Ireland will shortly publish its plan to use the more than €900 million it will get from the new Europan Union Recovery and Resilience Fund. Designed to deal with the fallout from Covid-19, it will be wrapped up in talk of a green transition and digital transformation.
If you think this is a small amount of cash for Ireland to get as the main allocation from a fund of some €672.5 billion, you would be right. There will be a small additional allocation in 2023 and some access to loans, but it is a long way from 1993, when Albert Reynolds returned from an EU summit trumpeting £8 billion in EU funds. It is a story which tells a lot about our changing relationship with the bloc and signals some big battles to come, where Ireland may at times be out on a limb.
Ireland's allocation from the fund is based largely on GDP figures. The presence of multinationals here inflates our GDP per head – it places us as second highest in the EU, whereas the reality is probably closer to between 8th and 10th. The figures also exaggerate how Ireland performed in 2020.Had the Government tried to argue this,the European Commission and other member states would have said it was due to the sweet tax deal we have offered multinationals. So Ireland directed its fire elsewhere and secured the establishment of a separate Brexit fund, out of which we should get more than €1 billion.
The economics and politics of the EU pandemic response – for Ireland and other member states – is a no-brainer. Using borrowed money to boost the economies of southern Europe is exactly the right thing to do. Stability and stronger EU growth is to our benefit. It is part of the wider story of our EU membership, and particularly the incalculable economic benefit of being part of the single market, and more recently being able to borrow to fight the pandemic with European Central Bank support.
Changing relationship
But the nature of the cash relationship with the EU has changed – we became a net contributor to the EU budget in 2014 – and the funding of the EU’s pandemic response underlines the impact of Ireland’s rising GDP. Work by the European Commission had estimated that Ireland’s share of the repayments on the money borrowed by the EU to fight the pandemic would be €18.7 billion in the 30 years after 2028, leaving Ireland as the second largest net contributor as a percentage of GDP behind only tiny, and very rich, Luxembourg.
Since it made the initial stab, the commission has put forward plans to raise other revenues and lower the direct impact of repayment on national exchequers – as well as a tax on plastic waste already agreed, these include a carbon border tax, a change to the emissions-trading regime and a digital sales tax on big companies. It is not clear what will be agreed – the EU is to outline its plans more fully next month. The Department of Finance says that while it cannot estimate exact figures until it becomes clear what other cash may be raised, Ireland's additional direct contributions in the longer term were likely to be "significant". And some of the proposals for the commission to find new so-called own resources, such as via a new digital sales tax, are also problematic for Ireland.
International economic diplomacy is a brutal business. During the last financial crash, the troika of the EU-IMF and ECB were able to dictate Irish policy because they had us over a barrel. And word is that the commission is now having a strong input into plans of big-recipient nations from the pandemic programme, such as Spain and Italy, using the leverage to increase its influence. But with Ireland getting a limited payout from the fund, Brussels has less leverage with Dublin on this one.
Part of the commission’s recommendations in relation to Ireland’s application for the fund – as reported recently by European correspondent Naomi O’Leary – was a crackdown on aggressive tax practices. Ireland’s small take from the fund means we probably won’t have to concede more here than what is already under way due to the OECD tax reform process. But it is a really important signal of the relentless pressure on Ireland over the tax issue.
Corporate tax
Ireland has been painted as the one of the villains of the piece on corporate tax, not helped by the crazy decision in 2015 to the extend the double-Irish tax scheme to 2020. Some of the rhetoric directed Ireland’s way is overdone, though the country’s – ironic – gains from the first phase of reform has kept the spotlight on Dublin.
What will the price of peace be for Ireland? Minister for Finance Paschal Donohoe has already factored in €2 billion less in annual corporate tax revenues, due to a proposed new digital sales tax – the impact of which will largely involve companies paying tax in different places, rather than paying more.
There will be an even bigger battle on plans for a global minimum effective tax rate – now supported by the US and big EU states – which is a significant factor in our ability to attract foreign direct investment in the future.
Ireland has to accept the inevitable changes to ensure big corporations have less opportunity to shift profits and cut their tax bills. But the Government also has to do what it can to protect tax revenues and the country’s ability to attract investment. This is going to be really tricky balance. And lurking in the background is an EU proposal to revive plans for a common corporate EU tax base, also dangerous for Ireland.
I remember, 18 months ago, asking a senior international official with knowledge of these things whether there was a link between the EU’s support for Ireland during the Brexit talks and Ireland signing up for corporate tax reform. “Not an explicit one,” was his answer. What was left unsaid seemed important. The Government has a fight on its hands. Ireland will frequently find itself portrayed as part of the awkward squad in Brussels in the battles to come.