By Kash Mansori
Posted: October 30, 2014

Ireland has long been a favorite country for multinationals to set up shop in, thanks in part to its 12.5% corporate tax rate – one of the lowest in the world. A typical situation would be for a multinational based in the US or Asia to set up an Irish subsidiary as the principal entity from which to run its European business, thereby allowing it to legally record a significant portion of its European income in Ireland.

But this low tax rate has not been so popular among other European countries, as it is seen as making it difficult to compete with Ireland in their ongoing quiet contest for tax revenues from multinationals. So with the visit of German finance minister Wolfgang Schäuble to Dublin this week to deliver some low-interest loans, The Irish Times posed an interesting question: why hasn’t Berlin demanded that Ireland raise its corporate tax rate in exchange for its assistance?

"German officials mystified by inaction on Irish corporate tax rate

German finance minister Wolfgang Schäuble is in Dublin tomorrow to help Ireland’s Halloween party with a €150 million loan from Germany’s KfW state development bank. Matched by the European Investment Bank (EIB), this is the starting capital for Ireland’s Strategic Banking Corporation of Ireland…

As on previous occasions where Ireland was looking for something from Berlin – the prom note reconfiguration, or the bailout itself – Berlin demanded something in return, having already given Dublin what it wanted first…

Given the regular German swipes at Ireland’s 12.5 per cent tax rate, it’s interesting that Berlin never followed the Cyprus strategy. Last year, Nicosia was “encouraged” to make a sovereign decision to raise corporate tax rates as a precondition for the required assistance."

It’s a good question, though I’d like to rephrase it slightly: why does Germany treat Ireland so differently from Cyprus when it comes to providing financial assistance? One possible explanation is that the corporate tax rate in Cyprus, which had been set at 10%, was seen by Germany as being more egregious than Ireland’s rate. But it may also be a subtle symptom of the north-south divide in Europe that has emerged so strongly in recent years. The distrust and hostility between northern European nations and southern Europe has been displayed in many ways since the Eurozone crisis began in 2009-10. Perhaps this is another one.