The G7 Agreement to Combat Global Tax Avoidance by Multinational Corporations (MNCs) aims to ensure that a greater proportion of corporate tax is paid in the countries in which they operate. This included the G7’s support for a minimum global corporate tax rate of at least 15%. This agreement can form the basis for a global agreement.
The minimum rate of 15% is closer to Ireland’s prevailing 12.5% than the original US proposal of 21%, but it still represents a loophole.
However, the tax rate is just one factor that investors consider when deciding where to put their money. Ireland is no exception.
Ireland has several attractions for international companies
Ireland offers several attractive factors for international businesses, including the English language, a well-trained workforce, membership of the EU internal market and favorable business conditions. Unless the tax increase goes significantly beyond current expectations, most MNEs from Ireland are unlikely to exit. The G7 agreement is just the starting point for future discussions in the G20 before a final agreement is reached and will likely include exceptions to ensure that as many countries as possible join.
The full domestic impact of global tax reform will also depend on Ireland’s policy response, which may include new measures to attract foreign capital and support local businesses. This could include promoting innovation funding, such as campus incubators, which help companies access venture capital.
Given the role of MNEs in the Irish economy, any corporate tax increase is important
Any increase in the tax rate is important nonetheless, considering that Ireland is dependent on pharmaceutical, computer services and other MNC sectors, which is evident in the resilience of the economy amid the Covid-19 crisis.
Ireland’s GDP growth of 3.4% was the highest in the EU in 2020 as multinational companies benefited from pandemic-induced trends such as more remote working and the demand for immunological drugs. However, Ireland’s underlying economy – measured by real modified domestic demand – shrank by 5.4% in the face of a comparatively strict lockdown, which was more like an overall decline in euro area GDP of 6.7%. The performance of pharmaceutical and technology MNCs during this crisis could also extend into a post-Covid era, with these companies potentially benefiting from structural economic changes in the longer term.
Endanger some of the government’s tax revenues
Changes in global tax rules could jeopardize some of the government’s tax revenues, which according to the IMF will be between 0.6-1% of GDP or 1.1-1.8% of modified GNI in 2018. The Irish government estimates that the OECD proposals to change the geographic location of corporate taxation could lose EUR 2 billion (0.9% of the estimated modified GNI for 2021) in corporate tax revenues in the longer term.
Ireland’s small, open economy and the size and complexity of its financial and corporate sectors make it vulnerable to changes in international regulation regarding cross-border trade and investment.
Improved creditworthiness; Growth forecast for 2021 has been revised upwards
Scope raised Ireland’s credit ratings by one notch to AA- on May 21 and revised its outlook to stable. Scope expects GDP growth of 9% in 2021 (upwardly revised from 5%) – supported by a backlog, strong monetary and fiscal policy support and a recovery of Ireland’s most important trading partners – followed by growth of 4% in Year 2022.
You can find an overview of all today’s economic events in our economic calendar.
Dennis Shen is Director of State and Public Sector Ratings at Scope Ratings GmbH.