Is Ireland’s 12.5% Corporation tax rate toast?
Thursday saw the OECD forge a landmark deal to reform the global corporation tax system.
Brokered among 130 countries and jurisdictions, the accord aims to modernise and stabilise what’s seen as an outdated and divisive means of calculating and collecting what large multinationals owe and pay in tax.
But Ireland isn’t on board as yet, one of nine not to sign up to the deal.
It will come under pressure though to do so.
So does this spell the end of Ireland’s trademark 12.5% corporation tax rate, vital for decades in attracting in foreign direct investment?
WHY ARE THESE REFORMS HAPPENING?
The current process is a follow-on from one that began in 2013 and addressed tax planning strategies used by multinationals that exploited gaps and mismatches in tax rules to avoid paying tax.
After that the OECD moved to examine two other thorny issues.
The first of these is that some large multinationals (particularly in the tech sector) often don’t pay much tax on profits in countries where those profits are earned.
States including France and many others claim they are unfairly losing out on digital tax revenues, because tech companies are selling large volumes of products and services into their jurisdictions but the tax on the profits is being paid where they have a physical presence.
Ireland has been a big beneficiary of this over the years.
That’s because we have a concentration of large tech firms, like Facebook, Google and Apple, with their European or international headquarters here.
The second issue was calls for a global minimum corporation tax rate.
This was being sought by countries who were sick of losing out on foreign direct investment decisions to countries, like Ireland, with a very low corporation tax rate.
They want a floor put in place to protect their tax bases.
SO WHAT HAVE THE 130 COUNTRIES SIGNED UP TO?
The outline plan brokered by the OECD is divided into two “pillars”, based on the two issues to be addressed.
Under pillar one, countries will be able to tax the profits of large companies in markets where they are earned, regardless of whether they have a physical presence there.
This will lead to taxing rights on more than $100 billion of profit being reallocated from markets where companies are physically based to other jurisdictions where they operate every year.
Companies considered in scope would be multinationals with global turnover above €20 billion and a pre-tax profit margin above 10%, with the turnover threshold possibly coming down to €10 billion after seven years following a review.
Countries will be able to claim up to 30% of the tax on profits, once a firm derives at least €1m in revenue from that jurisdiction (or €250,000 in the case of countries with a GDP under €40 billion).
Extractive industries and regulated financial services are to be excluded from the rules on where multinationals are taxed following pressure from states including the UK.
Under pillar two, a global minimum tax rate of “at least” 15% will be set.
It is expected to yield up to $150 billion in additional revenue every year, the OECD said, welcome funding at a time when so many states are struggling with the financial fallout from the pandemic.
The rate would apply to companies with turnover above a €750m threshold, with only the shipping industry exempted.
WHY HAS IRELAND NOT SIGNED UP THEN?
Although successive Governments here have been fiercely protective of Ireland’s right to set and maintain a relatively low corporation tax rate, the country has been part of the OECD reform process from more or less the start.
The pragmatic view was that like it or not, change driven by large states was coming, and despite our small size, it would be better for the country to be at the negotiating table trying to influence the outcome than not.
The Government has also supported the idea of an accord because it would provide stability and certainty, rather than having countries breaking away and doing their own thing.
So given its participation in the process, it was somewhat surprising that Ireland wasn’t a signatory to the deal.
The Minister for Finance said Ireland has fully supported the pillar one proposals, because the Government recognises that the way in which business is conducted has evolved and so too must the tax system.
Finance Minister Paschal Donohoe
This is despite the likelihood, as estimated by the Department of Finance, that the changes could cost Ireland up to €2 billion a year in lost corporation tax, a fifth of the current total, by 2025.
The sticking point though, according to Paschal Donohoe, is pillar two.
Ireland broadly supports the concepts, the minister said, but it is the reference to “at least” in the description of a global minimum corporation tax rate of 15% that is the problem.
The implication, therefore, seems to be that while we’d prefer it to be lower, Ireland could live with a global minimum rate of 15%, once there was definitively no question of it being higher.
SO DOES THIS MEAN WE’RE OUT OF THE DEAL?
Not necessarily. Minister Donohoe said Ireland remains committed to the process and will continue negotiating, although he wouldn’t say what would make the plan acceptable to Ireland.
There is time for us to still sign up before the October deadline if we can either negotiate further concessions or row back on our objections.
The technical detail will take time to work out, so implementation won’t begin until 2023 at the earliest to give countries time to get themselves ready.
One interpretation of Ireland’s obstinate stance is that it wants to send out 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 rolling over at the first major hurdle wouldn’t play well.
This might be where the Minister’s decision to conduct a public consultation comes in, because if feedback from stakeholders is that we should join, then it may dampen some of the political heat.
It is a gamble though, with the potential to send out a damaging reputational message about Ireland’s attitude to tax.
And ultimately 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 US, China, India, UK, France and Germany, there is unlikely to be any further concessions granted in what has been an exhaustive process.
The devil will be in the detail though, and much of that has yet to be finalised, so it is still possible that Ireland will get thrown a reassurance or two in order to bring us on board.
Reputationally though, staying outside in order to protect our 12.5% rate could be very damaging for Ireland, reinforcing the view among many international economists and tax experts that Ireland is a “tax haven”.
Among the club of other eight states who also haven’t signed up are tax havens Barbados and Saint Vincent & The Grendanines. Interestingly, Bermuda has joined up though.
Plus, with most of the EU (except low-tax states Estonia and Hungary) signed up to the plan, pressure is likely to come from Brussels too, where a fresh separate corporation tax reform agenda is gathering steam.
AND WHAT ABOUT OUR 12.5% RATE THEN – IS THAT TOAST?
Certainly, if we sign up as expected before the deadline, then yes, it probably means we will have to raise our corporation tax rate to 15% (or possibly higher if the final rate settles above that level).
We might still be able to hold firm on it, but there will be mechanisms to allow countries to clawback the other 2.5% themselves, effectively taking away Ireland’s tax advantage while at the same time causing us to lose out on potential extra tax revenue.
And even if it does rise to 15%, we’d still be competitive in the European context.
But by biding their time, Ireland’s negotiators can wait to see if the “at least” reference translates into something higher before making a final decision.
The key influencer to watch in all this is the US. The Biden administration had signalled it wanted to increase the tax on the overseas profits of its multinationals to 21%, before conceding that a global minimum rate of at least 15% would suffice.
Joe Biden may therefore need the “at least” phraseology to help get his tax reform package through Congress.
Expect a flurry of diplomatic calls back and forth between Dublin and Washington DC then over the coming weeks, as these vital negotiations for Ireland reach a crescendo.