Crunch point awaits Ireland in global corporate tax debate

You wait for a bus for ages, the old story goes, and then three come along together. There has been talk of a major shake-up of the way corporation tax is collected internationally for many years now – with a series of proposals from the European Union, reform plans in the United States and lengthy talks on an international deal among 139 countries at the Organisation for Economic Co-operation and Development (OECD) in Paris. So far the impact of these has been limited – EU plans have run into the sand, the major Trump reform programme did not hit foreign direct investment (FDI) as some had feared and the OECD talks, while agreeing a first phase of reform, have struggled to make progress beyond that.

Now, however, the arrival of a new administration the US has changed the mood. President Joe Biden has outlined plans for a big increase in taxes on US businesses, including – crucially for Ireland – on their offshore earnings. And his treasury secretary, Janet Yellen, has strongly supported the OECD process, creating the possibility –perhaps even the likelihood – of a deal emerging by the summer for the biggest international shake-up of corporation tax in decades.

The US is now investing very significant political energy in this, with a string of announcements over the past few weeks. As Yellen put it in an oped in the Wall Street Journal this week: “ We want to change the game.”

Ireland’s low-tax corporate tax regime is under threat here from a process which effectively aims to stop countries using corporation tax as a competitive tool to attract investment. Here are the three separate but connected threads of what is happening – the three buses which have arrived together.

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1: The US proposal for a global minimum tax on its companies. Biden’s plan, to help finance a massive investment proposal of $2 trillion, includes major tax increases on big companies. From Ireland’s point of view the key proposal is a 21 per cent minimum tax rate on global earnings. This is an increase in what is called the GILTI (global intangible low-taxed income) rate, currently 10.5 per cent. Crucially, the administration also proposes to change the way the tax is levied, removing a key allowance exempting earnings below a certain threshold and collecting the tax for each jurisdiction the company operates in. As outlined, this would mean US companies paying a top up in the US of 8.5 per cent having paid 12.5 per cent here, effectively undermining Ireland’s low-tax regime. However, there is a long way to go before the details and the new US tax rate are agreed.

2: The OECD minimum tax plan. Yellen repeated this week that the US favoured an agreed global minimum rate being agreed by all countries at the OECD talks. And this is gaining support from big EU countries. It is not clear yet what level it will argue for – up to recently a rate around Ireland’s 12.5 per cent had been thought possible, but Yellen’s support for a US minimum of 21 per cent suggests the Biden administration will push for a higher rate at the OECD talks. It is not clear whether, if there is a deal at OECD level on a lower rate – say 15 per cent, or even 18 per cent – the US might agree to set its GILTI rate at this level, rather than 21 per cent. The outcome of all this is vital to Ireland’s use of tax as a tool to attract FDI here. Depending on how it falls, it may even lead the Government to consider whether to increase the Irish rate to the new global minimum.

3: The OECD digital sales tax plan. This is the other key part – or pillar – of the OECD programme. It proposes that multinationals pay tax on what they sell through digital channel in the markets where they do so. This is a change from current rules under which profit is declared and tax paid in countries from where the digital sales are managed. Crucially, the US supported a version of this plan during the week in submissions to the OECD, suggesting that the biggest companies pay a levy on their sales to the exchequer of the country where the sale takes place. This is seen as a quid pro quo; it will affect US companies, but the Biden administration hopes it will help win support from Europe and other players for its minimum tax rate plan.

As Ireland is a small market, and also the location from which many major digital and tech companies manage EU sales, this would lead to less tax being paid here – as companies would get allowances for tax paid on sales in big EU markets. The Department of Finance previously guesstimated that this would cost Ireland between €800 million and €2 billion in annual revenue. This may change as further details of the latest US proposed plans become clear.

Dangers

There are two dangers here for Ireland. The clearest is the potential loss of revenue from the digital sales tax (this would not mean corporation tax would necessarily fall, but it would be lower than it would otherwise be). However, the more serious threat to Ireland’s regime is more likely to be the new US GILTI tax rate and the possible agreement at OECD level on a minimum global corporate tax rate. These moves threaten to undermine one of Ireland’s key calling cards for attracting investment – the 12.5 per cent rate. Depending on where a new minimum it is set – in the US and internationally – it has big implications for Ireland’s model.

It it, as yet, hard to know exactly how this might pan out. In terms of the US legislation, congressional support is needed, though some aspects of the plan may progress more quickly. In an analysis of the plan, Grant Thornton in the US pointed out that the key changes to the GILTI regime are driven by arguments that the current rules, introduced as part of the Trump 2017 reforms, create an incentive for big US companies to manufacture abroad – the massive manufacturing of pharmaceuticals for the US market in Ireland is regularly quoted as one example of this. Removing allowances for offshore earnings and making the tax collectable country by country could turn the GILTI rate into a “true global minimum tax” for US firms, the company said.

As Yellen put it in her Wall Street Journal oped: “That way, corporations can’t shift profits around the world to minimise their tax bills.”

The small print – the detail of what is agreed – will be vital for countries such as Ireland, as well as whatever minimum rate emerges for US companies from domestic legislation and OECD agreement.

Speaking this week, the Minister for Finance, Paschal Donohoe, said Ireland would argue at the OECD that smaller countries needed to be able to maintain lower tax rates to compete in attracting investment. It will be an argument which will attract support from other smaller low-tax countries such as Hungary. But Donohoe did concede that a "period of significant change is coming".

Ireland may not meet the traditional definitions of a tax haven, but is now regularly referred to as such

So what might this mean for Ireland? The next few months will tell a lot. And it remains to be seen where the US and OECD processes end. Feargal O'Rourke, managing partner at PwC, says Biden is likely to have to compromise on his proposal to increase the main US corporation rate by seven points to 28 per cent. A rate of 25 per cent is more likely, he said. In turn the proposed 21 per cent GILTI rate – the vital issue for Ireland – is also likely to fall in negotiations with Congress, possibly to something in the 12 to 16 per cent range, he believes.

In turn the OECD process will be driven in part by what happens in the US. Previously the speculation had been on an OECD minimum rate set at about the Irish rate of 12.5 per cent. Now some reports speculate a deal might be done at 15 per cent. The hints from the US this week have been towards a higher rate, to close off the tax incentives for US firms to make profits overseas. Donohoe has said Ireland will argue for the right of smaller countries to be able to compete on tax. But the US is arguing otherwise – that tax should not be a competitive tool.

Impact

It is too early to speculate where this might land. Any OECD agreement will mean the organisation advising that setting a minimum rate at a certain level is best practice. Ireland could hold out and keep the 12.5 per cent rate. But the impact of this would depend on what is happening in the US as well.

Alternatively if the OECD rate was set at, say, 15 per cent, then Ireland could decide to set its rate at this level. This could raise more cash from profit declared here – though the whole process would be likely to cut the tax benefit for major US companies of locating some activities here. It is hard to know how this would balance out in terms of revenue, but over time the danger would be of a leakage of some activities away from Ireland.

O’Rourke points out that some competitor countries would still have higher tax rates – Ireland’s tax regime would be less of an attraction, he said, but would still be important. Ireland’s rate would still likely be below the UK rate, due to rise to 25 per cent, for example. And Ireland would have still its membership of the EU single market as a strong card to play in attracting US investment.

Big multinationals will retain global operations, whatever happens in the tax field. Predictability will remain vital for Ireland, says O'Rourke, as US companies may wonder what will happen in their own home market under future administrations. Bodies such as Ibec have pointed out that increased investment would also be needed in areas such as infrastructure, research and education – the other vital ingredients to attract investment here. And recent announcements from big players such as Intel suggest that Ireland remains attractive.

But many of the complicated tax structures used by companies to lower their tax bills by moving profits between jurisdictions would be ended, or would offer significantly less advantage. This would not lead to US companies upping sticks and leaving – but it could affect what they do here and alter future investment decisions.

Ironically, Ireland benefited from the first phase of OECD reform. This encouraged companies to move operations and assets out of traditional tax havens such as the Cayman Island and Bahamas. Ireland has been the beneficiary. This has helped boost tax revenues here, but has also increased the spotlight on Ireland. Ireland may not meet the traditional definitions of a tax haven, but is now regularly referred to as such and Ireland is now regularly mentioned in the US debate.

So Ireland will be firmly in focus in the months to come. Donohoe will know that whatever happens at the international talks, the US looks set to move anyway, with significant implications for Ireland. So as well as what happens in Paris, just which of Biden’s plans eventually pass into law is now vital. It is clear now that this is a priority for the US and that the gist of a plan has support in the bigger EU countries. Ireland can make its case, but has no veto.