Far-reaching global tax reforms are reaching fruition and on the face of it, Ireland has most to lose after the small European economy threw open its doors to US multinationals.
On Thursday, 130 countries endorsed an outline agreement by the Organisation for Economic Co-operation and Development (OECD), which groups 38 wealthy nations, to level up global corporation tax.
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“Pillar one” would re-allocate tax jurisdiction from where multinationals are headquartered to where they make profits, while the second pillar would establish a global minimum rate of 15 percent.
The OECD says the deal will generate an estimated $150 billion in extra revenues globally, adapt the tax system to the modern digitalised economy and support state finances battered by the coronavirus crisis.
The pact came after the G7 group of leading economies — the United States, Britain, Canada, France, Germany, Italy and Japan — last month agreed on the minimum rate of 15 percent for corporation tax.
Ireland has maintained a 12.5 percent rate since 2003, and has become the European base for a raft of US companies, especially technology and pharmaceutical giants whose profits have rocketed during the pandemic.
It was one of only nine nations that refused to sign up despite expressing “broad support”, owing to the 15-percent proposal.
“I have expressed Ireland’s reservation, but remain committed to the process and aim to find an outcome that Ireland can yet support,” Finance Minister Paschal Donohoe said.
– ‘Writing on the wall’ –
Some analysts believe Ireland’s economy is over-dependent on multinationals like Facebook, Apple and Google.
Just 10 firms paid 51 percent of Ireland’s corporate tax receipts last year. In 2019, Ireland drew 15.7 percent of its total fiscal intake from corporation tax.
Ireland’s finance ministry expects to lose two billion euros ($2.4 billion) each year from 2025 if the global minimum rate comes about.
Research company Oxford Economics predicted the OECD reforms would make Ireland one of Europe’s most indebted states, and it also faces disruption from neighbouring Britain’s Brexit withdrawal from the EU.
But with tax havens such as the Cayman Islands also signing up to the proposals, Ireland knows “the writing is on the wall”, said economics professor Lucie Gadenne of Britain’s University of Warwick.
The OECD deal’s exemption for financial services, which favours Britain, suggests Ireland could carve out its own concessions.
“Individual countries can use whatever bargaining power they have to gain exemptions for national champions. Ireland are trying to maximise their negotiating power by holding out and putting pressure on the EU-level negotiations,” Gadenne told AFP.
“Ireland’s tax haven model has served it well, but it may need to graduate to a more sustainable economic model,” she added.
– Biding for Biden? –
For John FitzGerald of Trinity College Dublin, a former commissioner at Ireland’s central bank, any Irish fears are overblown.
“I can see no reason not to adopt it if the US implements it,” he told AFP, noting US President Joe Biden still has to persuade recalcitrant Republicans in the US Congress.
The Irish-American Biden said the minimum rate would “halt the race to the bottom for corporate taxes” and prevent multinationals from pitting countries against each other.
FitzGerald commented: “No firm could do better by leaving Ireland, so if 15 percent is everywhere you might as well be in Ireland and pay.
“If the US implements the rules, Ireland could end up with more revenue.”
Corporation tax is just one factor explaining Ireland’s stellar growth of recent decades and attractiveness to foreign investors, alongside a highly educated, English-speaking population and strong infrastructure.
“The jobs would remain here because there are the skills, the capital investment, physical capital, they cannot move easily. I do not see any long-term implication for the Irish model of economic development,” FitzGerald concluded.
Further negotiations — including a meeting of G20 finance ministers in Italy this month — and political bargaining in the US Congress and the EU mean there is still a long road ahead.
Within the EU, Hungary is another holdout, although Germany and France are four-square behind the OECD agreement.
“It is only when you know the technical details that you can assess the impact,” said Emer Mulligan, of the J.E. Cairnes School of Business and Economics at the National University of Ireland.
She emphasised the “real meat” lay in pillar one — taxing companies more where they operate, rather than where they register their income.