A new global minimum tax rate could affect the “location strategies” of multinationals and Ireland’s corporate tax revenue as a result, the Organisation for Economic Co-operation and Development (OECD) has warned.
In its latest global outlook report, the Paris-based agency said “buoyant, but partly transient, corporate tax revenues” in Ireland “warranted caution”.
The business tax generated a record €22 billion for the Government last year but up to 50 per cent, or €11 billion, of this has been classified by the Department of Finance as “windfall” or beyond what can be explained by domestic activity.
While a new global minimum rate of 15 per cent for multinationals, due to come into force in 2024, is expected to boost tax revenue initially, the longer-term impact remains uncertain.
The OECD noted that “the continued buoyancy” in corporate tax receipts delivered a fiscal surplus of 1.6 per cent of GDP (gross domestic product) last year and accounted for a fifth of total tax revenue. It recommended that further gains be saved.
“Given the uncertain impact on multinationals’ location strategies of the increased 15 per cent effective corporate tax rate, set to kick in in 2024, part of any further windfall tax gains should continue to be allocated to the National Reserve Fund, on top of the €6 billion already put in it since 2022, or to a new long-term savings fund, whose establishment is being discussed,” it said.
In its report, the agency said that after two years of double-digit growth, Irish GDP is set to decelerate, with growth projected at 4.4 per cent in 2023 and 3.7 per cent in 2024, “as support from exports in multinational-dominated sectors gradually eases”.
“A weaker global outlook, rising energy and input prices, and higher borrowing costs lowered firms’ investment incentives, especially in the manufacturing sector,” it said.
Combined with low exports, this led to a contraction in GDP in the first quarter of 2023, the OECD said.
However, it noted that despite persistent inflation, consumer spending will be relatively strong in 2023, “underpinned by significant employment growth and the summer tourist season”.
On the global economic outlook, the OECD warned the global economy was “turning a corner” in the wake of the energy price shock and other headwinds “but faces a long road ahead to attain strong and sustainable growth”.
“Falling energy prices and headline inflation, easing supply bottlenecks and the reopening of China’s economy, coupled with strong employment and relatively resilient household finances, all contribute to a projected recovery,” it said.
It projected global growth will be 2.7 per cent in 2023, with a modest pickup to 2.9 per cent in 2024 – both well below the average growth rate in the decade preceding the Covid-19 pandemic.
The agency said policymakers needed to act decisively to deliver stronger and more sustainable growth.
“This is hard. Core inflation remains too persistent. Debt levels are too high. And potential output is too low. Monetary policymakers need to navigate a difficult road,” the OECD said.
“Although headline inflation is declining thanks to lower energy prices, core inflation remains stubbornly high, more so than previously expected,” it said.
Central banks need to maintain restrictive monetary policies until there are clear signs that underlying inflationary pressures are abating, it said.