Taxing times: challenges ahead implementing the new global minimum tax

The OECD’s implementation of a landmark reform to the international tax system aims to ensure that multinational enterprises (MNEs) will be subject to a minimum 15 per cent tax rate from the end of 2023 onwards. Since the European Union member states unanimously adopted the Minimum Tax Directive in December 2022, the deadline is now set to transpose this directive into national legislation by the end of this year.

Alan Connell, managing partner and head of tax, Eversheds Sutherland expands on this: “EU member states have also reconfirmed their commitment to the successful accomplishment of the ongoing work on the elements of Pillar One, which covers the new system of allocating taxing rights over the largest multinationals to jurisdictions where profits are earned, including the agreement of a multilateral convention.”

Earlier this year the OECD issued further commentary on a number of matters not addressed directly in the EU directive. “Consideration needs to now be given to how this additional commentary is taken into account,” says Deloitte tax partner James Smyth. “Pillar Two requires detailed calculations to be performed in each jurisdiction. However, the OECD have issued guidance on safe harbours, which provides for simplified calculations that exempt low-risk countries from having to perform detailed calculations,” Smyth adds. “The availability of these safe harbours in an EU context is welcome for impacted groups and will significantly ease the initial compliance burden.”

It is now in the hands of each member state to transpose the directive into their national laws, notes KPMG tax partner Cillein Barry. “As the directive was approved in advance of final guidance and commentary on the Global Anti-Base Erosion Rules [Globe] rules from OECD, it will be necessary to seek to align the principles of both when transposing the directive.”

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Connell notes that there are a number of administrative issues, ranging from record keeping, registration and deregistration, group filing and payment requirements, which will need to be contended with as part of the implementation of the Pillar Two rules in Ireland.

Remaining competitive

Connell sees an opportunity for Ireland to ensure that our tax regime remains competitive. “Ireland signing up to the G20/OECD inclusive framework allows for the retention of our statutory 12.5 per cent rate for businesses with annual revenues of less than €750 million, so there will be no increase in the corporate tax rate for over 160,000 businesses, representing approximately 1.8 million employees,” he notes. “This is quite significant in terms of Ireland’s continuing attractiveness as a preferred jurisdiction of choice for ongoing and future investment.”

However, Smyth warns: “While there are many reasons other than tax for Ireland’s success – including an English-speaking population, an educated workforce, membership of the EU and favourable business conditions – we cannot ignore the reality that the 15 per cent minimum tax will to some degree level the playing field with other competitor countries in terms of attracting foreign direct investment. Given the significant tax contributions made by multinationals in Ireland, Pillar Two may pose a risk to our public finances.”

To ensure that Ireland remains a competitive location in which to invest and grow businesses both from the perspective of inward investment and also domestic indigenous growth, Smyth advises: “Considerations such as high marginal personal tax rates in Ireland, the existing complexity of Irish tax legislation and incentives to drive innovation and growth in the knowledge economy are, in our view, crucial to securing our future competitiveness on the global stage.”

Barry advises: “It will be important that the Government enhances Ireland’s competitiveness for both domestic businesses and multinationals based or looking to invest here. The Government’s White Paper on enterprise 2022-2030 correctly identifies decarbonisation and digitalisation as two key pillars of our future policy direction to ensure enterprises adapt to the evolving global business environment.”

Complexities of implementation

As we head towards the implementation phase, Grant Thornton international tax partner Peter Vale warns: “The rules are incredibly complex, with significant guidance issued from the OECD to assist with implementation, although it seems inevitable that the next few years will see disputes between jurisdictions over taxing rights.”

As a small, open economy, there is a danger that Ireland will lose tax revenue in such a scenario. “Getting agreement on how to reallocate taxable profits has proved challenging for both the OECD and the EU, with temporary digital service taxes in place in many countries until a wider consensus can be reached,” says Vale.

“Where the competing forces ultimately leave Ireland in terms of corporate tax revenues is very difficult to predict, but of course corporate tax revenues everywhere are dependent on the profitability of larger MNCs in particular. Ireland remains dependent on a very small cohort of large global companies for a sizeable portion of our corporate tax revenues, hence significant volatility in our corporate tax revenues is a risk.”

Remaining largely optimistic, Vale cautiously notes: “While we don’t think it’s likely, any change in behaviour that saw MNCs leave Ireland as a result of the higher corporate tax rate would not only impact on corporate tax revenues but would also impact significantly on other tax heads such as payroll taxes and VAT in particular.”

Timing remains a real concern, according to Barry. “The OECD’s commentary and guidance on the Globe rules continue to be developed, and in particular key aspects such as the permanent safe harbour rules have not yet been released. This represents a challenge for all stakeholders to understand, implement and apply the Pillar Two rules. Further guidance is expected in the coming weeks.

“Another factor is consistency – ensuring that the rules are introduced and administered in a consistent manner creates challenges. Already some divergences in approach are emerging as more and more countries release their legislation.”