New corporation tax rules: Will they make Ireland richer or poorer?

Why is Ireland changing its corporation tax system?

Ireland was one of 135 signatories to an Organisation for Economic Co-operation and Development (OECD) agreement in 2021 to reform the way big companies are taxed.

This was aimed at stopping big multinationals from moving their profits around the world and slashing their tax bills to very low levels.

This is the second part of a process which began with a first round of reforms in 2015.

Subsequently, there was an European Union agreement on implementing one key part of the OECD deal – a minimum 15 per cent effective tax rate on the profits of companies with annual turnover in excess of €750 million.

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What does this mean for Ireland?

When the idea of a minimum rate first appeared, it was thought that Ireland might have to abandon its existing 12.5 per cent corporation tax rate.

Subsequently it was agreed that as the new rate was aimed at the biggest companies, countries could retain lower rates for smaller companies – so it looked as if Ireland would have two headline rates, 12.5 and 15 per cent.

However, when it came to deciding how the minimum rate would be most easily applied, international negotiations also led to another option – a so-called domestic top-up tax.

[ Ireland set to avoid implementing 15% headline corporate tax rate ]

For Ireland, this means big companies will first pay tax at 12.5 per cent, and then face a top-up change to bring their effective rate to 15 per cent. Minister for Finance Michael McGrath is to bring a proposal to proceed on this basis to Cabinet on Tuesday, and the Department of Finance is engaging in a consultation with interested parties over how it will work in practice.

Isn’t that really the same thing as applying a new rate?

Yes, more or less. The intention is that it would have the same effect. But the top-up option is seen as more straightforward, particularly as Ireland’s main rate is below the new minimum rate.

And the IDA can still talk about Ireland’s 12.5 per cent when marketing overseas – remember, many smaller multinationals will still pay at that rate.

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Either way, this is going to be complicated, as the definition of profit on which the 15 per cent rate is applied is different from the conventional measure used in annual company statements.

This is to try to ensure that companies cannot use accounting devices to reduce the effective, or actual, rate they pay below 15 per cent, except in cases which are clearly specified by the rules.

Multinationals with Irish headquarters and the biggest Irish companies will face significant new reporting requirement – and higher tax bills.

How much money will this raise for the exchequer?

First, let’s be clear what we mean here. We can try to guesstimate what this might mean on the basis of tax paid last year, but as we don’t know exactly how many companies will face the new charge, we can’t be precise.

[ The Irish Times view on the EU corporate tax deal: overdue progress on implementing OECD agreement ]

A back-of-the-envelope calculation would suggest that on the basis of last year’s figures, the 15 per cent rate might increase the take – which was €22.6 billion – by about €3.5-€4.5 billion. But other factors will affect corporate tax too over the next year – such as the tech downturn, for example.

But wasn’t the OECD process meant to cost us money?

Yes. But the potentially costly bit for Ireland is the other part of the deal, which involves a reallocation of where big companies pay some corporation tax.

In practice this would mean companies paying some tax on the basis of where they make sales and less where they have their headquarters – and Ireland is a small market with a lot of company headquarters, so the country would lose out here.

[ Ireland’s corporation tax take unlikely to fall due to global reforms, ESRI says ]

The Department of Finance has said it calculates that in net terms Ireland would lose €2 billion or more – and perhaps up to €4.5 billion – from the OECD process, but we don’t know how this breaks down between gains and losses, and whether it considers possible changes in investment patterns.

Crucially, also, negotiations are continuing on implementation of the reallocation part of the OECD deal. Success here is not guaranteed, but if not, pressure may come on at EU level to introduce a similar arrangement in Europe.

But the 15 per cent part of the deal is all tied down?

In the EU, it looks like it is, with countries obliged to legislate this year and – generally – implement that next year. But there is still a problem here, as the Biden administration in the US looks unlikely to get legislation through which would bring US rules in line with the OECD deal.

In particular, this could cause problems and tensions over how the top-up tax interacts with the US system for taxing the overseas earnings of its companies. This is one to watch – and given that Ireland is a vital home for US companies in the EU, this is an important one for us.