It is a case of “game on” for global corporate tax reform. Important decisions will be made in the coming weeks that will have serious and long-term implications for the republic. The clear signal from Janet Yellen, the new US Treasury Secretary, to the G20 Treasury Ministers that the US wants a corporation tax deal in the ongoing talks at the OECD means that there is a good chance this will happen. Finance Minister Paschal Donohoe has said he is in favor of such a deal. But the conditions on which this happens are of vital importance to Ireland.
The OECD Talks – the second part of their Erosion and Profit Shifting (BEPS) program – are divided into two parts, or pillars, as they are called. The first involves a change in the way large multinationals pay taxes. For the first time, they would have to pay a portion of the taxes based on the location of their sale rather than declaring profits at the locations where those sales transactions are managed. In the digital age, these two locations are often separate.
Since many large companies have their international headquarters in the Republic, this would mean that part of the profit previously posted here would in future be effectively taxed in other markets in which sales are made from Ireland. The tax in other markets would in fact be levied on sales rather than profits, but would result in less tax being paid in Ireland.
The Treasury Department has said this could reduce Ireland’s annual corporate tax base by € 800-2 billion. Last year corporate tax was levied at € 11.8 billion and its revenue has grown rapidly in recent years. How the reform losses would offset against other factors in terms of annual return cannot be calculated.
The government appears to have come to terms with these costs under an OECD agreement. The reason is that missing a deal would likely result in many of these costs being incurred anyway, as many countries plan to unilaterally impose digital sales tax on their own markets. And this, in turn, could lead to international clashes and a revival of the trade wars that smoldered under the Trump administration. This could create tariffs and threats that could cause trouble for the republic as we rely on US investment.
The big unknown, however, is now the second part of the OECD plan, the so-called second pillar. Central to this is the plan to impose a minimum tax on the profits of large multinationals, a kind of kickback to ensure they pay at least that amount for what they make globally. The main considerations for Ireland are how these rules are made and what the rate would be.
Yellen pointed to a “robust” rate. If this is above the Irish corporate tax rate of 12.5 percent, it clearly undermines the attractiveness of multinational companies to locate here. Donohoe and other ministers from smaller countries have argued that in order for countries like Ireland to attract investment, the rules need to take into account an element of tax competition.
However, signals from the Biden government point to an increase in corporate tax rates. Signs of this are an increase in the US key interest rate from 21 to 28 percent. Yellen has also proposed an increase in the special tax rate for offshore income not otherwise taxed – the so-called GILTI rate – from 10.5 percent to 21 percent. So the trend is pointing upwards.
The risk for Ireland is that the proposed minimum rate under an OECD agreement could, for example, rise to 15 percent or more. Depending on the structure of the rules, this would likely mean that companies would have to make top-up payments on profits that were already taxed here at a tax rate of 12.5 percent.
So there is a lot at stake for Ireland in the coming weeks. The OECD talks are expected to be concluded in July. Some debates are about where companies pay taxes – others how much they pay. Both pillars of planned reforms pose risks to Ireland, both for revenue and, perhaps more importantly, for the tax model that has been part of the state’s attraction to FDI for many years.