Biden’s ‘global minimum’ tax rate carries big dangers for Ireland

The Republic's 12.5 per cent corporate tax rate is facing a new threat, with the United States signalling its support today for a global minimum corporate tax rate of 21 per cent on its companies.

Proposals emerging from the White House on Wednesday say the US administration intends to push for this new global minimum rate to be passed by Congress – essentially meaning US companies here would have to pay a top-up tax in the US after paying at 12.5 per cent here.

While details have yet to be spelled out, the move relates to proposals to increase the tax charged on foreign earnings of US companies and to tighten the rules significantly. Essentially, according to Ibec’s chief economist Gerard Brady, the new administration is targeting extra taxes on US profits earned abroad to help pay for a huge boost to investment.

The key changes relate to the so-called GILTI tax, a charge US companies face on overseas earnings. This is currently set at 10.5 per cent – and the information emerging from the White House is that it is proposed to increase it to 21 per cent. Crucially, under the plan it would apply to each country the US company operates in – rather than allowing companies to average earnings from different subsidiaries.

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It would also be charged on all income, removing a current allowance which means it does not apply to a significant amount of earnings.

“Effectively, if you paid 12.5 per cent in Ireland you might, under this plan, end up paying an extra 8.5 per cent tax on your Irish income in the US,” according to Brady.

It remains to be seen what is passed by the US Congress, but the implication is that if the bulk of this is passed, Ireland’s 12.5 per cent rate may no longer be a significant attraction for US companies looking for where to invest.

Ireland would then face the choice of whether to increase the Irish rate to try to capture more of the additional tax here. It is difficult to predict what this would mean for Irish corporate tax in the longer term – but it would certainly remove one of the key factors which has attracted US investment here for many years.

‘Strong’ minimum rate

The proposed changes relate to US tax rules. However, the plan also says that the US hopes to encourage other countries to set a “strong” minimum rate internationally.

The concept of a global minimum tax rate has been part of OECD negotiations on global corporate tax reform due to conclude this year. The general expectation was that a minimum would be set at around the State’s current rate of 12.5 per cent, but the latest indications from the US suggest they will push for a higher rate as part of any global agreement.

The idea of a global minimum rate is to ensure that big multinationals pay a certain amount of tax no matter how they shift their profits from one country to another. President Joe Biden said that he wants to hit profits in "tax havens". In his pre-election literature, the president put particular emphasis on returning pharmaceutical investment overseas to the US. Ireland is one of the big international hubs for US pharma.

Ireland has come under increasing pressure in recent years to alter its corporate tax rules and was expected to have to give some ground at the OECD talks. Now, however, President Biden has moved first and as US companies are the main players here this has huge implications for Ireland.