Corporate tax: Economic impact unclear but dangers have eased

For Minister for Finance Paschal Donohoe, the talks on corporate tax have always been a game of damage limitation. And his decision not to sign up to the draft OECD deal over the summer carried political risks. Success was far from guaranteed. However, with significant "wins" achieved in relation to Ireland's concerns, Donohoe can justifiably say that the original decision not to sign the draft terms was the right one.

Ireland’s political hand in the talks was not that strong. It was clear from the start that if there was a deal, we could not stay outside – and now indeed we are to sign up. But the other countries did want us on board. As a big home for the international headquarters of US companies, the Biden administration believed Ireland’s participation would make implementation much easier. And France, long a supporter of a higher corporate tax rate in the EU, wants to see the OECD deal written into EU law as soon as it can.

Donohoe used these factors to get the key concession of removing the "at least" before the level of the new minimum rate of 15 per cent. And to get assurances from the European Commission that it would not push for a higher rate when translating the OECD deal into EU law. Other EU countries could still object to this, but EU tax changes work by unanimity.

Domestic businesses

Domestically, the shape of the deal largely closes off opposition criticism, with Sinn Féin recently calling for the 12.5 per cent rate to be retained for domestic businesses – which is now to happen – and favouring Ireland’s participation in the OECD deal. The 12.5 per cent rate has been a rare area of political consensus over many years and, even as the rate changes, this looks set to largely hold – a point investors will note with the possibility of Sinn Féin leading the next government.

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Business reaction was positive, centred on the certainty about the new tax rate. PwC managing partner Feargal O'Rourke said the odds on Ireland finding a safe landing slot in the deal had looked long last summer, but this had been achieved. Ibec greeted it as "the right decision at the right time".

There are costs here, notably in changes to rules about where companies pay tax which will cost the exchequer up to €2 billion a year, a figure now well-flagged and included in budget forecasts. The impact on future inward investment remains unclear, but business says certainty is important. The IDA said that the investment pipeline was “extraordinarily strong” even with the tax changes on the horizon. Still, Ireland could lose some more tax-sensitive projects in future. The economic impact remains unclear, but the dangers have eased a lot since the original proposals earlier this year.

Ireland’s reputation

Despite the risks, not signing up to the deal, as Donohoe explained, would have left Ireland outside the tent and unable to influence negotiations on the detail, would have hurt the country’s reputation and cost it tax revenue which would have been collected elsewhere.

In getting assurances on the EU implementing the 15 per cent rate and no more from the commission, Donohoe seems to have headed off the risk of further pressure from Europe on our corporate tax regime, for now anyway. And the commission's willingness to green light a 12.5 per cent rate for companies under the OECD limit is a surprise. The EU insisted we abandon a dual system in the past, according to Brian Keegan, public affairs director at Chartered Accountants Ireland, and the changed attitude this time is a boost to Irish companies.

Uncertainty still lies ahead. The details of the OECD deal remain to be thrashed out and are still controversial. And crucially it remains to be seen what the US Congress can pass by way of parallel changes to its tax laws. If it fails completely, then the OECD process will collapse, leading to the threat of what might be termed international tax wars, with Ireland stuck in the middle. Having signed up, Ireland will now want the deal to be done.