When Ireland’s low corporation tax strategy was conceived in the 1950s, it was aimed at stimulating growth at the expense of tax revenue. Today it has, instead, been transformed into a huge source of tax revenue for the government, while it has a relatively minor role in driving employment growth.
Karlin Lillington commented on this changed role in her column last week: there are now many more important reasons why multinationals employ large numbers of people in Ireland than the low corporation tax.
Last year revenue from corporation tax amounted to about 6 per cent of national income, with about 80 per cent of it coming from foreign multinationals, and about half of the total from US companies. This income is very important to Ireland, so that future changes in the international environment that seriously reduce our tax receipts could have a longer-lasting impact on the economy than the pandemic.
The OECD proposals would, among other things, provide for a minimum tax rate internationally
The Irish corporation tax regime has caused friction with our international partners and friends since it began. The Anglo-Irish Free Trade Agreement of 1965 provided for it to be phased out over the early 1970s. However, membership of the EEC in 1973 superseded that agreement.
Our tax regime continues to attract adverse headlines. Recent years have seen a step-up in international pressures to reform the global corporation tax system. Looking at this drive for reform objectively, it has some significant merit, which will make it hard for Ireland to resist change.
The EU had suggested an alteration in how the tax liabilities are calculated based on where countries do business. That proposal has foundered, partly due to Irish opposition.
OECD proposals
Another set of proposals for reform is being developed by OECD, and this agenda is likely to be more successful than the EU platform.
The OECD proposals would, among other things, provide for a minimum tax rate internationally. They would also allow taxation of digital services companies based on where they do business, rather than where they are legally established. However, the Trump regime pulled out of the potential deal, which temporarily stymied change.
What is different now is that the Biden regime is returning to the OECD negotiations, and is also planning a major change in its own corporation tax system to help fund a major infrastructure programme. It is the change in the US approach which has the potential to make most difference to Irish tax revenue.
From a US perspective, it would make sense to require its companies to pay the US government a share of any minimum tax on foreign profits
However, as of today, while we know that changes in US tax legislation could be very important for Ireland, we don’t even know with certainty that they could lead to a loss in revenue.
Nevertheless, though acknowledging things remain uncertain, Wednesday's Stability Programme Update from the Department of Finance has built in an anticipated €2 billion drop in tax revenue by 2025 as a possible result of the OECD process and the Biden tax changes.
US law
The fundamental factor in Ireland’s burgeoning corporation tax revenues has been the unusual nature of US tax law. While German and UK firms cannot move much of their profits offshore to reduce their tax liabilities, US companies have been able to do so for many years.
The original justification for this approach was that it made US firms more competitive. However, firms such as Apple and Microsoft don't need any such help. The continuation of this loophole means that the US loses large tax revenues from these companies, some of which we get instead.
The Trump regime changed things by introducing a minimum rate of 10.5 per cent that US firms have to pay on foreign profits. This helped shift a lot of profit to Ireland, because our rate was 12.5 per cent, which was deemed acceptable compared to a zero rate in some jurisdictions. Thus, Trump’s changes raised Irish tax revenue.
The Biden regime is talking about raising the minimum rate to 21 per cent. If no other changes were made, the Irish Government could potentially offer US companies the option of paying tax here at 21 per cent – massively raising tax revenues in Ireland, as US companies sought to avoid paying tax at an even higher rate in the US. However, such an outcome seems too good to be true.
From a US perspective, it would make sense to require its companies to pay the US government a share of any minimum tax on foreign profits. At worst, any such rules could mean that up to €6 billion of the exceptional taxes Ireland currently collects from US companies might accrue instead to the US treasury. That would constitute a huge hit for Ireland, and a minor gain for the US.
