New era of tax won’t end Ireland’s winning streak

Labour's finance spokesman, Ged Nash, did the unthinkable last week. He contemplated – out loud – raising Ireland's 12.5 per cent corporate tax rate.

"A small increase is something I believe we can live with," Nash said in an interview with the Financial Times. He called for a "national conversation" on a potential increase in the wake of proposals for a new global minimum rate of 15 per cent, agreed by G7 leaders at a summit the previous weekend.

Not long ago such an utterance would have incurred a political fatwa and placed Nash outside the realm of rational discourse. But we’re on the brink of the biggest international shake-up of corporate tax in decades and Nash was only articulating what now looks increasingly likely.

Either Ireland's 12.5 per cent rate will be shredded on foot of the EU adopting a statutory minimum rate across the bloc – though Ireland is likely to veto such a move – or it will be neutralised to an extent by the voluntary adoption of a global minimum rate.

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In the latter scenario, home or “source” countries will levy a top-up on rates below 15 per cent – presuming that’s the agreed minimum rate – to limit tax competition.

Squeeze

The two pillars of the reform process being forged by the Organisation for Economic Co-operation and Development (OECD) – that multinationals pay a greater proportion of tax in those countries where they earn the profits, and the establishment of a minimum rate – has put the squeeze on Ireland.

But is it a tipping point, one that changes the current dynamic and stymies future investment? While nothing is certain, there are strong reasons to think it won’t.

A minimum rate of 15 per cent – if adopted – is a very modest lift and would still leave Ireland with one of the lowest, if not the lowest, statutory tax rates in the EU. It would put a floor on tax competition but not end it.

In pure tax advantage terms, a greater danger for Ireland is US president Joe Biden’s proposal that a rate introduced on the global income of US companies - under the Trump 2017 plan – the so-called Gilti rate – be increased from 10.5 per cent to 21 per cent.

In the pharma and tech industries, profits are often tied to patents. US companies which are the main source of foreign investment here have been selling the rights to their patents to their Irish subsidiaries to avail of lower tax rates here. These intellectual property (IP) transactions are the main reason why our headline GDP metric is so out-of-kilter with domestic economic activity.

These firms pay very little tax here because of the IP allowances they’re afforded by the Irish tax authorities. Gilti is an attempt by the US government to recapture some of this tax for the US treasury.

Onshoring

However, since its introduction in 2017, it has failed to stop the onshoring of assets here and may have even strengthened it. We can see that from our own national accounts and the ongoing surge in corporation tax receipts.

It’s questionable whether a higher 21 per cent rate would change that dynamic as it would still be less that Biden’s proposed 28 per cent corporate tax rate, meaning it would still be advantageous for US companies to locate assets offshore.

Biden's proposals are also facing fierce opposition from corporate-friendly Republicans in Congress and are likely to be watered down considerably.

All of this presupposes that tax is the only enticement for US multinationals to locate in Ireland; not a skilled workforce, not membership of the EU or the Government’s generous research and development (R&D) credits.

There is also the simple fact that the investment is already here and, in the case to tech multinationals, they specifically want to be inside the EU for operational reasons.

Sensitivity

Nonetheless sensitivity in Irish Government circles is running high. Tánaiste Leo Varadkar criticised Nash's comments, suggesting it is "damaging to the national interest" to speculate on an increase to corporation tax.

Brought in by Labour’s former finance minister Ruairí Quinn in the mid-1990s, the 12.5 per cent rate is credited with cementing Ireland’s metamorphosis from protectionist, vassal state of the UK to global export hub, host to the biggest names in pharma and IT. It’s become the sacred talisman of Irish industrial policy, uncontested politically.

It is perhaps the chief reason why 24 of the top 25 pharmaceutical companies in the world have operations here. Or why we have the biggest per capita tech hub in the world with every name from Apple to Google to Facebook using Ireland as a bridgehead into Europe. More than €162 billion was invested in the Irish economy in 2019, €3 billion a week. These metrics are off the charts internationally.

When Nicolas Sarkozy and Angela Merkel tried to pressurise a beleaguered taoiseach, Enda Kenny, to give it up in 2011 at the time Ireland was at the centre of a financial crisis, he didn't flinch. Surrendering it would have been political suicide.

And even when change, potentially damaging change, has come along – the ending of our so-called “double Irish” scheme in 2014; the European Commission’s €13 billion Apple tax ruling in 2016; Trump’s tax reforms in 2017 – investment by multinationals in the Irish economy hasn’t diminished, it has only increased. There are strong reasons to believe this winning streak will continue.