitched the rate.
Participants recalled how there was some early debate about whether there was any way to keep banks, insurance companies, and retailers at a higher rate, but that it was quickly realized that this would be not feasible. Several participants drew attention to the macro level context: about 60 percent of the CT taken at the time came from companies paying tax at the preferential 10 percent rate. While the rate would be reduced significantly for companies paying tax at the standard rate, it represented an increase for the most significant contributors to corporation tax revenues. To balance the reduction in exchequer returns somewhat, the introduction of the 12.5 percent rate was accompanied by both a broadening of the CT base (by removing various incentives from the system) and the introduction of a 25 percent CT rate on passive income to ensure that Ireland did not attract FDI without the substance associated with increased employment.
If passive income had been subject to the 10 percent or the 12.5 percent rate you might have had an absolute load of investments sort of plonked into Ireland to passively grow there subject to a low rate which would have done damage to the trading …. We wanted substance, we wanted jobs.
Certainty
Certainty was a major consideration in arriving at the new 12.5 percent rate. Ireland’s 10 percent manufacturing rate had fallen foul of the EU’s State Aid rules due to becoming inconsistent, overly complex, and ambiguous. The new 12.5 percent rate, however, was uncomplicated and stable: the fact that it did not have a prescribed end-date meant that it was not a “tax holiday,” while “grandfathering” (entailing the gradual winding down of the older 10 percent rate before, and even after, the introduction of the 12.5 percent rate) provided even further certainty. Nevertheless, the reality was that companies that had previously been availing of the 10 percent rate would inevitably end up paying tax at the higher rate of 12.5 percent. While there was some concern that this could lead to the departure of multinationals already established in Ireland, participants agreed this did not happen. They widely agreed that having a “sunset” day for the 10 percent rate provided these companies, as well as those considering establishing in Ireland, with the added certainty of a defined period during which they could still avail of the low 10 percent rate.
… there was … a run up to 2010 which we were sure about and now, with the 12.5 percent, it is a key thing and that as more and more of the, the big multinationals … , are investing huge amounts of money in Ireland …. So, they are depending on this low tax to continue forever because otherwise it actually shakes up their confidence in how we operate.
Participants also agreed that the 12.5 percent rate has since become a strong Irish brand. They considered that a reduction in the rate in the future would be just as detrimental as an increase, because of the uncertainty this would generate.
The Commission on Taxation …. I was on it, and X [another participant] was on it and when it came to the 12.5 percent rate, there was a paragraph – X, you and I wrote it. … we said, “look the rate, it shouldn’t go up but it shouldn’t go down either and … it is all about stability … it kind of talks to commitment, stability, predictability.”
Most political parties in Ireland since then have staunchly defended the 12.5 percent rate, even when international pressure was exerted in the aftermath of the 2008 financial crisis.
[In the context of the 2008 financial crisis] there was external pressure from France particularly and Germany on the rate but in fairness the IMF were very helpful, and there was domestic unanimity around the importance of keeping the rate so, in fact it helped that it was foreigners who are looking for us to change the rate, because the natural reaction was NO.
Even throughout the 2008 financial crisis when a plan was made to reduce the burgeoning budget deficit, there were no significant changes made to the Irish CT regime. This plan included tax measures (the introduction of the Universal Social Charge, a reduction in personal standard rate tax bands, and increases in Value Added Tax), and non-tax measures (cuts in the civil service, savings in capital spending), yet the CT regime remained largely untouched. The participants agreed that what helped Ireland’s position in its dealings with the IMF was not only the fact that Ireland developed its own plan, but that there was little domestic opposition to it. This plan was then largely accepted by the IMF.
What helped us to get out of the crisis was before the Troika came we had done our own plan and the Troika then said, we have a plan we told them, and they tweaked it a little and it was our plan there was no domestic opposition to it, unlike the case of Greece where it was an external plan and the locals hadn’t bought it.
Foreign Direct Investment
A major consideration in the adoption of the 12.5 percent rate was the importance of attracting further inward foreign direct investment. As one participant recalled, while Ireland had up to then largely focused on attracting companies that qualified for the 10 percent preferential rate, the new 12.5 percent rate provided Ireland with an opportunity to market itself as a location for a broader range of foreign direct investment projects. The importance of foreign direct investment was even understood at the level of the individual taxpayer: there was widespread recognition across the population that a generally low rate of CT was the inevitable price to pay to promote inward investment, the outcome of which could be seen in terms of employment opportunities.
So, roughly 350,000 of 2.2 million workforce are directly employed by companies here and they know in their heart and minds that tax it is one of the reasons they are here … it had been ingrained into the public psyche that low tax creates employment in your town and your village.
A Shift in CT Policy?
All participants agreed that moving to a low CT rate did not represent a dramatic change in Irish tax policy. On the contrary, they considered it a gradual, possibly inevitable, result of a sequence of events, dating back to the 1950s.
… we never had any alternative as a country, but to have a low rate of corporation tax as an incentive on the periphery of Europe to try and promote the development of a protected and agricultural-based economy which was there in the 1950s …. I regard it as a logical progression, taking account of the way circumstances and international views on taxation were changing and in particular, of course, taking account of evolution of thinking on State Aid rules at the EU.
However, while the change in the rate may not have been a significant departure from what had gone before, the fact that it now applied across the whole economy opened up new opportunities for how Ireland might market itself.
… there was a paradigm shift …. Prior to the reduction in the rate, when we were targeting inward investment, you were only looking at a certain type of company or a certain part of the value chain‥ Once the low tax rate came in … all of us around here could go out and say no matter what activity you have or where it is in your particular supply chain, your value chain, you can bring it into Ireland.
International Reaction
While Ireland’s 12.5 percent rate has since attracted international criticism, particularly in the aftermath of the 2008 financial crisis, participants did not recall much reaction when the rate was initially introduced. However, there was surprise in some quarters.
… a British colleague … was just flabbergasted that we would … do that, sort of the boldness of it on one hand, and on the other hand, they could never have done because it would knock such a hole in their … exchequer
Success of the 12.5 Percent Rate
When asked how Ireland was able to successfully navigate to a general low tax regime, participants identified several key themes, outlined below.
National Context
Firstly, it was noted that being a small country facilitates close collaboration between stakeholders and government departments, which helps to expedite progress by facilitating a timely and uncomplicated information and feedback loop.Footnote 53
“One great thing I think about Ireland is there has always been consultation. It is a small country. The Department of Finance, Revenue, the practitioners, we’d all know each other and there would be a lot of communication and trust as well.”
Participants agreed that this was something unique, which may not be possible in larger countries.
“… I don’t hear it from any other country that I engage with in Europe with my peers I don’t hear that at all … policy here is probably a more integrated process than it might be in the UK where I don’t get a sense of the UK, for example, that my equivalents would be sitting down with the Minister, or sitting down with General Commissioners or the Secretary General of the Department of Finance and feeding back what we are hearing in the market place, giving their views on what we think is the right.”
I remember one time it was a small sized corporation … they were shocked. They said “Oh God we couldn’t do that in England, we would have to have a white paper and get the views,” we could do that on the phone, and get a view immediately …
Trust and Communication
Close relationships result in ease of communication and strong bonds between the relevant stakeholders. One participant described, with all the others agreeing, that the ecosystem around tax policy in Ireland is hugely collaborative: despite not always getting everything that one might want, such is the level of trust that all parties work together and cooperate in a joint effort of consultation and communication.
I think we all put on the green jerseyFootnote 54 on regular occasions, and I would give tribute to Finance and Revenue - there is massive consultation that takes place between those parties, not that we always get what we want, far from it, but at least we feed into the system, and we know we are listened to.
The added certainty that this provided contributed further to Ireland’s success in attracting foreign direct investment. The participants agreed that this closeness was a significant factor in Ireland’s success story when the country shifted its focus to inward investment and foreign direct investment.
Broad Political Agreement
There was, and is, widespread political support in Ireland for the 12.5 percent rate. Most of the major political parties recognize the importance to the country of having a low and stable tax regime.
There are dissident voices … the smaller left-wing parties would be favouring an increase. If they get into Government, they might change their mind, when they find out what the consequences would be but the vast bulk of the political system favors keeping the 12.5 percent rate.
Quality of International Relationships
Participants regularly referred to the quality of Ireland’s international relationships, both at an organizational and an individual level. These relationships often yielded positive results (or at least partially mitigated negative results). It was essential in this regard that Ireland be seen to be consistently engaged in international tax discussions.
… our whole approach in the Department of Finance and in Revenue … was to be in the forefront of international discussions. You never deal with the issues by absenting yourself … In the OECD … we always had a strong hand, a strong team in there, same … in the Monti Group when it was going, the tax policy group. We were always in those discussions.
A further comment referred to the quality of the individuals chosen to represent Ireland at these international discussions.
… we always had impressive … people in the OECD and … if there was something important going on there, we needed to be there … with high caliber people who would take a leading role …. What always stuck me when I would be going to meetings sometimes on my own, sometimes with x [another participant] but I always felt very well briefed … I looked around the table and there might have been four guys representing some other country, but I had my folder and my brief, and I always felt I was on top of it.
Echoing earlier comments regarding trust and communication at a national level, participants agreed that the need to achieve specific outcomes for Ireland was sometimes less important than contributing in a constructive way to solving international tax problems. Assisting other countries and not becoming entrenched in any specific position but trying to negotiate sensibly and constructively was important in building solid international relationships. Knowing when to admit defeat gracefully was also important.
… I always thought that it was important for Ireland to be helpful to solve problems in the EU … if you were able to solve that problem … contribute to coming up with a wording that would nuance something … when it came to the big issue that you were really concerned about, they didn’t say here’s a guy who has not said anything for the last three meetings and now he is coming in on this thing and my inclination used to be if there was an issue was to ask a question rather than raising an objection.
Anticipation of Events Combined with Luck
One participant expressed that consistent engagement in international tax affairs allowed pre-emptive action to be taken when required. When trying to allocate scarce human resources Ireland prioritized international engagement.
… in a small county, you have to spread your resources very thinly at times, but we had to decide on priorities - we always went with the OECD …. We had a very good feel for the way the wind was blowing internationally and then in the EU, I think it was something similar.
Participants also suggested that Ireland was lucky.
we were 20 years ahead of our time … In finding a tax system which is fit for the 21st century but it was an accident… looking back … if you could transport yourself back to 1996, you would say, “Guys this is the way the tax system will have to be – low, a single rate, no rulings, uniformly applied.”
Indeed, the timing of Ireland’s shift towards the 12.5 percent rate coincided with the boom in the information technology sector, an opportunity which might otherwise have been missed.
… in relation to the timing, we are very, very lucky because … manufacturing was starting to tail here in Ireland … the part of the supply chain and the value chain you wanted wasn’t manufacturing anymore …. So, if you look at the Googles, the Facebooks, the Twitters, the Linkedins, the Oracles, none of these would have qualified for manufacturing relief. So we brought it in, the 12.5 percent rate, at the perfect time to catch the new wave of companies born on the internet and said, “it does not matter what you do we have got a low tax regime.” Had we delayed it … we would have missed all that “born on the internet” companies completely.
Reputation
Finally, participants discussed the damage to Ireland’s reputation caused by the well-known “Double-Irish” tax avoidance loophole,Footnote 55 identifying it as much more significantly criticized internationally than a low rate of CT. In this regard, participants pointed to Ireland’s response—including for example the introduction of Transfer Pricing legislation—as necessary and appropriate in demonstrating good international corporate citizenship. Nevertheless, when asked whether there was anything that Ireland might have done differently, the following serves as a representative opinion.
… there’s always things you could have done better but I would say that there was quite a coherent strategy on the tax policy side of Finance and … an active engagement with the international organisations so that we were to the fore when all these changes were happening …. So, yes, you never do anything perfectly, but I would, I would say we had a fairly good account of ourselves. Footnote 56
Insights Revealed by the Oral History Method
One of the key contributions of this paper is the use of the Oral History method to reveal insights that might otherwise have remained hidden. The overall atmosphere of the session was positive with participants happy to reunite with each other and recollect past events and past disagreements with no animosity. There was no tension detected, with all participants engaging fully in the session with no particularly dominant voice present. Participants openly shared stories and reminisced, with little coaxing from the researchers. These stories often helped to jog the memories of others in the room, who would then add their own recollections to the overall conversation (for example, “It’s only when you were describing that, I was thinking back”). While participants were in widespread agreement as to the broad sequence of events leading up to the introduction of the 12.5 percent rate, there was sometimes discourse over certain aspects, such as the precise dates when events took place or when decisions were made. Nevertheless, participants freely admitted to not always being able to recall such details (for example, “Feel free to contradict me,” “[name] will set me straight here” or “[name] would know this much better than I would”) and so were open to correction. The collegial and jovial nature of the seminar strongly evidenced that regardless of their initial perspective on where the rate should go, all stakeholders were dedicated to ensuring a positive result for Ireland from the new regime and worked together to achieve it. However, the lack of voice from the NGO sector was notable in the discussions in terms of the range of stakeholders who had a seat at the table of Irish tax policymaking during the era in question. In their enthusiasm to ensure that we understood how those with key roles in Irish tax policymaking approached meetings and negotiations with the EU and engaged with the OECD, participants often offered examples that added richness to findings. For example:
Oh yeah, she was fine … Charlie McCreevy even gave her a lift in the Government jet back from Brussels - it had to stop off in Bristol [referring to Dawn Primarolo whose report referred to Ireland’s 10 percent corporate tax rate as a harmful tax measure].
These examples were often indicative of the closeness of the industry in Ireland spoken about earlier, such as the annual Irish Tax Institute dinner, where the list of guests would typically include many of the same key figures from the various branches of the tax system.
… tonight’s dinner now - the Institute of Tax dinner, if a bomb goes off tonight in the Burlington Hotel the entire tax system of Ireland just gets wiped out for a generation, but like everybody, the Minister would be there, the Chairman of the Revenue Commissions, the commissioners, the second secretaries, everyone will be there and they will be there till 4 o’clock in the morning.’
The authors who were in the room during the witness seminar left the session with a strong sense of the pride the participants had in what they had collectively achieved in terms of a positive tax policy outcome for Ireland while remaining consistent with EU regulations and maintaining positive relationships internationally. Some of the insights discussed in the next section would not have emerged had the oral history method not been adopted for this study.
Discussion and Conclusion
To address the gap in the literature on how tax policy decisions are made, particularly in the context of navigating a path consistent with a large international entity (in this case the EU), this study has examined the background leading to the introduction of the Irish 12.5 percent CT rate in 2003. We do this at a juncture in the international tax environment where the continued existence of this well-recognized rate may be in doubt due to the introduction of a global minimum 15 percent CT rate. An oral history method, rare in business history research, is used to shed light on the approach of key participants in the Irish policymaking process in navigating tax policy changes in a challenging international environment. In doing so, we provide a case study for other tax administrations facing tax policy change in an international environment, answering the research question: how did Ireland manage to navigate a path to a generally low corporate tax rate when faced with EU opposition to its existing corporate tax regime? Our oral history seminar enabled us to understand in a much more nuanced manner how key participants in Irish tax policymaking initially handled the complaints from the EU about the extant CT regime. It also revealed their approach to arriving at a CT rate and regime that was consistent with EU regulations while still appropriate for the Irish economy. These insights could only have been revealed through capturing the stories and lived experiences of the individuals who were on the front line in terms of working through the problems and arriving at a successful outcome.
Consistent with Wales and Wales,Footnote 57 our findings confirm the existence of a “small country effect.” The level of integration of the tax ecosystem in Ireland facilitates being agile when it comes to introducing policy measures needed to address specific issues. The ability to “get everyone into the same room” reduces the level of bureaucracy to be navigated to arrive at a good outcome for all relevant stakeholders—though the literature also points to concomitant dangers to be guarded against.
Findings also reveal the importance of relationships both within and external to the country. Ireland’s economic history and possibly other aspects of the Irish policymaking ecosystem had helped to secure a broad political consensus in favor of a low CT rate.Footnote 58 The broad political agreement within Ireland that a low CT rate was essential, both in terms of the certainty it offered existing taxpayers and its ability to attract foreign direct investment, was crucial in bringing all relevant Irish parties together in a united front to achieve the best outcome for the country. Building and maintaining international relationships was important in achieving an advantageous policy outcome consistent with EU regulations, good for Ireland, and acceptable (at the time) to other EU member states. Positive relationships result in trust and open communication, which was essential both internally and externally with relevant international partners. These relationships were built over time by the positive engagement of Irish policymakers across all tax areas within the EU context, even when the issues at hand were not of direct relevance to Ireland. Maintaining a high level of involvement in discussions around tax within the EU (and later also at the OECD) gave the relevant Irish personnel a broad understanding of how the international tax environment was changing, allowing them to correctly anticipate the direction of travel in terms of best practice in corporate tax policy. This demonstrates that tax policymakers need to engage domestically with stakeholders within the country, but also with external international institutions.
The narrative around how the 12.5 percent rate was arrived at illustrates some of the internal negotiations that took place between the Department of Finance, other government officials, the Revenue authority, and bodies like the IDA and Forfás. It reveals that the rate was not arrived at using any mathematical or scientific formula. Following Christensen’sFootnote 59 suggestion that the dearth of economists within the Irish Department of Finance resulted in a generalist civil service orientation, we offer an alternative viewpoint: had the ranks of policymakers at that time been populated with qualified economists in the majority, the focus on contemporary economic models may have stifled the pragmatism which resulted in all interested parties putting aside their differences to work instead in the interests of the country.
Unpredictable national or global events can disrupt the best-developed policy plans. A global pandemic, a war impacting global food security and supply chains, a change in the leadership of important trading partners—any one of these can critically undermine the most thoughtfully considered tax policy approach. However, our findings highlight that the correct approach to tax policy evolution—an approach centered on strong positive national and international relationships, a willingness to engage in tax debate to assist others even when the issue does not directly impact the country in question, respect for international partners and open communication and trust—can provide the building blocks to achieve positive policy outcomes in a challenging international context. It is hoped that the Irish case study can offer guidance to others facing similar challenges.
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