Ireland’s 12.5% corporate tax rate has been a cornerstone of the country’s economic prowess since its introduction by then finance minister Charlie McCreevy in the early 2000s. Its preservation is one of the few areas of policy that unites all shades of political opinion – a recent poll found that 59% of the public favoured its continuation.
The low rate of the tax belies its high importance to the Exchequer. Corporation tax represented 21% of Revenue’s total tax take in 2020, with just 10 multinationals accounting for over 50% of this. The contribution of all 14,500 foreign multinationals based in Ireland to the country’s tax haul goes even further as, according to Revenue, they account for 32% of all jobs here. A particular emphasis on high-value IT and life sciences roles also translates into an outsized 49% multinational contribution to total employment taxes.
The success of the 12.5% rate may, therefore, speak for itself, but its critics are no less vocal. In 2018, a study by economists in the US and Denmark described Ireland as the biggest tax haven in the world, outstripping the entire Caribbean in enabling multinationals to shelter profits. In a recent interview with The Irish Times, American philosopher and social critic Noam Chomsky declared that Ireland’s tax policy had ‘robbed poor working people of tens of trillions of dollars’.
‘The case for companies to invest in Ireland will remain compelling’
Reform
It is arguably less the headline corporate tax rate than the ability of companies to reduce tax payable through base erosion and profit-shifting strategies that leads to sometimes astonishingly low tax contributions. Ireland has certainly not been alone in this regard and has taken steps to close more extreme loopholes such as the so-called ‘double Irish’ in recent years.
However, the 12.5% rate remained a concerted focus for those demanding global tax reform, and significant momentum came with the incoming Biden administration in the US in 2020. Endorsed by the G20 in July this year, long-standing proposals by the Paris-based OECD to respond to the tax challenges created by digitalisation and globalisation received a fresh lease of life. Key was the OECD’s ‘pillar two’ proposals for a minimum corporate tax rate of ‘at least 15%’.
While Ireland initially rebuffed the plan, it was soon evident that this was more negotiating strategy than red line, particularly as the country has long argued that the OECD is the legitimate vehicle for global tax reform. On 7 October 2021, finance minister Paschal Donohoe bowed to the inevitable, announcing that, following agreement to delete the phrase ‘at least’ (which Irish officials feared would be used as a device to increase the rate at a later point), Ireland would increase its corporate tax rate to 15% from 2023.
The change will apply only to multinationals with an annual turnover of more than €750m. According to the government, there are 56 Irish multinationals and 1,500 foreign-owned groups based in Ireland that meet that criterion.
Uncertain impact
While acquiescence to the OECD agreement represents a seismic policy shift for Ireland Inc, it is far less clear what the actual impact will be on the economy or the Exchequer. Among those voicing concern is the Department of Finance, which has estimated that participation in the global deal will cut the country’s tax take by €2bn a year, primarily as a result of the ‘pillar one’ element of the agreement, and in particular the loss in taxation on sales of goods and services to other countries.
Not everyone agrees with this assessment. KPMG Ireland’s head of tax Tom Wood argues that Ireland will ‘break even at least’ when the changes take effect. He believes the new 15% tax rate could deliver an additional €2bn from Ireland’s top 10 corporation taxpayers and as much as €4bn from its top 100.
A longer-term concern will be how the higher tax rate affects future inward investment. To date, no alarm bells are ringing. CEO of IDA Ireland Martin Shanahan emphasises the positives in response to the change. ‘The pipeline [of inward investment] remains strong, and many of those decisions made and announced recently were made in the full knowledge that Ireland was engaged in this OECD process,’ he says.
‘The new 15% tax rate could deliver an additional €2bn from Ireland’s top 10 corporation taxpayers and as much as €4bn from its top 100’
Peter Vale, tax partner at Grant Thornton, also believes ‘the case for companies to invest in Ireland will remain compelling’, but points to a need for Ireland to get its house in order on a number of fronts. Non-tax factors such as ‘transport, infrastructure, broadband, education and supply of labour will play an increasingly important role going forward’, he warns.
Top-up tax
In signing up to the agreement, Ireland also now has the assurance that no country can undercut its baseline rate. Yet, as with everything to do with tax, headline figures conceal the complexity beneath. ‘There is likely to be some level of optionality in terms of how a country adopts some of the measures,’ Vale says. Large Irish companies with low-taxed subsidiaries internationally may see Revenue ‘seek to collect any “top-up” tax to ensure that the minimum tax is paid,’ he adds.
Lorraine Griffin, head of tax at Deloitte Ireland, believes that although those currently enjoying a low effective tax rate will inevitably see that rate increase, the impact of the new rate won’t be straightforward. She says: ‘From an impacted corporate group’s perspective, the effect of these measures will depend on its global footprint overall, and whether they are currently doing business in higher or lower-taxed jurisdictions.’
Meanwhile, in welcoming the maintenance of the existing rate for the vast majority of companies in Ireland, Karen Frawley, president of the Irish Tax Institute, says it means that ‘our SMEs can continue to benefit from our 12.5% rate without any damage to their competitiveness’.
It may have departed the international stage with a whimper rather than a bang, but Ireland’s 12.5% corporate tax rate hasn’t been consigned to the history books just yet. While many will hope the OECD reforms represent a step towards a more equitable global tax system, they are also likely to open up new faultlines and battlegrounds. Ireland’s finance professionals can expect busy times ahead at the leading edge of a steep learning curve.
The two-pillar solution
The key elements of the OECD’s two-pillar solution, to which Ireland has now signed up.
Pillar one
- Taxing rights over 25% of the residual profit of the largest and most profitable multinationals will be reallocated to the jurisdictions where those multinationals’ customers and users are located.
- Tax certainty will be achieved through mandatory and binding dispute resolution, with an elective regime to accommodate certain low-capacity countries.
- Digital services taxes and any other relevant or similar measures will be removed or parked.
- A simplified and streamlined approach will be taken to the application of the arm’s length principle in specific circumstances, with a particular focus on the needs of low-capacity countries.
Pillar two
- Global rules to prevent tax-base erosion will include a global minimum tax of 15% on all multinationals with annual revenue over €750m.
- All jurisdictions that apply a nominal corporate income tax rate of below 9% to interest, royalties and a defined set of other payments will be required to implement the ‘subject to tax rule’ into their bilateral treaties with developing countries when requested, to prevent those treaties being abused.
- There will be a carve-out to accommodate tax incentives for substantial business activities.
