A significant reform of the Irish corporate tax system is set to be announced by Minister for Finance Michael McGrath next week, including a simplification of rules sought by multinationals and a scheme to introduce a new 15 per cent rate of tax on companies with a turnover of more than €750 million.
The proposed new legislation follows extensive consultations with industry and representative bodies about the introduction of new rules agreed under the Organisation for Economic Co-operation and Development (OECD) reform process, as well as associated changes to the Irish system in what will be the biggest reform seen in many years.
Central to the change is a new structure to ensure big companies pay tax at an effective rate of 15 per cent, as agreed under the OECD process. This will involve the 12.5 per cent rate remaining in place for all companies. On top of this, will come the imposition of a special top-up tax, called the qualified domestic top-up tax, effectively a 2.5 per cent charge on the profits of the biggest companies, to bring their rate to 15 per cent. This is one of the ways in which the OECD allows countries to introduce the new minimum 15 per cent payment.
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As the new top-up tax will sit outside the normal Irish corporate tax system, the legislation will need to outline how it will work and the associated reporting and payment obligations for companies. This is complicated as the OECD rules involve some differences from the existing Irish legislation. However, Department of Finance officials judged that this was a better way to proceed than introducing a new 15 per cent rate.
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The new draft legislation will also include a move towards what is called a territorial system of taxation, a change from the existing so-called worldwide system in practice in Ireland. This will bring the Republic into line with most other EU countries and make it more administratively straightforward for Irish-headquartered companies that receive dividends from operations abroad. It will also help companies to manage double tax agreements which are designed to avoid paying tax twice.
In a submission to the Government, professional accountancy bodies and business lobbies have argued that simplifying the Irish corporate tax codes is essential for Ireland’s competitiveness. “Moving to a territorial system of taxation would reduce the administrative burden for Irish companies with international operations and simplify how double taxation relief would be available in Ireland on such foreign earnings,” according to the Irish Tax Institute. Lobby groups argue that as part of this move to a territorial regime. a new exemption regime for dividends will be vital to attract foreign direct investment to the State in future, particularly as the OECD process pushes firms to consolidate holding companies in fewer locations, a process where Ireland will not want to lose out.
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As competition builds up for foreign direct investment, with many of Ireland’s traditional competitors now joined by countries such as Germany in offering incentives, Ireland is under some pressure to act to maintain its attractiveness to projects. The move to a territorial system would not cut tax bills for companies but would make compliance and tax management more straightforward.
Many of these issues have been under consideration in Ireland for a number of years, dating back to a report on the Irish corporate tax system by UCC economist Seamus Coffey in 2016. He recommended that consideration be given to the move to a territorial system. Since then, a range of new anti-avoidance measures introduced under the OECD process and under EU rules is seen to have cleared the way for this change by lowering the chance that it could be used to further tax avoidance by major companies.
