Joe Biden needs to revise international tax guidelines. Eire stands in the way in which

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  Joe Biden wants to revise global tax rules.  Ireland stands in the way

Biden still needs Ireland.

For years, the country has successfully attracted hordes of global companies with a corporate tax rate of just 12.5%, compared to 21% in the United States and 19% in the United Kingdom. Facebook (FB), Google (GoogL) and Apple (AAPL) have set up regional headquarters in the country, while pharmaceutical companies like Pfizer (PFE) have built production centers.

Now that 132 governments around the world have agreed on minimum corporate taxes of at least 15% to ensure big corporations pay their fair share, Ireland is digging on its heels.

Political pressure, however, could force Ireland’s leaders to give in. Donohoe met with Treasury Secretary Janet Yellen last week and said the talks had been productive. Yellen told reporters that Ireland, along with its other EU objectors Hungary and Estonia, “wants to find a way to say yes”.

Ireland’s opposition, however, highlights the obstacles that remain as governments attempt to turn public support for the ambitious project into concrete action. Ireland is believed to hold out to see if Biden can garner enough support in Washington. And even if Ireland finally signs, experts on EU law consider implementation in the block to be difficult.

“These plans are always taking longer to implement and legislate than discussed,” said Gary Hufbauer, a non-resident senior fellow at the Peterson Institute for International Economics.

Ireland’s low tax legacy

Something spectacular happened in Ireland in 2016: in a shock revision of official data, the country said its economy had grown by more than 26% in the previous year.

Unemployment fell and public finances were carefully managed. The real reason for the rise in production, however, was that global companies had relocated parts of their business to the Emerald Isle.

President Biden wins global support for massive tax reform “This revision can be seen as a result of increasing globalization,” said the European Commission in a memo. “It is primarily due to the relocation of a limited number of large economic players to Ireland.”

The episode highlights how effective the country has been in recruiting multinational corporations, some of which have been drawn down due to the corporate tax rate of 12.5% ​​in place since 2003.

“A low corporate tax rate was one of the factors that made Ireland attractive to FDI,” said Iulia Siedschlag, associate professor at the Dublin Institute of Economic and Social Research. “Obviously, multinational companies have made and are making a significant contribution to economic growth.”

The presence of foreign companies helped Ireland recover from the global financial crisis and the subsequent European debt crisis. While Ireland needed 68 billion euros ($ 80 billion) in international bailout loans in 2010, its economy grew at a staggering rate of more than 8% through 2014 following the collapse of its property market and the collapse of banks.

Tax revenues from multinational companies also gave public finances a decisive boost during the Covid-19 pandemic. In 2020 Ireland was the only EU economy that grew instead of shrinking.

Donohoe emphasized his commitment to working with other countries and the Organization for Economic Co-operation and Development, which coordinates the tax talks. However, he has expressed concern that an agreement could undermine one of Ireland’s great economic advantages.

“Although the potential loss of income depends on many factors, according to my department, corporate income tax could be charged in the short to medium term by up to 2 billion euros annually,” he recently told the legislature.

Withstand

Ireland, whose backing is needed for the European Union to ultimately adopt a directive on this issue, is under considerable pressure to soften its position.

Ahead of a meeting of the group of 20 finance ministers earlier this month, countries such as India, China and Switzerland spoke out in favor of the OECD’s reform plan. Support the minimum tax of at least 15% and a corresponding provision that would enforce The largest corporations pay taxes where they generate sales and profits, and not just where they are physically present. That could have a big impact on top tech companies like Google and Amazon.

Last week the European Union announced it was postponing its proposal for a digital tax that would have disrupted talks, another indication of growing support.

“The details need to be finalized, but the political traction is stronger than ever,” said Robert Danon, professor of international tax law at the University of Lausanne in Switzerland.

There are good reasons to believe that Ireland will eventually capitulate. If a global minimum tax of 15% is agreed and Dublin does not change its statutory tax rate, the United States could step in under the proposal and collect the remaining 2.5% of the tax owed by an American company. on its profits recorded in Ireland. At this point Ireland may also make the changes necessary to offset this revenue itself.

“At the end of the day, when you have a critical mass of countries taking over the framework, this is it,” Danon said.

However, Siedschlag notes that the possibility that a global minimum tax rate could ultimately be set above 15% is a “major concern” for Irish leaders, an option that remains on the table.

The country could likely handle a 2.5 percentage point increase, she said. However, if a consensus builds on a global minimum tax of 21%, it would destroy Ireland’s competitive advantage over the United States in taxation. the source of more than 50% of FDI in the country.

Ireland's Treasury Secretary Paschal Donohoe and US Treasury Secretary Janet Yellen will meet in Brussels on Monday 12 July for a meeting of EU Treasury Ministers.

Not just Ireland

Ireland is not the only obstacle between the Biden administration and a global tax overhaul.

Hufbauer believes that once the details of the tax plan are published, “the US Congress will face very serious objections” as lawmakers scrutinize the numbers on the impact of top American companies. With the reallocation of the US tax base, existing bilateral US tax treaties will also be suspended, which Hufbauer describes as a “very arduous process” that is not well received by some senators.

Gerard Brady, chief economist at Ibec, Ireland’s business lobby, said his country’s government was right to withhold support while Biden tries to see what can be done domestically.

“The decision not to make any commitments until we see what the US Congress can decide is a strategic one,” he said.

Even if the heads of state and government of the European Union support the OECD proposal, the complex web of existing rules and regulations could make it difficult to actually translate it into law, said Adolfo Martín Jiménez, chairman of the European Association of Tax Law Professors.

Talks will continue over the coming months with the aim of establishing a final plan for implementation by October. Ireland has announced that it will continue to participate actively.

“We are determined to negotiate to see if we can hit the deal at some point,” Donohoe said last week.

But the Irish government’s reluctance is a reminder that, despite unprecedented political support, recasting global tax rules will not be easy – even before you even grapple with the actual plan.

“An agreement on a worldwide minimum tax of at least 15% is a big step forward. But the devil is in the details,” wrote Nobel laureate in economics Joseph Stiglitz earlier this month.