The taxation of multinational corporations is imminent. But nobody knows exactly what it will look like. The finance ministers of the major industrialized countries – the G7 – made headlines at their meeting last weekend about support for a dramatic reform of the international system. The enormous political capital that has been invested in it suggests change is imminent.
Exactly what this looks like is of vital importance to Ireland, its treasury and the attraction of foreign investment in the years to come. The era of competition with tax revenues for investments is coming to an end – a central goal of politics is to decide how the next steps should be designed.
Part of the G7 move is about getting big companies to pay more taxes by closing loopholes that allow them to shift profits around the world. But behind all the fine words there is also a desperate scramble among the countries to generate income for their own national coffers after a massive Covid-19 hit. This reform plan is not just about how much taxes companies pay, it’s also about where they pay them.
There is no question that after years of discussions in the Organization for Economic Co-operation and Development (OECD) on this issue, the G7 is gaining new momentum. “The ball is in and the game is on,” said Feargal O’Rourke, managing partner of PWC.
But it wasn’t long before the obstacles appeared afterwards. “Although it looked like the G7 had cracked aspects of the deal,” said O’Rourke, problems are already emerging. The UK is looking to opt out of major financial firms in the City of London on how incentives can replace low taxes.
Other sectors are likely to look for carve-outs in the coming months, says Dr. Brian Keegan, Attorney General at Chartered Accountants Ireland. This has been evident at the OECD since the beginning of the process.
“There is no such thing as international taxes,” he says. “Governments all over the world will evaluate these proposals solely on the basis of their effects on their own state revenues and the prospects for their own industries.” US President Joe Biden already sees himself confronted among Republicans in Congress against aspects of the agreement that they argue about that they put US companies at a disadvantage.
Ireland is at the center of this debate and has been accused of attracting investment with sweet deals
The G7 supported two different parts of the global tax reform agenda. The first involves large multinational corporations paying some tax where they sell and a little less where they are headquartered – for the benefit of larger countries. The aim is to fix what O’Rourke calls a “mismatch” between a tax system developed in the early 20th century and a 21st century business model that allows companies to sell in large markets online without prior Place to have staff. This is the part of the deal that, if agreed, will directly cost Ireland tax revenue – an estimated € 2.2 billion – € 2.4 billion per year, or around a fifth of its current corporate tax revenue.
The second part of the OECD agenda is to set a minimum tax rate on corporate profits. This is to prevent the use of extremely low tax rates to attract investment – and the practice of shifting profits around the world in search of the lowest rates. Since the G7 has called for a rate of at least 15 percent, this could call into question the future of the Irish 12.5 percent rate.
Finance Minister Paschal Donohoe argues that small countries, disadvantaged by their size and sometimes geographical location, should be able to use low tax rates to attract foreign direct investment (FDI). But the larger countries disagree and are trying to adjust the tax framework. This is the decisive battle that is to come.
Ireland is at the center of this debate and has been accused of attracting investment with sweet deals. According to Pascal Saint-Amans, the man who leads the OECD talks, Ireland is not a tax haven, but he said in a recent interview with the Irish Times that the country “has tried its luck with some very generous incentives,” particularly these “Double Irish” corporate tax tool that has been used by US multinational corporations for years that allows companies that are based in one location but managed in another to be taxed no where. Irish sources argue that this is US tax law, which was not changed until 2017 and was the ultimate foundation for US corporations’ tax avoidance structures.
And while Ireland has been accused of promoting tax avoidance, the country is now also picking up because, ironically, it collects so much taxes from multinational corporations. Corporate income tax here has almost tripled since 2014, the economist Séamus Coffey points out in a recently published blog that the country – despite its small size – is the third largest international recipient of US corporation tax payments. While the tax structure of part of Microsoft is controversial, Coffey estimates that another of its Irish subsidiaries paid a whopping € 1.6 billion in corporation tax in Ireland in 2020.
Global minimum
What does the major reform plan mean for Ireland? If there is an OECD agreement at a global minimum that is applied in every country where a multinational company operates, it will put a stop to competition. Even if a country cuts its interest rate to a significantly lower level, the multinational would pay a top-up in its home market – and other rules will encourage countries to apply the new minimum amount.
“There’s no math magic at 12.5 percent,” says O’Rourke of PWC. “What it is now is a symbol of certainty and predictability for doing business in good times and bad.” He says a key question for Ireland will be whether the EU would recommend a minimum rate in an OECD agreement , could enforce an agreement that requires this across the bloc. “You wouldn’t be spending a lot of money on it now,” he says, although other low-tax countries such as Hungary and Poland have reservations as well as Ireland.
For Ireland, a lot will depend on what the US does. This is a key – perhaps the key – exposure. Biden is targeting a 21 percent tax rate on US corporation international profits. As things stand, this would mean that companies would pay a substantial premium after paying 12.5 percent here. But then Biden is under pressure in Congress to agree to a lower interest rate. And then comes the result of the OECD talks. There are many moving parts.
With many large corporations deeply rooted here, the chances are they will stay
If there is an OECD deal, Ireland will be calculated as to whether it should try to keep the rate of 12.5 percent or eventually agree to the new global minimum. Domestic politics becomes interesting. Increasing the rate here would generate more corporate tax base revenue – and offset some of the losses from the other part of the plan. But it would only make sense if it looked like a stable international agreement had been reached. Should that happen, sticking to the 12.5 percent mark could jeopardize Ireland’s reputation.
What does this mean for investments? That’s the really big question. It will be crucial where the US tax system ends up – and whether there is still a tax break for international investments. This is a factor that has been pushing US foreign investment into countries like Ireland for years.
Danny McCoy, CEO of Ibec, the business lobby group, is confident. “Ownership is nine tenths of the law,” he says, and Ireland has already garnered massive US investment and may even get some protection from future aggressive tax-driven competitors.
With many large corporations deeply rooted here, the chances are they will stay. Relocating their operations would be costly and have tax and legal implications. But, says McCoy, in the future, key factors such as higher and higher education, infrastructure including housing, and the legal and research environment will be critical to attracting and retaining investment.
Ireland does well in some areas here, but we’ve been friends with third-party funding for years, and Irish universities have slipped in the international rankings. Keegan says taxes are still important, but other factors like EU membership, skilled workforce and strong intellectual property (IP) legal protection are crucial in today’s business world.
There is no doubt that all of this brings uncertainty. It won’t be about companies putting their sticks up and saying Ireland for so long and saying thanks for the tax breaks. But future tax-driven projects may not come. Other markets can be served from the USA. For a country that relies so heavily on what decisions are made in US boardrooms for jobs and taxes, this is a high stake. The challenge is to revamp Ireland’s existing attractiveness as a location for all kinds of innovation and investment, domestic and foreign, building on its strength and addressing the problems.
O’Rourke believes a deal will come about, but it will be more about “politics than principle”. The outcome of the policy has potentially major economic and financial implications for Ireland.
And an important point is that if there is no international agreement, individual countries will make their own changes, a process that exposes a small country like Ireland even more and could potentially get into serious EU-US tension. Deal or no deal, much is at stake for Ireland.