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The introduction of an EU-wide common consolidated corporation tax base (CCCTB) could result in Ireland's potential economic output being 1.5 percent lower than would otherwise be the case, according to modelling by the Economic and Social Research Institute (ESRI).
ESRI's latest projections for the Irish economy put the sustainable long-term real growth rate of the Irish economy at approximately three percent.
Commenting on the potential impact of a CCCTB, ESRI said that the European Commission's initiative to simplify and harmonize corporation taxes may reduce some administrative burden on firms.
However, it warned that "if the corporate income on which taxes are levied is shared amongst countries for firms operating in multiple locations, then the risk for a small country such as Ireland is that the tax base here is reduced."
The Commission relaunched its CCCTB project in October. It intends first to introduce harmonized rules on the calculation of a company's tax base in all EU member states. After that, tax revenues would be collected and distributed among member states under a formulary apportionment approach, whereby revenues would be allocated based on factors such as turnover, sales, and employment levels.
ESRI said that the CCCTB could not only reduce Irish revenues, but also reduce the attractiveness of Ireland's 12.5 percent corporation tax rate, "as it would apply to a smaller share of a multinational enterprise's income."
ESRI calculated that the combination of these effects could lower Ireland's potential output relative to the baseline (three percent growth) scenario by 1.5 percent.
ESRI added that a number of other countries also stand to lose significantly, with Bulgaria, Romania, and Poland expected to see falls in foreign direct investment (FDI). "Apart from Germany, most of the countries that would expect a reduction in tax revenues are small open economies reflecting the redistribution of sole revenues to their sales location rather than production center or headquarters," it noted.
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