There are at least three reasons why Ireland’s current opposition to international regulations setting a minimum tax rate of 15% for multinational companies is justified.
Discussions about changing the tax regime for multinational corporations have been going on for nearly a decade, but in the past two months negotiations involving 139 countries have gained new momentum.
The reason for this is simple. This is because the US has thrown its weight behind the process.
The US wants to increase tax rates for companies, but wants to do so in such a way that its own competitiveness as an investment location is not diluted. A good way for the US to remain competitive is to get other countries around the world to raise their own tax rates.
Major tax reform in the US can be a long and complicated process. There is no guarantee that all of the ambitions of the current Biden administration will see the light of day in Congress, but the rest of the world is being asked to pre-approve US plans. This is like selling a car, but handing over the keys before the money is received.
This risk is the primary source of opposition and should warrant reluctance by any country, not just Ireland. So why have almost all of the 139 countries in the process already agreed to participate?
The answer to this question brings us to the second reason Ireland is reluctant. Many of the 132 countries that have already signed up will end up collecting more taxes than before, but Ireland may not.
Every country has been damaged by the pandemic and every national treasury needs more money. There are few easier ways for a finance minister to raise money than to raise taxes on companies on the political excuse that the higher rates are part of a global consensus.
We can be sure of that, because we did it ourselves 25 years ago. The Irish key tax rate of 12.5% was introduced at the behest of Brussels in order to harmonize the existing tax rates of 40% and 10%. Since most companies at the time paid their taxes at a rate of 10%, the introduction of a rate of 12.5% was a tax increase.
The same principle will apply in many countries if an effective minimum interest rate of 15% is achieved. High headline rates do not mean high effective rates. Many countries today report effective tax rates of less than 10% because there can be a big difference between the profit a company makes and the taxable portion of that profit.
There are few agreed details yet in the proposed new rules on how much corporate profits should be taxed.
The third reason is that kowtowing now won’t necessarily save an international reputation. Some commentators claim that persevering against the emerging consensus will cause significant reputational damage.
Perhaps, but previous changes in Irish tax policy, reflecting international developments, have never stopped Ireland from being called a tax haven, especially in countries that compete with us for investment. Despite these alleged reputational problems, foreign companies continued to invest in the Irish economy and other countries continued to enter into international tax treaties with us. A reputation for persistence also has value.
Every country is more vulnerable economically when the world emerges from the pandemic. This great global design will favor many, especially the larger, countries. If it is Ireland’s detriment to join, it is right that the government not sign up.
- Brian Keegan is Director of Public Policy at Chartered Accountants Ireland