Since the finance ministers of the G7 meet practically on Friday before a face-to-face meeting in London on June 4th and 5th, one point in particular will dominate the discussion.
The Biden government’s proposals to create a global minimum corporate tax rate could revolutionize the taxation of multinational corporations around the world. The idea has gained significantly in momentum since he took office in January, and finance ministers are expected to endorse the key tenets of the plans ahead of an expected OECD deal this summer.
A very interested spectator at the meeting on Friday is the President of the Eurogroup, Paschal Donohoe. He participates for his role as head of the EU Finance Ministers’ group, but in his role as Irish Finance Ministers, his views on the issue of the day are perhaps most contradicting those of his colleagues.
Ireland’s corporate tax rate of 12.5% is one of the lowest in the EU and has long drawn the ire of people like France and Germany. Other elements of the Irish corporate tax system have also made international headlines over the years, for example when it battled and won an EU lawsuit against its decision to cut Apple’s corporate tax burden by approximately EUR 14 billion (US $ 17 billion) during the reporting period worked from 2004-2014.
So far Ireland has supported the Biden proposals with lukewarm support at best. However, as the plans move closer to reality, Ireland and other countries with similar tax models are starting to ask some fundamental questions about their own economies.
The U.S. plan calls for around 100 of the world’s largest multinational corporations, namely companies with annual sales of $ 20 billion or more, to pay taxes to national governments based on their sales in these countries. A globally agreed minimum corporate tax rate of 15% has also been proposed to prevent “profit shifting”, where companies find mechanisms to shift profits to countries where they are least taxed.
Irish Treasury Secretary Paschal Donohoe is in a somewhat difficult position from a tax point of view
This would have an obvious impact on countries like Ireland and the Netherlands, both of which have attracted huge FDI from multinationals through their corporate tax policies.
“We really have significant reservations about a global effective minimum tax rate status that is so high that only certain countries and economies of certain sizes can benefit from that base,” Donohoe told Sky News earlier this week. “We have really big concerns.”
Donohoe previously spoke of the potential implications of the changes for Ireland. “I have said this moment has been coming for years, it is happening now and it will have consequences,” he told Irish state broadcaster RTE last month. “It could have a very important and significant impact on the way we operate corporate tax policy in Ireland.”
Undermine an economic model
Dan O’Brien, chief economist at the Institute for International and European Affairs, said the Irish government is largely supportive of the process and “knows the direction”.
“I don’t see any deal that will change the Irish economic model or employment in the multinational sector, and I would expect Ireland to remain a hub for international business whether that is agreed or not,” he told DW.
While he believes the 250,000 or so jobs in Ireland associated with multinational investment will be largely safe, he believes that the government may have to budget for a significant loss of income if FDI in Ireland begins to decline .
“With COVID-19, it would not be a good time to lose some of the revenue now. The risk of putting a significant hole in the Irish government’s finances is the big direct effect.”
The Biden Plan has brought tax systems like the Irish one back into focus.
Ireland has been routinely referred to as a “tax haven” by groups advocating changes in global tax laws. However, O’Brien said the charges were unfair.
“Ireland has certainly used a low corporate tax rate to be attractive and that is, in my view, a perfectly legitimate policy choice for a peripheral small economy that has traditionally lagged behind its neighbors and was poorer than its neighbors,” he said. “She used her tax system to compensate for the disadvantages of the ‘periphery’.”
The Biden plans were criticized beyond the low-tax countries. Several developing countries and lobby groups have suggested that the proposals are unlikely to do much to help obtain additional taxes from large multinationals, even though many companies source their raw materials from these countries.
Then there is the argument that the global corporate tax avoidance problem is overrated.
O’Brien said the amount of globally missed taxes is relatively small compared to the amount of attention paid to the issue. “Corporate tax revenues have not decreased, they have increased as a percentage of GDP and as a percentage of total tax,” he said. “I always emphasize this point when it comes to this debate. It is very important, but it is rarely mentioned.”
But he also believes the proposals are, by and large, a good thing for the global tax system, a view shared by Eduardo Baistrocchi, professor of tax law at the London School of Economics. “It is the first systematic attempt to reallocate hub jurisdictions and MNEs [multinational enterprises] Rent to market courts since 1933, when the Mitchell Carroll Report was published, to solve the problem of income distribution, “he told DW.
“The Biden proposal should allow jurisdictions to generate more tax revenue and address the growing problem facing humanity: increasing inequality in their communities.”