Going, going, gone: the long goodbye to Ireland's 12.5% tax rate

Ireland could well face a moment of truth over the future of the 12.5 per cent tax rate in the next few days. Draft texts will circulate ahead of a key OECD meeting next Friday. Ireland's argument for offering more certainty on what the new global minimum corporate tax rate will be has, it seems, got a hearing. But there are 139 other players in this game, all with their own interests, and delays in the US Congress could yet hold things up. As former Irish soccer manager Giovanni Trapattoni would have put it, the cat is not yet in the sack.

With political momentum for a deal to be done, Ireland has been under relentless pressure as one of the countries holding out against the draft terms published in July. If the other countries agree to replace the draft text, which aims for a minimum global rate of “at least 15 per cent ” with a clear commitment to having 15 per cent as the rate, then Ireland will sign on the dotted line.

The language of a final deal needs to allow all sides to claim victory. The political danger for Minister for Finance Paschal Donohoe would be if he did not get much by way of concessions as a result of not signing up to the draft deal over the summer. But if the agreement is clear that the new rate will be 15 per cent – or strongly recommends or indicates this level – then this would have been a fight worth having.

EU directive

As the Minister has increasingly identified the key issue as being the "at least" phrase in recent weeks, we must assume he is confident of progress on this and feels the G7 finance ministers to whom he spoke to this week are on board. In turn, a commitment to a 15 per cent rate would give him significant cover at European Union level, where a directive to implement the new minimum OECD rate would have to be agreed. Ireland would fear pressure for a higher European rate if the OECD wording left this open.

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Other issues in the talks also matter for Ireland; how multinational profits are reallocated between countries for tax purposes is vital and Ireland is also pushing for leeway on the treatment of research and development spending. But the tax rate is the totemic issue.

Donohoe has carefully prepared the way for change – ever since last October’s budget when he said he wanted to take the opportunity “to again reaffirm Ireland’s commitment to the 12.5 per cent corporate tax rate”. A series of seminars, speeches and consultations have slowly introduced the possibility of change. A year ago a hike in the rate would have come as a shock – now it is expected and, the Government hopes, accepted.

The reality has always been that Ireland could never stay outside the tent if an OECD agreement emerged. It would be politically impossible and economically damaging, as big companies would face top-up tax payments in their home market – and thus would gain nothing – and Ireland would lose out on some revenue. And indeed the 12.5 per cent rate could survive for companies below the OECD threshold, basically the domestic economy, though a two-tier structure would require EU sign-off.

US rate

It is a high-stakes game. If the OECD text shows enough progress, Ireland will have to give the nod. But doubts remain about what exactly the US Congress will agree to – and when – a key issue given the scale of US investment here. Currently a rate of 16.125 per cent is proposed in a compromise plan in Congress for the overseas earnings of US companies – just above the likely 15 per cent OECD rate. But the whole legislative programme around this remains on a knife-edge. Ireland may have to sign up at the OECD before it is clear what will happen in Washington. This would carry its own risks,as the logjam in Congress could yet derail, or delay, the whole OECD process and Ireland would have accepted the principle of a higher rate.

If there is no OECD deal, then countries will try to address the same issues unilaterally. Ireland would then be exposed to what the US decides to do and the likelihood that the EU would try to revive its own corporate tax reform plans, which offer even greater dangers. We would be caught between Boston and Berlin, right in the middle of serious tensions on how US companies are taxed in Europe, with unpredictable and potentially dangerous consequences.

But deal or no deal the world is changing. If the OECD process goes ahead, Ireland will still offer some tax advantages for foreign direct investment (FDI), but not on the scale of the past. Ironically the controversy about Ireland’s tax regime is a lot more about the role of our rules on multinational profit shifting than on the 12.5 per cent rate.

Big multinationals here typically have significant physical operations and employment, but set beside them have been structures which are part of global tax-avoidance arrangements, taking advantage of gaps in rules between countries. Ireland is not solely to blame here, not by a long way, but the country has, as OECD tax head Pascal Saint-Amans has put it, pushed its luck too far in how rules have been set over the years. And so Ireland is now under pressure.

Opportunities for profit shifting are gradually being closed off, and the new minimum rate would be part of this. What this means for future FDI in Ireland is hard to call. Multinationals are well embedded here, but future investment could well be affected. Much will depend on decisions in a couple of dozen US boardrooms. And on Ireland’s efforts to develop other areas of competitiveness and address new problems in areas such as energy provision. We won’t have much time to wake the 12.5 per cent tax regime as the future challenges are already clear.