Reports of the death of Ireland’s business tax regime, central to attracting multinationals here, have been exaggerated for many years. But 2021 looks set to be a defining year for international tax.
Countries are scrambling for tax revenue after the pandemic. And the big digital companies, in the firing line for years over tax, are also in the dock over fake news and their massive influence. Put these two things together, and it points to more tax on big business.
The change of administration in the US is central to what happens next. President Joe Biden and the new treasury secretary, Janet Yellen, have massive spending plans. But with a budget deficit approaching 15 per cent of GDP, Biden needs revenue too. And business is one obvious target.
As the European home of many major US multinationals, Ireland is exposed. Tax seems to have been touched on when the president spoke to the Taoiseach this week, but only in passing. The political focus is on what Micheál Martin said to Biden about vaccines. But a quiet chat about tax would have been useful because everyone is now waiting to see how the US will play this.
For Ireland,to use the RTÉ sports commentator George Hamilton’s phrase when some slippery opposition forward approaches the Irish goal, it is clearly a case of “ danger here” .
Under the aegis of the OECD, the Paris-based think-tank, more than 120 countries are trying to reach a deal on multinational tax. Predictably this tends to be like cats fighting in a sack; last year the US withdrew from a key part of the process, with the Trump administration arguing it was unfair to US companies.
Yet under Biden the US is back at the table .The US president wants to reverse in part the massive Trump corporate tax cuts. And it is hard to sell the idea of US companies paying more at home if they are being taxed at much lower rates abroad. Hence the new enthusiasm in Washington for the OECD talks.
Two big issues
The OECD process raises two big issues for Ireland. The first is that it proposes that big multinationals pay some tax in markets they sell to from Ireland using digital platforms.This would mean less tax paid here.The Department of Finance previously estimated that this might cost the Irish exchequer up to €2 billion a year out of total corporate tax revenues of €12 billion.
The second danger comes from the other part of the OECD talks. It is the proposal for a global minimum tax rate – a base rate which ensures that all companies pay at least a certain amount of tax on profits. Yellen has underlined the US commitment to this. The big question for Ireland is what the rate, if agreed, will be.
If it is at our current 12.5 per cent rate or lower then the Irish rate stays where it is. But after years of cutting the trend in corporate tax rates is now upwards.
And if the minimum rate is higher, say 15 per cent, then big companies based here would face making top-up payments in the US to reach the minimum. If this happened Ireland would have to decide whether to raise our rate to the new minimum – either way part of our armoury used to attract companies here would be undermined.
A lot hangs here too on how the minimum tax rules would be applied, and in particular how they relate to the way companies account for their intellectual property assets, the copyrights, patents and trademarks at the heart of modern digital and tech businesses.
A lot of these assets have moved to Ireland in recent years, and they are central to tax arrangements. This could yet boost taxes here in years to come, but there is a lot to play out first.
The final danger also relates to intellectual property. Biden intends to raise a kind of back-stop rate which the US has for international profits of its companies related to their intellectual property.( This is called the GILTI rate, and we will be hearing a lot more about it). He has said he wants to raise this from 10.5 per cent – below our 12.5 per cent rate – to 21 per cent. If this happens this again knocks the attraction of Ireland’s tax rate as US companies would face top-up payment back home.
Dangers
Despite the dangers of the OECD process to Ireland's policies, Minister for Finance Paschal Donohoe has said he is committed to it. He is right as the alternative might well be worse.
If there is no agreement then a number of countries will impose taxes on digital sales unilaterally. In turn, US objections to their companies being targeted could lead to a spillover to wider economic tensions and a new trade war – with Ireland stuck in the middle.
If you think nice Uncle Joe in the White House won’t play hard on tax then think again. Read his campaign literature which talks in detail about bringing investment back to the US, including in the key pharma area where Irish plants export back to the US market.
Ireland profited for many years as being a kind of link in an international chain based on companies taking advantage of the interplay between US tax rules and Irish ones. We now have big vibrant companies here, but with complicated tax structures attached, many now based on tax allowances related to intellectual property.
The decision of Stripe to create 1,000 jobs and move a large part of its business to Ireland shows that Ireland does indeed have a lot going for it as a location for new-wave businesses. But tax is important too, and the game is about to change.
The Irish Government has long argued that the attraction of Ireland for multinationals goes well beyond tax. We may be about to find out.