Cliff Taylor: The week when the Irish economy dodged a bullet

It was a tale of two G7 meetings for Finance Minister Paschal Donohoe. Emerging from the G7 finance ministers meeting in London in June, he noted the ministers' support for the OECD tax deal and talked about the potential €2 billion annual loss to Ireland.

But while Donohoe pointed the news agenda in this direction, you would suspect what was concerning him was something else – the inclusion of the famous phrase of “at least 15 per cent” as a target level for the new global minimum rate in the G7 communiqué .

Even more worryingly, the Biden administration was then shooting for a 21 per cent rate to be charged on the foreign earnings of its companies, which would have blown our low tax policy out of the water.

Donohoe wasn't playing with a particularly strong hand – everyone knew Ireland would have to get on board eventually and political pressure has been fierce

Donohoe attends G7 meetings in his role as president of the Eurogroup – the committee of finance ministers from euro countries – and so is not there to talk about tax. But in another meeting of the G7 ministers last week he was asked to remove his Eurogroup hat and put on the hat of Irish Finance Minister and to make his case.

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By then it was clear that the winds had changed. It now looks likely – though as yet far from certain – that the US Congress will opt for a minimum tax rate of about 16-16.5 per cent on the foreign earnings of its big companies , near enough to the new OECD figure. Meanwhile France – a key supporter of a higher tax rate on companies – seems to just want a deal done now before next year’s presidential election.

Key concession

Donohoe wasn't playing with a particularly strong hand – everyone knew Ireland would have to get on board eventually and political pressure has been fierce. But these important changes in the international mood helped Donohoe to win a key concession – the removal of the "at least" phrase – thus closing off the risk of a higher rate in the OECD deal, with the European Commission also saying it will not seek to gold-plate the deal for Europe.

So it is was the week when Ireland dodged a bullet. The big dangers which loomed early this year have largely passed, even if the uncertainty of what the US Congress will agree remains.

Now, having signed up to the OECD tax deal, Ireland needs it to be done. We will preach its virtues with the zeal of the convert. The main danger is that if the US Congress fails to approve the OECD deal, then it will collapse. This would put everything back to square one and threaten tax wars between the US and Europe. Ireland would get caught in the middle of a potentially nasty fight here.

Another possibility is that Congress approves the minimum tax, but not the digital sales tax element of the OECD plan, which could also be messy.

If the OECD deal did collapse, then the EU would come straight back on to the pitch, seeking to agree its own minimum tax levels and a wider corporate tax shake-up of a kind Ireland has been resisting for years.

Ireland has had to balance its economic relationships with the US and EU for years , fighting to maintain low taxes and fiscal independence here and using access to the EU market as a key factor to attract American firms.

While former Progressive Democrats leader Mary Harney once put it as choosing between Boston or Berlin, Ireland’s tactic has generally been the act a bridge between the two.

We have used the OECD tax process as a mudguard to fight off EU plans for tax centralisation for years. Ireland’s good fortune is that the first phase of OECD reform introduced after 2015 played hugely to our advantage. It was one of the reasons why corporation tax revenues here have soared, as big companies rearranged their financial structures to cut out tax havens such as the Cayman Islands and Bermuda, benefiting their operations here.

Tax avoidance

Tax rules in Ireland have changed as a result of the OECD process. And big changes introduced under Donald Trump in the US have ended the practice of big companies parking massive amounts of untaxed cash offshore.

Controversy will continue about how multinationals pay tax, but the impact of the changes of recent years are significant. The new rules are also closing off many old tax avoidance structures and the impact of this is uncertain.

There won’t be a pull-out of multinationals from Ireland because of this deal. Ireland will lose revenue from the changes in where companies pay tax, but will get some back from higher corporate tax rates.

The real question is the impact on inward investment and how the big companies organise their finances. The rate increase itself should not be a major factor, provided everyone believes it will last.

Multinationals will see how the OECD process settles and then reassess where they place their investment and where they house key assets. Risks remain

The wider OECD reforms are, however, designed to blunt tax competition – and smaller countries including Ireland could lose some investments because of this, or some revenues from multinational financial reorganisations.

Multinationals will see how the OECD process settles and then reassess where they place their investment and where they house key assets. Risks remain. A lot of our corporate tax revenue – some €5 billion per annum on the Fiscal Advisory Council’s’s calculations – is hard to explain on the basis of their physical activities here. We remain vulnerable to decisions made in a small number of US boardrooms on future investment strategy.

With the wind firmly in the direction of reforming international corporate taxes, these factors were always going to be in play. Now the dangers look less potent and the landing spot from the OECD process as good – or better – than we might have hoped for.

Future battles and dangers lie ahead, but once the big reform of international tax started that was always going to be the case.