Biden’s global corporate tax shake-up an opportunity for Ireland

In late February, when the new US treasury secretary, Janet Yellen, strongly backed the Organisation for Economic Co-operation and Development corporate tax reform process at a virtual meeting of the G20 finance ministers, Irish eyes remained transfixed on the daily Covid-19 case numbers.

The Yellen endorsement might yet be the most pivotal moment in that month for the Irish business model.

In doing so she removed some of the major roadblocks that the Trump administration had left in the path of agreement at the OECD for its base-erosion profit shifting (BEPS) proposals for global corporate taxation. These will include not just changes in where tax is paid but also a robust minimum global effective tax rate.

While the change in tone is not the last obstacle to an agreement on a jurisdiction-by-jurisdiction global minimum tax at the OECD, there remain political and legal barriers, not least legal concerns in the European Union and getting any subsequent agreement passed by the United States Congress.

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This is a moment to reflect on what opportunity it presents Ireland. Yes, opportunity. Too much emphasis around global corporate tax reform in Ireland is couched in impending doom.

Current discussions

Ibec, as the Irish representative for business at the OECD, has followed the BEPS process in Paris since its inception over the past decade. The choice between a minimum effective tax rate which bites in each jurisdiction, rather than a global blended one, has already been settled at the OECD.

It is also clear that the current discussions between the US, EU and other large countries at the OECD are now very much focused on a minimum effective corporate tax that is not less than 12.5 per cent .

Flattering as it is that Ireland's fabled corporate tax rate is much discussed as the pivot, more recent interventions by US president Joe Biden confirm that the trend on corporate tax rates globally, which had been falling in recent years, is now very much reversing.

From an Ibec perspective, we have been clear for several years that we will need to meet this competitiveness challenge by investing in other growth levers such as education, research and development and critical infrastructure.

The UK has reversed course too, with the first corporate tax rate rise since 1974. In both cases, the headline rates are moving to the mid-20 per cent levels, with the US now suggesting a minimum effective rate of 21 per cent. Most importantly it would now be imposed on all the income of US companies abroad, including on their normal return on both tangible and intangible assets with substantial activity in countries such as Ireland.

This rate would now also bite on the tax paid in each country individually rather than on a global blend of all foreign earnings. Effectively, if a company paid 12.5 per cent in Ireland it might, under this plan, end up paying an extra 8.5 per cent tax on its Irish income in the US.

Essentially this would represent a tax on US multinational activity in Ireland and other countries. Confirmation this week that the Democrats can circumvent the famous filibuster in the US Senate by using procedural changes make the prospect of the proposals passing through Congress by summer more real.

Where this all lands will have obvious implications for our business model. Even at a 12.5 per cent rate, the US or OECD minimum tax proposals might, depending on their scope, impact significantly on how we support innovation, investment and research and development.

New proposals

A rate above 12.5 per cent through either US or OECD reform would be a significant departure for our global tax brand. Any rate higher than 12.5 per cent would close the competitiveness gap to other EU competitors with effective tax rates close to or below 20 per cent, such as the Netherlands, Belgium, Sweden, Denmark, Switzerland and Finland.

However, rising global rates in the US and UK still keep us attractive relative to those competitors.

From a fiscal perspective, the Government has estimated a change in where tax would be paid under OECD plans would cost the State between €800 million and €2 billion per annum.

New proposals from the Biden camp to narrow the number of companies impacted but increase the level of distribution to market countries might again change these calculations over the coming weeks.

Far more significant for fiscal sustainability would be any loss of long-term competitiveness resulting in lower growth rates and a falling tax take. This is particularly a concern given corporate tax, at 14 per cent of the total tax take, is now more than twice the European average.

From an Ibec perspective, we have been clear for several years that we will need to meet this competitiveness challenge by investing in other growth levers such as education, research and development and critical infrastructure.

The opportunity is to deliver the factors that our society needs anyhow – investment in social infrastructure: housing, health, education and innovation.

EU rules

This is not the first time the Irish business model has had to overcome a similar challenge. EU membership meant the gradual end of the zero rate on manufacturing exports that existed from 1956 to 1980.

The subsequent 10 per cent rate for manufacturing exporters (introduced in 1980) and the special IFSC regime (introduced in 1987) were also ended by EU rules. Our current 12.5 per cent headline rate was phased in from 1996 to 2003. The core reason we continued to thrive despite these changes was radical and concrete action by business and government in areas of tax, education, innovation and skills.

While the post-Covid debate may increasingly be about the distribution of wealth, Ireland will need to take concrete and significant action to guarantee the continued creation of that wealth in the first instance.

So where is the opportunity? In the past decade as a consequence of the BEPS process, Ireland has moved to being a model of substance with extraordinary levels of investment such that the capital stock in our globalised business model has been transformative.

Ireland has arrived at a new level; the challenge is now one of retention as opposed to aspiration.

One positive of the shifting corporate tax trends to globalised effective minimum rates is that Ireland cannot be undercut in its future tax proposition.

The opportunity is to deliver the factors that our society needs anyhow – investment in social infrastructure: housing, health, education and innovation.

Danny McCoy is chief executive of Ibec