If orange was the new black, then 15% is the new 12.5%

Having come off weeks of arduous negotiations, Paschal Donohoe is more than entitled to a large glass of wine tonight to ease him into the weekend – if he didn't have the budget next Tuesday.

But when the Minister for Finance and his officials go home on Friday evening, they will reflect on the fact that they have ensured Ireland has emerged from one of the most consequential weeks of the global tax debate, that has trundled on for the past eight years, in a remarkably good position.

When the Government declined to sign up to the ambiguous OECD proposition of a minimum tax rate of “at least 15 per cent” in July, unlike the 130 other countries that did on the day, there was a bit of “what will the neighbours think” criticism in some quarters. There was also some genuinely placed concern as to whether this was the right move. The overriding question was where Ireland’s path forward was from here.

On Thursday the Minister was able to announce that Ireland was now signing up to the OECD agreement, had secured the elimination of the phrase “at least” thus getting certainty about the minimum rate and, in a genuine rabbit out of the hat moment, maintained the 12.5 per cent rate of tax for, broadly speaking, the domestic economy. The Department of Finance has estimated that 160,000 businesses employing up to 1.8 million people will benefit from the retention of this rate.

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Why were we not steamrollered by the OECD and the G7 into taking what was on the table last July? I think there are three reasons. Firstly, they accepted we had a legitimate point about the 12.5 per cent rate being fair tax competition. Up to January, all the indications were that the big countries accepted 12.5 per cent as an appropriate minimum figure. It wasn’t until the Biden administration raised the idea of 21 per cent that the landscape changed. Secondly, Ireland has been a positive and proactive player in the OECD process. When it started in 2013, we were seen as part of the problem. Our engagement has seen us become part of the solution.

But the key can probably be traced back to July last year when, against the odds, Paschal Donohue beat his Spanish counterpart Nadia Calvino in a knife-edge ballot of their peers to become president of the Eurogroup. This gave him status and access to the key global players who might not otherwise have entertained an Irish minister for finance at all. It would be instructive to see just how many engagements he’s had with Janet Yellen, Rishi Sunak, Olaf Scholz, Bruno Le Maire, Pascal Saint Amans and Mathias Cormann from the OECD over the past year. But it clearly has paid off.

There have also been subtle, imperceptible at times, shifts along the way from the department. In the summer, Ireland committed to the principle of a minimum global rate. That was a real signal that the 12.5 per cent rate was up for debate and negotiation, but not one that was widely commented on at the time. Once that commitment was made, there was no real way that Ireland was going to become the North Korea of the tax world by staying out of a global agreement.

Subtle indications

In recent months the Minister and his department did an extensive outreach with foreign and domestic companies and groups to indicate subtly where the end game might be. In terms of signing up to the OECD agreement, no one will have been surprised.

Maintaining the 12.5 per cent rate for the companies with a global turnover of less than €750 million was a surprise, as the EU was required to sign off on it. As I have often said, there is no arithmetic magic to 12.5 per cent but it’s a symbol of predictability and certainty in a world where such traits are rare and prized. It’s also a tacit EU admission that there is nothing wrong with 12.5 per cent per se but that the real target here was global corporations, primarily ones with US headquarters.

There is an upside for Ireland here. While earlier this year the department estimated Ireland would lose about €2.5 billion from Pillar One (where big market jurisdictions will collect some corporate tax currently being earned by countries like Ireland) there were no gains estimated from Pillar Two on the assumption that the 12.5 per cent rate would remain. However, with a 20 per cent increase in the tax rate for large companies that pay the bulk of Ireland’s corporate tax, there could be an equivalent gain when the changes are made in 2023.

What does it mean for foreign direct investment in Ireland? I don’t believe it will have any material impact at all despite some eclectic observers suggesting the contrary. If orange was the new black, then 15 per cent is the new 12.5 per cent and Ireland will set out its impressive (primarily non-tax) stall once again.

So tax peace in our time (although Chamberlain regretted that phrase)? This needs to be the outcome now where cross-border disputes diminish and the spectre of trade wars disappear. The tax war should now be over.

Feargal O’Rourke is managing partner of PwC