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A taxing matter

Ireland is holding out on the historic global deal on corporate tax. Why? And at what cost?

Ireland is one of just nine countries out of 139 to reject the deal.

IT’S NOT QUITE ‘ourselves alone’ but it’s not far off it.

Ireland’s refusal to sign up to the broad outline of a new, harmonised system for taxing some of the world’s biggest companies means we’re ploughing a lonely furrow on the international scene.

Just nine countries out of 139 involved in the OECD process have held out on the deal, which will create a global 15% minimum rate of corporation tax.

It means that the Government is under significant pressure to raise its already controversial 12.5% rate of corporate tax, a key — if not the key — component of Ireland’s industrial policy over the past 30 years or so.

Other low and no tax countries like Switzerland, the Bahamas and the Cayman Islands have all signed up to the agreement. Even Luxembourg and the Netherlands, typically two of Ireland’s biggest allies in Europe when it comes to defending our competitive tax environment, have given the nod to the deal.

Finance minister Paschal Donohoe is keen to get across the point that the broad agreement reached yesterday is not final.

A plan for the implementation of the framework won’t come into focus until October and in the meantime, Donohoe said, Ireland will continue to make the case for keeping its 12.5% rate.

He’s not alone in this. Two other low-tax European countries — Hungary and Estonia — are also holding out.

Donohoe, for his part, said that Ireland still “broadly supports” the deal, just not the 15% rate.

Meanwhile, tax havens like Barbados, Saint Vincent and the Grenadines and other nations like Sri Lanka, Nigeria and Kenya have also rejected the agreement for the time being.

Peru abstained as it’s currently without a government following a recent election, the results of which are yet to be finalised.

Poster boy

The reasons for Ireland’s intransigence on the issue of a global minimum rate are obvious.

Our model of development has largely hinged on our ability to lure multinational companies through our competitive, low business tax rate environment.

It’s a model for which the country has become a poster boy since the 1990s.

Successive Irish governments slashed the business tax rate every year between 1994 and 1999 before introducing the world-famous 12.5% version between 1999 and 2003, which remains in place.

The result: Ireland has managed to convince some of the biggest companies in the world to headquarter here.

Corporation tax is now Ireland’s third-largest source of tax revenue, behind income tax and VAT, worth €11.8 billion to the State in 2020.

One in every five euros the Irish exchequer takes in is from corporate taxes.

So, the argument goes, in a situation where the global playing field is level and Ireland is forced to raise its tax rate to 15%, the economy loses some of its competitive advantages.

“In calculating their tax liabilities,” the Central Bank said this week, multinationals would no longer be able to blend taxes paid in high-tax jurisdictions with taxes paid in low-tax countries.”

“This would reduce the relative attractiveness of the Irish system.”

Although the Department of Finance has estimated that these changes could cost the exchequer up to €2 billion each year in the long run, the Central Bank says there is considerable uncertainty about how it will all shake out.

In one scenario, it said, the changes could reduce the overall volume of profits being booked in Ireland by multinationals and thus reduce the State’s tax take but without impacting multinational activity in Ireland.

In a more negative scenario, the changes could scare off investors altogether.

This would have “more serious implications for the public finances since it would not only reduce corporation tax revenue but also potentially lead to lower revenue from other sources such as VAT and income tax”.

But the outlook is far from certain and we’ll have to see the details of the final deal.

Two pillars

From an international perspective, the benefits of the deal are just as obvious as the threat it seems to pose to Irish public finances. 

For the last 30 years or so, the world’s biggest corporations have cut labour costs by offshoring production to emerging markets like China and India where wages are cheaper.

Simultaneously, through tax competition and sweetheart arrangements with national governments, they have been empowered to shop around for the lowest rates.

“The trouble is, with Ireland running a 12.5% rate and the likes of the Cayman Islands and British Virgin Islands not taxing corporate profits at all,” explained Bloomberg columnist David Fickling in April, “it’s a race to the bottom that rich-country governments can only win by either drastically cutting spending or by shifting more and more of the fiscal burden onto the shoulders of middle-and working-class voters.”

That’s why the United States is leading the charge behind the OECD proposals.

A related issue is profit shifting.

This is when a company like Apple, for example, books its sales revenues in a home base country like Ireland, far away from where most of its users are and where its sales are generated.

Engaging in this (perfectly legal) practice means that just three companies — Microsoft, Google and Facebook — could be depriving the Global South of a whopping $2.8 billion each year, according to ActionAid International.

This ‘tax gap’ is “based on the share of the three tech giants’ global profits, relative to their number of users and adjusted for countries’ GDP per capita”, the NGO explained at the time.

“India, Indonesia, Brazil, Nigeria and Bangladesh are the markets studied with the highest ‘tax gaps’ from these three companies,” according to ActionAid’s estimates.

“The total ‘tax gap’ for the 20 countries contained in the research is $2.8bn, equivalent to 729,010 nurses, 770,649 midwives or 879,899 primary school teachers.”

Two pillars

The OECD has been conducting discussions around remedies to both of these two issues — lumped together under the heading of ‘base erosion and profit shifting,’ or BEPS for short — for the last number of years.

There are two pillars to the BEPS agreement.

One is the harmonised minimum tax rate.

The other pillar, squarely aimed at tackling profit shifting, is a little more complex.

To oversimplify it, this part of the agreement — which Ireland has signed up to — will allow countries and jurisdictions to tax the biggest companies in the world even if they don’t have a physical presence in that country.

Under this pillar, India just for example, will have the right to tax nearly any company with a global annual turnover of €20 billion and pre-tax profit margins of 10% or more if the company generates at least €1 million in sales from Indian customers.

That €20 billion threshold falls to €10 billion after seven years and the OECD believes it could generate an extra €84.5 billion in tax revenues annually.

The global minimum 15% rate, meanwhile, could force companies to pay an extra €125 billion in taxes annually, according to OECD estimates.

There are caveats, of course.

Companies in extractive industries like oil, gas and logging have been excluded from the taxing rights rules, partially to protect the interests of resource-exporting countries in Africa and elsewhere.

In a big diplomatic win for the City of London and UK Chancellor Rishi Sunak, the 130 nations also agreed to exempt regulated financial firms from the new rules.

These exemptions were not enough to sway Ireland or the eight other countries that are holding out.

But whatever the next four months bring with them, the Doomsday Clock seems to be inexorably ticking towards midnight for Ireland’s 12.5% rate.

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