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DUBLIN (Reuters) - Ireland is set to announce sweeping changes to its corporate tax structure in its budget on Tuesday, phasing out a loophole that has allowed multinationals to save billions of dollars in tax on their worldwide income.
The country has faced sustained criticism over the past 18 months from other European Union members and the United States for its tax rules and Finance Minister Michael Noonan is expected to lay out plans to end an arrangement that has enabled firms such as Google and Apple to cut their overseas tax rates to single digits.
To maintain Ireland as an attractive destination for business, Noonan could at the same time make improvements to the intellectual property tax regime, and also has room to cut income tax following the economy's surprisingly strong rebound from the debt crisis.
The change in corporate tax structure will be the country's most significant tax reform since it lowered the corporate tax rate to 12.5 percent in the late 1990s to entice companies to bring jobs to the country.
Among the most criticized parts of the Irish tax code is a complex corporate structure whereby a multinational can channel untaxed revenues to an Irish subsidiary, which then pays the money to another company registered in Ireland that is tax resident elsewhere -- usually in a tax haven such as Bermuda.
Under the measures Noonan is set to announce, all Irish-registered firms would over time automatically be deemed to be tax resident in Ireland, bringing Irish law in line with U.S. and British rules, two sources familiar with the matter said last week.
At risk for Ireland are the 160,000 jobs -- or almost one in every 10 workers in the country -- employed by some 1,000 foreign firms that have set up a base in Ireland to benefit from its tax code and flexible, English-speaking workforce.
Noonan will look to balance out the planned changes by ensuring Ireland remains an attractive destination, probably through adjustments to intellectual property tax.
"It's important that there is also a positive message and some definitive action in terms of improving our existing regime, or at the very least a roadmap for future changes," said Peter Vale, a tax partner at Grant Thornton.
"There can be no period of uncertainty where our regime lags behind competing jurisdictions. The UK has already positioned itself as a serious competitor in terms of attracting overseas investment, with tax policy a key factor in their success."
While the corporate tax changes will be watched closely in Brussels and Washington, closer to home workers reeling from seven years of austerity will want to know how Noonan plans to take advantage of an unexpectedly sharp economic upturn.
Ireland originally required tax hikes and spending cuts of 2 billion euros to bring its budget deficit below an EU limit of 3 percent of GDP next year. But with the economy set to grow by 4.7 percent in 2014, Noonan has some room to instead cut income tax, possibly by lowering the top 52 percent tax rate or raising the income threshold for that rate, which currently hits middle as well as high-income earners. He could also announce the hiring of more teachers and increase benefits.
While economic growth is far outstripping most of Europe, consumers have yet to feel the benefit, putting Noonan's Fine Gael party and coalition partner Labour on the clock to change that with 18 months to go until they seek re-election.
They were served a reminder on Saturday as tens of thousands rallied against new water bills in the biggest anti-austerity protest for years as a candidate calling for a boycott was elected to parliament in a by-election.
"It's seven years of horrendous difficulty for people and we want to ensure that there is a dividend in the years to come and much of this will be confirmed tomorrow," transport minister Paschal Donohoe told reporters on Monday.
"But we will not do anything at all to jeopardise the recovery and any changes in tax will respect that."
Editing by Susan Fenton