French and German support for corporate tax reform underlines pressure on Ireland

The pressure on Ireland over the move to corporate tax reform has been underlined by comments from France and Germany in support of a new global minimum rate being set at a high level.

The finance ministers from the two countries ,when asked in an interview with German newspaper Die Zeit what their reaction was to the US proposals of a minimum 21 per cent tax on its companies, indicated broad support. However it is also clear that negotiations on the issue still lie ahead.

Earnings

The detail of what they were asked and how they replied is important. The US has proposed a 21 per cent global minimum to apply on the international earnings of its companies.

The Biden administration is also a key player in OECD talks which are trying to agree an effective global minimum tax rate for corporations to be recommended across 139 countries.

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Asked their reaction to the US 21 per cent rate in the context of the OECD talks, the two ministers were broadly supportive. German minister Olaf Scholz said: "I, personally, have nothing against the US proposal." His French counterpart , Bruno Le Maire said : " If that was the outcome of negotiations, we would also be agreed."

While both clearly leave room for manoeuvre, the message is that the intervention from the US has changed the game, making agreement on a higher global minimum rate at the OECD more likely.

Of course we have also still to see what President Biden will get agreement on in Congress – with speculation that his proposals could be changed in significant ways.

Le Maire said that a 12.5 per cent global minimum, equivalent to the Irish rate, had been under discussion at the OECD. The speculation now – after the US move – is that the agreed minimum could rise to a higher level , albeit unlikely to go all the way to 21 per cent. Asked had lower tax countries like Ireland been consulted, Scholz said negotiations were ongoing and that the level of the tax was part of this.

Policy

Ireland’s policy of using a low corporation tax rate to attract investment is now threatened by the US proposal to tax the overseas earnings of its corporation at 21 per cent.

The separate but linked talks at the OECD are also vital. Ultimately Ireland could be left with a decision on whether to increase the 12.5 per cent rate to the new OECD-agreed global minimum level.

In a speech last week, Minister for Finance Paschal Donohoe said small countries should be able to use lower tax rates to attract investment. He said he believed any OECD deal should be able to " accommodate" the Irish 12.5 per cent rate.

It is not clear where the US negotiations or the OECD talks will land, but the Government may well face a key decision on this later in the year. And with the US, France and Germany all apparently supporting a high global minimum, the political pressure is building fast.