Paschal Donohoe faces a giant resolution on Eire’s company tax fee of 12.5%

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Paschal Donohoe faces a big decision on Ireland's corporate tax rate of 12.5%

Will Paschal Donohoe be the Treasury Secretary to raise Irish corporate tax rate from 12.5 percent? It could well be him. It’s too early to be certain, but all the indications are that the big countries will push for a global consensus on a recommended minimum tax rate for large multinational corporations, likely around 15 percent.

If that leads to an agreement at the OECD on this issue – and remember that the big countries usually get what they want – Ireland will be left to choose. Stick to 12.5 percent – and face another battle as the EU wonders how to react to an OECD agreement – or raise the Irish rate to the new minimum in a one-off step.

This global tax problem was discussed yesterday at an online meeting of the finance ministers of the major developed countries, the G7, who may signal an agreement on the global tax minimum of at least 15 percent in a face-to-face meeting in London next week. This is a step to keep talks on global tax reform going in the OECD, in which around 139 countries are participating.

Ireland has been seen as some sort of pantomime villain in the process, the tax haven that stands in the way of reform. Some of this is exaggerated. The longstanding tax avoidance practices of US companies were essentially based on US tax law, which only changed in 2017.

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While Irish regulations have changed over the past decade in line with the OECD process, Ireland has also made some mistakes that the country has exposed in the current debate. These include the slow phasing out of controversial dual Irish tax rules and an overly favorable tax write-off regime that wasn’t changed until last October’s budget.

Ireland is now being portrayed as standing in the way of reform. The reality, however, is that an OECD agreement cannot force Ireland to change its rate and that other countries do not have to wait for an agreement to change theirs. The Biden government has proposed a minimum rate of 21 percent for its companies’ international profits. This proposed rate may decrease in negotiations with Congress. But a deal will likely be made.

While Ireland has maintained the OECD process as a forum for discussion, bilateral contacts with the US on this issue are also likely. One observer compared it to the Brexit talks, where Ireland insisted for years that we were only negotiating as part of the EU and then suddenly everything changed when Leo Varadkar met Boris Johnson on a heap of land in Cheshire. Donohoe could have a conversation with Janet Yellen at next week’s G7 meeting, which he will attend in his position as President of the Eurogroup of Finance Ministers. It could be an important moment.

Ireland will not adjust its tax rate just because the US changes its tax rate. That wouldn’t make sense because who knows what a future US administration might do.

This is a difficult area and a lot is at stake. However, this does not mean the upward movement of our national economic model

However, an agreement at the OECD that, for example, 15 percent is the recommended global minimum, could signal a change here. The practical aspects would depend on how the rules are structured. While this could only leave room for Ireland to provide some benefit by maintaining the 12.5 percent rate, there are strong arguments in favor of adopting the new global minimum.

One would be about the reputation. Would it really be credible to argue against an international consensus on a global minimum tax rate if it offered little or no practical benefit, apart from a fuzzy argument about the 12.5 percent mark? Remember, this is about big companies paying their fair share – and being seen to pay.

The other is about money. If Ireland kept its rate at 12.5 percent, companies would pay a top-up tax in their home market to meet the global minimum – or the rate set by the host country. That would mean Ireland is saying goodbye to cash that could be raised for the Irish treasury. Given that we will lose money in the other part of the global corporate reform process – the introduction of a digital sales tax that will benefit large countries – that money may well be needed.

Controversial

And the third reason is politics at home and abroad. It would be clearly controversial to forego a bundle of taxes domestically in order to maintain a largely irrelevant tax rate of 12.5 percent. It would be “Apple versus steroids,” as one observer put it, referring to Ireland’s decision to appeal the European Commission’s decision on Apple over taxes against Ireland. If Ireland joins the OECD process, we can internationally oppose the steps recently signaled in the EU to develop a new corporate tax base for the EU, which would pose enormous risks for Ireland.

This is a difficult area and a lot is at stake. However, this does not mean the upward movement of our national economic model. Taxes have been part of the attraction for multinational corporations here – but only part of it – and many large corporations are deeply ingrained here. Their tax structures tended, strangely, to stand alongside significant real-world operations.

Future investment flows can be affected in some cases. But there won’t be a big drop in investment. The challenge will continue to be to build an economy and society that is attractive to sustainable future investment, whether from domestic or foreign companies.

While Ireland has problems and challenges – and the pandemic has taken its toll – the country is assuming a decent position with a strong base of successful businesses. Rather focus on developing areas like education, research and infrastructure to hold and attract investment than waging the final war over a potentially redundant tax rate.