Cliff Taylor: The era of using tax as a lure for foreign investment is drawing to a close

International tax reform: Deal or no deal, there is a lot on the line for Ireland

US treasury secretary Janet Yellen (left) meets with President of the Eurogroup and Minister for Finance Paschal Donohoe on the second day of the G7 Finance Ministers Meeting, at Lancaster House in London on June 5th, 2021. Photograph: Alberto Pezzal/AFP via Getty Images

US treasury secretary Janet Yellen (left) meets with President of the Eurogroup and Minister for Finance Paschal Donohoe on the second day of the G7 Finance Ministers Meeting, at Lancaster House in London on June 5th, 2021. Photograph: Alberto Pezzal/AFP via Getty Images

 

A major shake-up is coming in the way multinational corporations are taxed. But nobody quite knows what it will look like. The finance ministers from the big industrialised countries – the G7 – won headlines about supporting dramatic reform of the international system at their meeting last weekend. The huge political capital invested in this suggests that change is coming.

What exactly that looks like is vital for Ireland, its exchequer and attracting foreign investment here in the years ahead. The era of competing for investment using tax as a lure is drawing to a close – a key goal of policy is to decide how to shape what comes next.

The G7 change is, in part, about getting big companies to pay more tax, by closing off loopholes which allow them to shift profits around the world. But behind all the fine words is also a desperate scramble by countries to generate revenue for their own exchequers, in the wake of a massive Covid-19 hit. This reform plan is not only about how much tax companies pay, it is about where they pay it.

There is no question but that the G7 has a fresh impetus after years of talk at the Organisation for Economic Co-operation and Development (OECD) on this issue. “ The ball is in and the game is on,” according to Feargal O’Rourke, managing partner of PWC.

But it didn’t take long for the obstacles to appear afterwards. “While it looked like the G7 had cracked aspects of the deal,” O’Rourke said, already problems are appearing.The UK is looking for an opt-out for the big financial firms in the City of London.The Swiss are looking at how incentives can replace low tax.

More sectors are likely to seek carve-outs for themselves in the months ahead, says Dr Brian Keegan, director of advocacy with Chartered Accountants Ireland. This has been evident at the OECD since the process started.

“There is no such thing as international tax,” he says. “ Governments the world over will be assessing these proposals solely by reference to how it impacts on their own exchequer receipts and the prospects for their own industries.” Already US president Joe Biden faces opposition amongst Republicans in Congress to aspects of the deal which they argue disadvantage US companies.

Ireland has found itself at the centre of this debate, accused of using sweet deals to attract investment
 

The G7 supported two different parts of the global tax reform agenda. The first involves big multinationals paying some tax where they sell, and a bit less where they are headquartered – to the benefit of bigger countries . This is to address what O’Rourke calls the “mismatch” between a tax system designed at the start of the 20th century and a 21st century business model, where companies can sell online in big markets while having no staff on the ground. This is the part of the deal which, if agreed, will directly cost Ireland tax revenues – an estimated €2.2billion - €2.4 billion per annum, or around one fifth of current corporate tax receipts.

The second part of the OECD agenda is to set a minimum tax rate to apply to corporate profits. This is designed to close off the use of super low tax rates to attract investment – and the practice of shifting profits around the world in search of the lowest rates. As the G7 has called for a rate of at least 15 per cent to apply, this could call into question the future of the Irish 12.5 per cent rate.

Minister for Finance Paschal Donohoe argues that small countries, disadvantaged by size and sometimes geography, should be able to use low tax rates to attract FDI (foreign direct investment). But the bigger countries disagree and are trying to level the tax playing field. This is the crucial battle to come.

Ireland has found itself at the centre of this debate, accused of using sweet deals to attract investment. Ireland is not a tax haven, according to Pascal Saint-Amans, the man leading the OECD talks, but he said in a recent interview with The Irish Times that the country has “ pushed its luck with some very generous incentives,” notably the “double Irish” corporate tax tool used by US multinationals for years, which enabled companies incorporated in one place but managed in another to be taxed in neither. Irish sources argue that it is US tax law, only changed in 2017, which was the ultimate basis for the tax avoidance structures of US companies.

And while assisting tax avoidance has been the charge levelled at Ireland, the country is also now attracting because, ironically, it is collecting so much tax from multinationals. Corporate tax here has almost trebled since 2014, economist Séamus Coffey points out in a recent blog, with the country – despite its small size – being the third largest international recipient of US corporate tax payments. While there is controversy about the tax structure used by one arm of Microsoft, Coffey estimates that another of its Irish subsidiaries paid a whopping €1.6 billion in corporate tax in Ireland in 2020.

Global minimum

So what will the big reform plan mean for Ireland? If there is an OECD deal on a global minimum – applied in each country in which a multinational operates – it will put a floor on competition. Even if a country cut its rate to something way lower, then the multinational would pay a top-up in its home market – and other rules will encourage countries to apply the new minimum.

“There is no mathematical magic about 12.5 per cent,” says O’Rourke of PWC. “What it is now is a symbol of certainty and predictability for business in good times and bad.” He says a vital issue for Ireland will be whether – in the wake of an OECD agreement which would recommend a minimum rate – the EU could push through a deal mandating this across the bloc. “ You wouldn’t be putting much money on it at this juncture,” he says, with Ireland joined by other low tax countries like Hungary and Poland in having reservations.

For Ireland, much will depend on what the US does. This is a key – perhaps the key – exposure. Biden is seeking a 21 per cent tax rate on the international earnings of US companies. As thing stand this would mean companies paying a substantial top-up, having paid at 12.5 per cent here. But then Biden is under pressure in Congress to agree a lower rate.And then there will be the outcome of the OECD talks. There are a lot of moving parts.

With many big companies deeply embedded here, the likelihood is that they will remain
 

If there is an OECD deal, the calculation for Ireland will be whether to try to stick to the 12.5 per cent rate, or eventually agree to move to the new global minimum. The domestic politics will be interesting. Hiking the rate would get more revenue from the corporate tax base here – and make up for some of the losses from the other part of the plan. But it would only make sense if it looked like a stable international agreement had been reached. If this happened Ireland’s reputation could arguably be hurt by sticking at the 12.5 per cent level.

What does this mean for investment? That is the really big question. Where the US tax system lands – and whether there remains a tax advantage for investing internationally – will be vital. This is one factor which has pushed US foreign investment for years into countries like Ireland.

Danny McCoy, chief executive of Ibec, the business lobby group, is sanguine. “Possession is nine-tenths of the law,” he says, and Ireland has already won massive US investment and may even get some protection from future aggressive tax-driven competitors.

With many big companies deeply embedded here, the likelihood is that they will remain. Moving their operations would be costly and have tax and legal implications. But, says McCoy, in future key factors like third-level and higher education, infrastructure including housing and the legal and research environment will be crucial in attracting and retaining investment.

Ireland scores well in some areas here, but we have kicked to touch for years on third-level funding and Irish universities have slipped down the international rankings. Keegan says that tax remains important, but other factors such as EU membership, a skilled workforce and strong legal protections for IP (intellectual property) are vital in today’s business world.

There is no doubt that all this brings uncertainty. It will not be a case of companies upping sticks and saying so long to Ireland and thanks for the tax breaks. But future tax-driven projects may not come. More markets may be served from the US. For a country relying so much for jobs and tax on what decisions are made in US boardrooms, these are high stakes. The challenge is to rework Ireland’s existing attraction as a location for all kinds of innovation and investment – whether domestic or foreign – building on the strength and addressing the problems.

O’Rourke believes a deal will be done, but that it will be more about “politics than principles”. The outcome of the politics has potentially big economic and financial implications for Ireland.

And a key point is that if there is no international deal, then individual countries will go ahead and make their own changes, a process which could see a small country like Ireland even more exposed and potentially caught in serious EU/US tensions. Deal or no deal, there is a lot on the line here for Ireland.

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