Ireland looks set to face some significant decisions on corporate tax in the next year or two. Attention has been focused on the talks on international reform under the auspices of the OECD. However, another issue has now come into focus – a new policy approach on corporation tax from US president Joe Biden which, if enacted, would have major implications for Ireland.
The key changes relate to a tax which is imposed in the US on much of the international earnings of US companies. Currently this tax is charged at 10.5 per cent, below the Irish 12.5 per cent, and the way it is structured means it has a limited impact on US multinationals here. The proposal is to increase the rate to 21.5 per cent and change the way the tax works, potentially undermining the use of the 12.5 per cent tax rate to attract US investment here.
There is a way to go before these changes, proposed by the US president as part of a package to fund a major investment programme, become law. Significant changes are possible. However, the direction of travel is clear – higher tax on US multinationals and a significant move against companies trying to cut their payments by locating in lower tax jurisdictions.
The move shows, in part, how the pandemic is changing the international debate, as countries look for revenue to pay the costs. There is also a longer-term trend here, coming in reaction to the emergence over recent years of details of the aggressive tax avoidance structures used by many multinationals. Ireland has supported the OECD process as a way forward, but now the preemptive move from Washington has raised new questions.
The 12.5 per cent tax rate has been an attraction for US companies investing here over many years, though it is far from the only factor. Ireland's membership of the EU single market is also vital, as is the presence of a predictable legal regime and a skilled workforce. Recent announcements from companies such as Intel and Stripe show Ireland continues to attract investment.
While there is a way to go yet to see what happens to the latest proposals from Biden, this is further evidence that the tax card will become less and less important as a way of attracting firms here. The playing field is being levelled.
Some of this is about how much tax is paid – due to the entirely justifiable move to close off tax loopholes.
And some about where it is paid – coming from a fight between countries who are all trying to grab as much as possible of the tax revenues for their own exchequer.
Investment in future will locate where the best workforce can be found – and where the best education, research and innovation infrastructures are evident. Building these areas is the challenge for the future.