Brendan McCarthy, Assistant Professor of Taxation, University of Limerick, Ireland.

This research was carried out with Professor Penelope Tuck, University of Birmingham, UK and Professor Frank Barry, Trinity College Dublin, Ireland.

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Introduction

We recently published a paper exploring the introduction of a specific Irish tax policy that has been the subject of much international attention, namely the 12.5% corporation tax (CT) rate.[1] This blog gives a summarized version of the paper. Ireland’s withdrawal of its opposition to the OECD’s 15% global minimum CT rate in 2021 may restrict the extent to which the 12.5% rate applies in the future making it timely to explore the background to its introduction.

Most sources documenting 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. To address this gap, our study used an oral history method to document the memories and lived experiences of key participants in Irish tax policymaking who navigated the introduction of the 12.5% CT rate which necessitated extensive engagement with the EU authorities. In so doing, the paper provides a case study that can guide other tax administrations by showcasing one approach to successfully negotiating tax change in an international domain. This is the primary contribution of the study.

The second contribution lies in our use of the oral history method. This method facilitates the creation of a richer and more nuanced contextual narrative on the evolution of the relevant tax provision. Despite numerous calls for the utilisation of oral history in business, the method has been employed infrequently. This study demonstrates how the method can be used to gain a richer perspective on how public policy decisions are arrived at which may encourage and assist other researchers in their endeavours.

Tax Policymaking in Ireland

Although there is a wealth of literature on policymaking more generally, Wales and Wales (2012) point to the dearth of research in relation to tax policymaking. This is particularly so in the Irish context. While the Wales and Wales (2012) study found that Ireland did not have a satisfactory consultative process when it came to tax policymaking, they note that the Irish business community nonetheless had good access to Department of Finance officials. The authors refer to a ‘small country effect’ when describing the informal relationship between the Irish business community and government, specifically noting how government institutions are small and senior private sector individuals are well known. In acknowledging that the Irish tax community is highly interconnected, the authors suggest that governments in similarly small countries may have the advantage of being able to hear the views of the people affected by a proposal simply due to being able to have everyone together in the same room and at the same time.

In a study from the following year, Christensen (2013) suggests that the generalist civil service orientation and closed recruitment mechanisms in Ireland created a tax policy bureaucracy characterised by constrained economic expertise, limited cognisance of microeconomic ideas about taxation, a passive approach to policy advice, and which identified primarily as ‘civil servants’. He argues that this ultimately led to Irish tax policymaking being dominated by politicians rather than technically skilled officials. He also suggests that this meant that neoliberal tax ideology (low rates, broad bases and neutrality) was not entrenched among Irish policymakers in the mid-1980s, resulting in high income tax rates, narrow bases and a plethora of tax reliefs at a time when many other countries were embracing neoliberal tax policies.

A Brief Historical Background to the Development of the Irish 12.5% CT Rate

Following independence in 1922, Ireland was a predominantly agricultural economy. With the volume of Irish exports falling substantially in the subsequent years (due to a combination of factors, including the Great Depression, protectionism, a trade war with the UK, and the difficult trading conditions of the Second World War era), a renewed focus on exports was necessary. In contrast with Department of Finance arguments in favour of trade liberalization to boost exports, the Department of Industry and Commerce advocated instead for financial and tax incentives. The victory of the latter 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. By confining the tax relief to exports, the policy achieved its objective of promoting the outward re-orientation of the economy without triggering the opposition of earlier protectionist-era industry. Profits in 1956 were subject to a total tax rate of approximately 50%. EPTR was initially due to operate for a period of five years, taking the form of a remission of 50% of the tax on manufacturing profits derived from increased exports over a datum year.Over the next two years, the tax remission was expanded to 100% and the period of the exemption was extended from five years to ten.

Manufactured exports increased strongly in 1957, more than doubling between 1956 and 1960. Moreover, by the eve of EU (then, EEC) accession in 1973, post-1955 export-oriented foreign firms accounted for almost 20% of manufacturing employment. As EEC accession approached, however, Ireland was understandably concerned by the prohibition in Article 98 of the Treaty of Rome regarding export incentives introduced without prior EU approval. Nevertheless, EPTR would survive until the end of the decade, when it was replaced by a new 10% CT rate on all manufacturing enterprises. This special rate was extended to qualifying activities carried out at the International Financial Services Centre (IFSC) in Dublin in the 1980s, while most other services activities continued to be taxed at a substantially higher rate. This resulted in a complex system under which some companies paid the lowest rate of CT in the EU while others paid one of the highest.

Ireland’s success in attracting foreign direct investment began to provoke claims of unfair tax competition from other EU Member States in the 1990s. The Irish government was informed by the European Commission in November 1996 that the preferential 10% rate could not be maintained indefinitely as it had been judged as an anti-competitive state aid.This gave rise to considerable political disquiet in Ireland: while the country was anxious to avoid being labelled a tax haven (thus damaging its international reputation), it was nonetheless considered vital to maintain a low CT rate to retain the foreign investment so carefully nurtured over previous decades. Eventually in 1998 the EU permitted Ireland to introduce a uniform rate of 12.5% for all companies from 2003 onwards. More detail on the historical background to the Irish 12.5% CT rate is outlined in the full paper.

Research Method

We now turn to a brief discussion of the oral history research method we employed for our study. 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 (Sommer and Quinlan, 2018). 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.Participants may assist each other to remember details or spark responses that otherwise would not have occurred. Moreover, individuals within a group will often provide corrections of information and can stimulate each other’s memory, especially when a large group come together:  as they argue and exchange stories, fascinating insights can emerge from this collective memory.

To gain a thorough understanding of the arguments and ideas in play during the period leading up to the introduction of the 12.5% CT rate, the authors held a ‘witness seminar’ in Dublin, Ireland, in February 2019, in a premises equipped with unobtrusive audio recording facilities. The seven participants involved in the witness seminar had held the following roles during the relevant time 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. 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.

Findings & Discussion

Space constraints prevent us from outlining the findings from our study comprehensively, however, we briefly outline the main themes below. Our findings support the existence of a ‘small country effect’ (Wales & Wales, 2012). The level of integration of the tax ecosystem in Ireland, as identified by participants, facilitates being agile when it comes to introducing policy measures needed to address specific issues. The ability to ‘get everyone together in the same room and at the same time’ reduces the level of bureaucracy to be navigated to arrive at a good outcome for all relevant stakeholders.

Participants spoke of the importance of relationships, both within and external to the country. Within Ireland, they noted how there was broad political agreement 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), something that was crucial in bringing all relevant Irish parties together in a united front to achieve the best outcome for the country.

I think we all put on the green jersey[2] on regular occasions…

Participants observed that building and maintaining strong international relationships was also important in achieving an advantageous policy outcome consistent with EU regulations, noting how positive relationships result in trust and open communication which were 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. Participants felt that 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.

… 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… We were always in those discussions.

Finally, participants’ discussions reveal that the 12.5% rate was not arrived at using any mathematical or economics-based formula.

… there is nothing magic about 12.5%… 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…

Nevertheless, in contrast with Christensen’s (2013) 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.

Conclusion

Unpredictable national or global events can disrupt the best developed policy plans. A global pandemic, a war impacting on 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 centred 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 on 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.

References

Christensen, J 2013, ‘Bureaucracies, neoliberal ideas, and tax reform in New Zealand and Ireland’, Governance, vol.26, no.4, pp.563-584.

Sommer, B. W., and M. K. Quinlan. The Oral History Manual. American Association for State and Local History Book Series. 3rd ed. Maryland, USA: Rowman & Littlefield, 2018.

Wales, C J, & Wales, C P 2012, Structures, processes and governance in tax policy-making: An initial report, Centre for Business Taxation, Saïd Business School, University of Oxford.

Authors’ Bios

Elaine Doyle is Professor of taxation at the University of Limerick, Ireland. She qualified as a Chartered Accountant and a Chartered Tax Advisor, working in PwC Dublin and EY Limerick before moving into academia. She has been awarded numerous accolades nationally and internationally for excellence in higher level teaching and learning and has undertaken several leadership roles in academia both locally and nationally. Her research interests include, inter alia, professional ethics and risk management in tax practice, tax compliance, tax policymaking, ethical reasoning and ethics education. She has published prolifically in these areas and has secured national and international funding to support her research activities.

Brendan McCarthy holds a Ph.D. in Taxation from the University of Limerick (UL), Ireland. He is a qualified Chartered Tax Advisor who worked for 10 years as a tax practitioner with Grant Thornton Chartered Accountants prior to returning to academia in 2016. His primary research focus is employee voice, in tax and the other traditional professions, and most of his research is qualitative in nature. Brendan has been teaching taxation at both undergraduate and postgraduate levels since 2016.

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[1] Doyle, E. M., McCarthy, B., Tuck, P., & Barry, F. (2025). The Evolution of the Irish 12.5 Percent Corporate Tax Rate: An Oral History. Enterprise & Society, 1-25. The Evolution of the Irish 12.5 Percent Corporate Tax Rate: An Oral History | Enterprise & Society | Cambridge Core

[2] Irish national sports teams wear green jerseys when competing aboard. The reference to ‘putting on the green jersey’ means that everyone is part of the Irish team when representing the country.