In the end, the months, perhaps even years, of existential angst among policymakers in Ireland about agreeing to global reforms of corporation tax ended with a whimper, not a bang. Ireland, which has attracted much adverse international publicity about taxation matters, was always going to sign up to the OECD changes. It was merely a question of when.
Holding out for several months, in an effort to win concessions about the language of the text and its impact on domestic businesses, had the look of being more for domestic consumption than any real substantive fight with other countries. In truth, the ship on tax reform set sail many years ago.
Ireland has had a good run in holding out until now. The attempted harmonisation of taxation in the EU by Brussels was never going to be successful, but when the OECD became involved all roads led to this destination.
Now that Ireland has agreed to join the rest of the OECD, it has been selling the message that certainty has once again been brought to corporation tax for large multinational investors in Ireland and that the issue has now been settled for a generation. There’s even a subtle hint from some quarters that the hit to tax revenues, once estimated at €2bn, may not in fact be as large as feared.
There are plenty of scenarios in which governments might come back to the well to tap companies for a greater proportion of tax
Yet how certain can we really be that this issue has now been resolved for decades to come? The carefully coordinated steps this year to get the momentous agreement sealed came about because of the need to rebuild economies laid low by Covid-19. It is that pressure to raise revenues from corporations, particularly those giant US technology and social media networks, whose profits would have been unimaginable to companies a few decades ago, that has provided the impetus to bring years of negotiations to a close.
Retapping the well
What has been set is a floor not a ceiling. Is it really impossible to envisage in a matter of years moves being made to reopen the debate on whether the rate of corporation tax should not move higher again? There are plenty of scenarios in which governments might come back to the well to tap companies for a greater proportion of tax.
The most obvious scenario of all is another economic downturn. The extraordinary pandemic-related fiscal supports over the past 20 months have proved very popular with voters. It will be hard in future recessions, especially in unforeseen circumstances, to allow for the cost of recovery to be paid for by extra government borrowing or by hiking the taxes of employees while allowing corporates to continue paying a minimum rate of 15%.
However, the bigger issue may be getting businesses to pay for the measures that governments will have to undertake to curb harmful greenhouse gas emissions since they are responsible for much of the climate problems we face. The scale of the financing needed to protect the environment dwarfs any of the recessions we have faced. Taxing companies to pay a greater share of it is an obvious option.
Having bowed to the pressure of the OECD and major economies to give up on 12.5%, Ireland may well find itself having to come back to the table and agreeing to go further than 15% and in a timeframe much sooner than a generation. Playing the short-term game for concessions now indicates that should further changes be necessary Ireland will have to play ball.
