Is Ireland’s 12.5% corporate tax rate toast?
On Thursday, the OECD reached a historic agreement to reform the global corporate tax system.
Negotiated between 130 countries and jurisdictions, the agreement aims to modernize and stabilize what is seen as an outdated and divisive way of calculating and collecting what large multinationals owe and pay in taxes.
But Ireland is not yet a party, one of nine not to have signed the deal.
He will, however, be under pressure to do so.
So does this mean the end of Ireland’s 12.5% corporate tax rate, essential for decades to attract foreign direct investment?
WHY ARE THESE REFORMS IN FORCE?
The current process follows one that began in 2013 and focused on tax planning strategies used by multinationals that exploited loopholes and mismatches in tax rules to avoid paying taxes.
After that, the OECD looked at two more thorny issues.
The first of these is that some large multinationals (especially in the technology sector) often do not pay much tax on profits in the countries where these profits are made.
States, including France and many others, say they are unfairly losing digital tax revenue because tech companies sell high volumes of products and services in their jurisdictions, but profit tax is paid there where they have a physical presence.
Ireland has been a big beneficiary over the years.
This is because we have a concentration of big tech companies, like Facebook, Google and Apple, with their European or international headquarters here.
The second issue concerned calls for an overall minimum corporate tax rate.
This was what countries were looking for, tired of losing foreign direct investment decisions to countries like Ireland, with very low corporate tax rates.
They want a floor put in place to protect their tax base.
WHAT HAVE THE 130 COUNTRIES SIGNED TO?
The outline plan negotiated by the OECD is divided into two “pillars”, based on the two issues to be addressed.
Under the first pillar, countries will be able to tax the profits of large corporations in the markets where they are made, whether or not they have a physical presence there.
This will lead to tax rights on more than $100 billion in profits reallocated from markets where companies are physically based to other jurisdictions where they operate each year.
The companies considered in the scope would be multinationals with a worldwide turnover of more than 20 billion euros and a pre-tax profit margin of more than 10%, the turnover threshold being able to go down to 10 billion euros. euros seven years after a review.
Countries will be able to reclaim up to 30% of income tax, once a company derives at least €1 million in revenue from that jurisdiction (or €250,000 in the case of countries with a GDP less than 40 billion euros).
Extractive industries and regulated financial services are to be excluded from rules on the place of taxation of multinationals following pressure from states, including the UK.
Under the second pillar, an overall minimum tax rate of “at least” 15% will be set.
It is expected to generate up to $150 billion in additional revenue each year, the OECD said, welcome funding at a time when so many states are grappling with the financial fallout from the pandemic.
The rate would apply to companies whose turnover exceeds the threshold of €750 million, with only the maritime sector being exempt.
WHY DIDN’T IRELAND SIGN THEN?
Although successive governments here have fiercely protected Ireland’s right to set and maintain a relatively low corporate tax rate, the country has been part of the OECD reform process from more or less the beginning.
The pragmatic view was that whether we liked it or not, changes driven by big states were coming, and despite our small size, it would be better if the country was at the negotiating table to try to influence the outcome. that no.
The government has also backed the idea of a deal because it would bring stability and certainty, rather than having countries break away and do their own thing.
Given its participation in the process, it was therefore somewhat surprising that Ireland was not a signatory to the agreement.
The finance minister said Ireland fully supports the first pillar proposals as the government recognizes that the way business is done has evolved and so has the tax system.
This is despite the likelihood, as estimated by the Department of Finance, that the changes could cost Ireland up to €2billion a year in lost corporation tax, a fifth of the current total. , by 2025.
The sticking point however, according to Paschal Donohoe, is the second pillar.
Ireland broadly supports the concepts, the minister said, but it is the reference to “at least” in the description of an overall minimum corporate tax rate of 15% that is problematic.
The implication therefore seems to be that while we would prefer it to be lower, Ireland could live with an overall minimum rate of 15%, once it was definitely out of the question for it to be higher.
DOES THIS MEAN WE ARE EXCLUSIVE?
Not necessarily. Minister Donohoe said Ireland remained committed to the process and would continue negotiations, although he did not say what would make the plan acceptable to Ireland.
There is still time for us to register before the October deadline if we can either negotiate further concessions or go back on our objections.
Technical details will take time to work out, so implementation will not start until 2023 at the earliest to give countries time to prepare.
One interpretation of Ireland’s stubborn stance is that it wants to send a signal to investors and other countries that this issue is so important to it that it fought to the bitter end.
Politically too, the optics of riding at the first major obstacle would not play well.
Perhaps this is where the minister’s decision to conduct a public consultation comes in, because if stakeholder feedback indicates we should join, that might dampen some of the political heat.
It’s a gamble though, with the potential to send a reputationally damaging message about Ireland’s attitude to taxation.
And finally, most seasoned observers consider it likely that Ireland will eventually have to sign up.
With so many countries on board, including huge states like the United States, China, India, United Kingdom, France and Germany, further concessions are unlikely to be granted in through what has been an exhaustive process.
The devil will be in the details though, and much of that has yet to be finalized, so it’s always possible that Ireland will get some reassurance or two in order to get us on board.
However, reputationally, staying out to protect our 12.5% rate could be very damaging to Ireland, reinforcing the view of many international economists and tax experts that Ireland is a ” Fiscal paradise “.
Among the club of eight other states that also did not register are the tax havens of Barbados and Saint Vincent and the Grendanines. Interestingly, Bermuda joined in though.
Additionally, with most EU countries (except low-tax states Estonia and Hungary) having signed on to the plan, pressure is also expected to come from Brussels, where a separate new program corporate tax reform is gaining momentum.
AND WHAT ABOUT OUR 12.5% RATE THEN – IS THAT TOAST?
Admittedly, if we register as planned before the deadline, then yes, that probably means we will have to raise our corporate tax rate to 15% (or possibly more if the final rate settles above that level ).
We may still be able to hold our ground, but there will be mechanisms to allow countries to claw back the remaining 2.5% themselves, removing Ireland’s tax advantage while causing us to lose additional tax revenue potential.
And even if it rose to 15%, we would still be competitive in the European context.
But biding their time, Irish negotiators can wait to see if the “at least” benchmark translates to something higher before making a final decision.
The key influencer to watch in all of this is the United States. The Biden administration had signaled that it wanted to increase the tax on foreign profits of its multinationals to 21%, before conceding that an overall minimum rate of at least 15% would suffice.
So Joe Biden may need the “at least” phraseology to help push his tax reform package through Congress.
Expect a flurry of diplomatic calls between Dublin and Washington DC over the coming weeks as these vital negotiations for Ireland reach a crescendo.