And so the day has come. The Government decision to sign up to the latest terms of the Organisation for Economic Co-operation and Development (OECD) corporate tax deal has been a long time coming.
The key issue for the Republic all along was ensuring that it could continue to offer a relatively low tax rate to attract investment here and would not be pushed by the OECD process, or by the EU’s reaction to it, into abandoning this arm of our economic strategy.
While some uncertainties remain – not least what will happen in the US – this looks to have been achieved, though the deal will still mean big changes.
If the OECD deal is done and 15 per cent is the new global minimum landmark, Ireland can continue to offer a reasonable level of certainty to international investors, and a rate lower than many other countries. Compared to the threats which appeared on the horizon earlier this year – with talk of a global minimum of as high as 21 per cent – this would leave the State in a much better position.
What will it mean for the economy? This breaks down into two main considerations, both of them linked. One is what it means for the public finances. The other is what the impact will be on inward investment and the way companies based here organise themselves in the years to come.
Neither of these is straightforward to answer, but the new tax rate, together with the sweeping changes in corporate tax rules, are fundamental moves. The playing pitch for attracting foreign direct investment (FDI) is changing and tax will not be as important a tool in future.
The new rules break down into two main areas – how much tax is paid and where it is paid.
1. Tax revenues: What will this mean for tax receipts?
The bit of the deal which will definitely cost the Republic is a change in where big companies pay tax. In future, so called taxing rights will change and the biggest 100 companies will pay some tax in major markets where they sell, even if they have no physical presence in those countries.
So big companies with big digital sales operations here, selling across Europe, will pay some tax in the countries they are selling into and thus pay less here.
The figure that has been trotted out repeatedly is that this could cost €2 billion a year in tax revenues, a figure now baked into our public finances forecasts.That compares to total corporate tax revenues last year of €12 billion.
Let’s be clear what the €2 billion means: it means that the exchequer’s corporate tax take might be that much lower than it would otherwise be. Other factors will affect the rise and fall of corporate tax revenues too. And the exact figures will depend on how exactly the rules are set , a matter which is being negotiated late into the day among the OECD countries.
Corporate tax is now a vital support for the Irish exchequer, almost trebling since 2014 and now accounting for 20 per cent of tax revenues. Add in income tax, PRSI and the USC coming from employment by international companies and not far off one-third of all taxes in Ireland come directly from multinational activity. So there is a lot at stake.
But while Ireland will lose revenue from the change in taxing rights, it will gain from the rise in the tax rate on big companies.
UCC economist and corporate tax expert Seamus Coffey points out that it is very difficult to know where the balance will land in terms of future corporate tax revenues, particularly after allowing for the unpredictable profit trends of the small number of companies that contribute more than half of all Irish corporate tax revenues.
And the accounting practices of these companies will be important also. These have been central to the boost in tax revenues in recent years, as global structures have been reorganised in the wake of the first round of OECD reform.
The Irish Fiscal Advisory Council has estimated that some €5 billion in annual corporate tax receipts here could be termed “excess”, in that they are hard to explain by activity levels here. So how multinationals reorganise their operations and where they declare profits in future will be vital. Ireland will hope, at least, to hold on to the gains of recent years.
Coffey points out that this aspect of the deal is very much in favour of the bigger G7 countries and to the disadvantage of smaller countries such as Ireland. He also believes it does not offer much to lower-income countries.
An issue for smaller countries is ensuring that this agreement is not the start of a trend to move more and more taxing rights to bigger countries in the years ahead.
The vital issue for Ireland will be the impact of the changes – and particularly the new minimum rate – on inward investment. Earlier in the summer the outlook was dangerous, with a higher 21 per cent minimum rate on the table for the US and possibly the OECD deal. This would have seriously hurt Irish competitiveness in terms of attracting FDI.
Since then, developments on both sides of the Atlantic have moved more in the Republic’s favour. By the time the OECD draft deal was done, the proposal was a minimum global rate of “at least 15 per cent”. Ireland’s decision to refuse to join the draft deal was justified by the removal in the past week of the “at least”, meaning the global minimum rate – if there is an OECD deal – will be 15 per cent and no more. Countries can levy more but they cannot be forced to do so.
Minister for Finance Paschal Donohoe has also secured assurances that the EU will not try to write in a higher figure when it translates the OECD deal into EU law and that the current rate of 12.5 per cent is to be retained for the bulk of businesses.
The new rate will apply only to 1,500 big foreign multinationals here and to 56 large Irish companies which, together, employ 500,000 people. But 160,000 companies employing 1.8 million people will pay at the old 12.5 per cent rate.
This removes a significant part of the threat to Ireland, certainly compared to the original proposals. Ireland’s research and development tax credit will also remain. However, Coffey points out that the direction of the plan is still to blunt the use of low tax rates to attract investment, again driven by the big countries.
Ireland will retain a lower rate than many countries, but the rules are being tightened, with the minimum rate to apply on a country-by-country basis.
This is unlikely to lead to big players upping sticks and leaving Ireland. But it could, Coffey said, mean some future tax-sensitive investments do not come here.
For now the IDA retains a strong pipeline. And there is a general view that other factors – such as the availability of skilled staff and research structures – are increasingly important. This again puts the focus on the housing crisis – a key issue in terms of attracting staff – and on emerging problems in areas such as planning and energy.
The 15 per cent deal, if it is “done” at the OECD and broadly supported by what passes in the US Congress, will be just another step in an ongoing process of making tax less important as a tool to attract FDI. But the big dangers which the earlier OECD and US proposals would have brought to investment now seem to be off the table.