Will Paschal Donohoe be the finance minister to increase the Irish 12.5 per cent corporation tax rate? He might well be. It's too early to call this for sure, but all the signs are that the big countries are going to push for a global consensus on a recommended minimum tax rate for big multinationals, probably at about 15 per cent.
If this leads to an agreement at the OECD on this issue – and remember the big countries usually get what they want – then Ireland is left with a choice. Stick with 12.5 per cent – and face another fight as the EU considers how it will respond to an OECD deal – or increase the Irish rate to the new minimum in a once-off move.
This global tax issue was discussed yesterday at an online meeting of finance ministers of the big industrialised countries, the G7, who may signal agreement on the issue at a face-to-face meeting in London next week on a global minimum of at least 15 per cent. This is a move to keep momentum going in talks at the OECD, in which some 139 countries are participating, on global tax reform.
Ireland has been cast as the kind of pantomime villain in this process, the tax haven standing in the way of reform. Some of this is overstated. The tax avoidance practices of US companies over many years were based fundamentally on US tax law, which only changed in 2017.
Mistakes
But over the last decade, while Irish rules have changed in line with the OECD process, Ireland has made some mistakes too, which have left the country exposed in the current debate. These include the slow phasing out of the controversial double-Irish tax rules, and an overly-favourable tax write-off regime, only changed in last October’s budget.
Now Ireland is portrayed as standing in the way of reform. But the reality is that just as an OECD deal can’t force Ireland to change its rate, nor do other countries have to wait for a deal to change theirs. The Biden administration has proposed a 21 per cent minimum rate on the international earnings of its companies. This proposed rate may decline in negotiations with Congress. But a deal will probably be done.
While Ireland has clung to the OECD process as the forum for discussion, bilateral contacts with the US on this are also likely. One observer likened it to the Brexit talks, where Ireland insisted for years that we negotiated only as part of the EU and then suddenly all changed when Leo Varadkar went to meet Boris Johnson at a country pile in Cheshire. Donohoe may well have a talk with Janet Yellen at next week's G7 gathering , which he will attend in his position as president of the Eurogroup of finance ministers. It could be an important moment.
Ireland will not adjust its tax rate just because the US moves their rate. That wouldn’t make sense, because who knows what a future US government might do.
This is tricky territory and there is a lot at stake. But it does not signal the upending of our national economic model
However, an agreement at the OECD that, say, 15 per cent is the recommended global minimum could well signal a change here.The practicalities would depend on how the rules were structured. But while this could – but only could – still leave room for Ireland to offer some benefits via maintaining the 12.5 per cent rate, there would be strong arguments to adopt the new global minimum.
One would be about reputation. Would it really be credible to hold out against an international consensus on a global minimum tax rate, when doing so would offer little or no practical advantage bar some fuzzy argument about the 12.5 per cent brand ? Remember that this is about big companies paying – and being seen to pay – their fair share.
The other is about money. If Ireland kept its rate at 12.5 per cent, then companies would be paying a top-up tax in their home market to get to the global minimum – or to whatever rate the host country had set. That would mean Ireland waving goodbye to cash which could be collected for the Irish exchequer. Given that we will lose money on the other part of the global corporate reform process – the imposition of a digital sales tax which will favour big countries – this cash could well be needed.
Controversial
And the third reason is politics, domestic and internationally. Domestically foregoing a wad of tax to keep a largely irrelevant 12.5 per cent rate would clearly be controversial. It would be “Apple on steroids” as one observer put it, referring to Ireland’s decision to appeal the European Commission’s ruling on Apple owing tax to Ireland. Internationally, if Ireland signs up to the OECD process, it gives us more standing to oppose recently signalled moves in the EU towards developing a new corporate tax base for the EU, which would involve huge risks for Ireland.
This is tricky territory and there is a lot at stake. But it does not signal the upending of our national economic model. Tax has been part of the attraction for multinationals here – but only part of it – and a lot of big companies are deeply embedded here. Their tax structures have tended to sit oddly alongside substantial real operations.
Future investment flows may be affected in some cases. But there will be no big pull-out of investment. The challenge will remain to build an economy and society attractive for sustainable future investment, whether it is from domestic or overseas companies.
While Ireland has problems and challenges – and the pandemic has taken its toll – the country starts from a decent position with a strong base of successful companies. Better to concentrate on developing areas such as education, research and infrastructure to hold and attract investment than fight the last war over what may end up being a redundant tax rate.