The looming danger of raising corporation tax in Ireland

Ireland's 12.5% corporation tax rate has long been a shop window for attracting multinational firms (and the jobs they bring with them), but now it's in danger of smashing.

Earlier this week, after the cost of bailing out Ireland's banks swelled to nearly €50bn and in the face of more economic uncertainty, EU economics commissioner Olli Rehn sparked controversy by suggesting that the country will no continue as a low-tax jurisdiction over the next decade.

And last week a group of German MEPs told Jean-Claude Trichet, the president of the European Central, that Ireland's corporate tax rate would have nearly double for it to get any EU assistance.

Predictably, the Irish government stated that it has no plans to change its corporation tax policy, but that other tax changes may instead form part of its fiscal shake-up.

If these changes do happen, it would be something of a hammer-blow for the Irish financial sector. While the majority of domestic institutions have been shedding headcount over the last two years, the number of roles housed in the IFSC has remained fairly constant.

There were 24,692 jobs in the IFSC at the end of 2009, compared to 24,902 in 2008, according to the Finance Dublin annual survey, which is a negligible decline.

While any incumbent financial services organisations, which have invested in infrastructure in Ireland, are unlikely to retreat, there's a real danger any tax rise could stem the number of new companies.

"There are other reasons for financial services firms investing in Ireland, not least of which is the skilled labour available locally, but the 12.5% corporate tax rate has been a major factor," says Enda Faughnan, partner in the taxation services, specialising in banking and capital markets at PwC. "It's therefore highly unlikely the government will make any changes - it would be a last resort."

Nonetheless, it's not all doom and gloom. A new report published by Vale Columbia Centre on Sustainable International Investment in New York, suggests that the lower cost of doing business has actually increased Ireland's attractiveness to international investment.

"The current crisis has had the paradoxical effect of increasing Ireland's attractiveness as a location for FDI", said the report.