A total of 131 countries, representing more than 90% of global GDP, are celebrating a groundbreaking deal to overhaul the global tax system and increase their revenues to fund the costly post-coronavirus recovery. From Argentina to Japan, from Canada to Turkey, industrialized and developing countries are preparing for transformative reform.
However, Ireland has chosen to stay on the sidelines and refused to approve the agreement reached under the auspices of the Organization for Economic Co-operation and Development (OECD).
The stated position of the Irish government until recently was that the tax reform proposals adopted by the OECD would also be accepted by Ireland. Dublin’s decision to oppose a minimum corporate tax of 15%, supported by so many countries, including all G20 members, is therefore puzzling not only to EU member states, but increasingly also to Irish citizens themselves.
One reason for the Irish objection is the often cited claim that the current tax rate of 12.5% is the “cornerstone” of its industrial policy. A worldwide minimum corporate tax rate, it was thought, would reduce the incentive to locate in Ireland.
Ireland has undoubtedly managed to attract foreign direct investment (FDI), particularly from Silicon Valley: companies like Apple, Google and Facebook are present in the republic. According to the U.S. Chamber of Commerce, over 800 American companies employ 180,000 people in Ireland, many of whom have high-paying jobs, while U.S. investment brings in $ 5.3 billion each year.
Perhaps counterintuitive, corporate revenues in Ireland are high despite low tax rates, amounting to € 11.8 billion or 20% of total tax revenues in 2020. Tax payments and corporate profits are high because the profits of multinational corporations are channeled to Ireland through, among other things, transfer pricing and R&D payments.
However, protecting the tax rate of 12.5% as the cornerstone of industrial policy is problematic: First of all, the tax rate has never been the main fiscal incentive in practice.
What has been really attractive to overseas companies are other features of the Irish tax system, which regularly offers complementary strategies, allowances and incentives that create an economic landscape with low or even zero effective tax rates.
Previous OECD tax reforms agreed and implemented in Ireland have had a significant impact on curbing these tax strategies, which critics say make the island a tax haven. Recently adopted reforms of the European Union, such as the directive on country-by-country reporting, will further reduce artificial tax avoidance strategies.
The omnipresent question of tax sovereignty
When asked about global tax reform efforts, Paschal Donohoe, the Irish finance minister, gave three reasons why he was against a minimum corporate tax rate:
To compete with larger economies, small countries – like Ireland – must use tax policies to offset factors such as lack of size and industrial heritage.
A collective agreement must enable tax competition.
The need to respect the “tax sovereignty” of every nation state.
These are not convincing arguments.
Many small countries – for example Denmark and New Zealand – are not accused of being tax havens. So-called “industrial heritage” such as shipbuilding, coal mining and steel production are often economic liabilities rather than assets. Surveys show that tax rates are not the deciding factor for a company when choosing a location.
On the question of national sovereignty, Ireland has already ceded a great deal of sovereignty in many economic and political areas as part of its EU membership. Indeed, since joining the bloc in 1972, Ireland has agreed to implement several EU directives in the area of taxation, such as information exchange and binding arbitration in tax disputes.
For Ireland, the principles of assigning and not assigning “tax sovereignty” are unclear and reflect rather mere reasons of practicality and expediency.
In Ireland, some have argued that the OECD agreement is premature because it will not survive the United States Congress, where the Republican Party firmly opposes any reform that increases taxes. This assumption could explain Dublin’s “wait and see” strategy and lead ministers to publicly state that they will continue to participate “constructively” in the global discussions.
It has been alleged – wrongly – that most of the 131 countries that agreed to the tax reform deal did so on the basis of concessions, and that Ireland should seek and negotiate them too.
The current proposals in Pillar 1 and 2 of the OECD scheme, however, put developing countries at a disadvantage in several ways. Developing countries are the ones who need concessions. High-income developed countries like Ireland do not.
Ireland’s position is undoubtedly influenced by the current high level of FDI, which many other countries around the world envy.
There are prominent proponents of FDI-friendly policies within the Irish government, routinely run by business organizations and big tech officials eager to uphold the status quo.
A risky half-replacement strategy
Another reason to oppose OECD reform, according to senior Irish politicians, is that Ireland will act as a diplomatic bridge between the European Union and the United States in the post-Brexit period. The small island has also been described as a bridge between Great Britain and the EU.
Irish Prime Minister Micheál Martin has stated that “our goal and our goal as government – [is] maintain constructive relations with the UK “while at the same time arguing before his EU counterparts that” the only future must be a constructive relationship between the UK and the EU “.
Intentionally – or unintentionally – this bridging policy implies a mediating activity and thus a certain distance from EU politics.
A halfway aloof view of EU politics, on the other hand, can mean that Ireland without hesitation blocks proposals in the EU Council with regard to taxation and the bloc’s common financial resources.
The introduction of an EU-wide minimum corporate tax rate of 15% requires a directive, as the Irish Finance Minister emphasized. According to EU treaties, every tax matter must be approved unanimously, which means that a simple “no” can derail the “yes” of the other 26 member states.
At the same time, Ireland relies heavily on EU support and solidarity in response to the coronavirus pandemic that has destroyed thousands of jobs, inflated the public deficit and significantly increased public debt.
But Ireland also needs Brussels by its side to cope with the economic turmoil caused by Brexit and the problems related to the Northern Ireland Protocol. Future troubles and confrontations due to the UK’s decision to leave the bloc are likely to be long-lasting and require continued European support to Ireland.
Solidarity is not a one-way street: it requires mutual adjustment and compromise.
It is time Ireland recognized this reality, pursued a strategy of closer cooperation with the majority of EU Member States and embraced global tax reform efforts.
Dr. Jim Charles Stewart is an Associate Associate Professor at Trinity Business School.