Cliff Taylor: Three reasons why the big global corporate tax deal could still fall apart

Talks on a major shake-up of the global corporate tax regime got a big boost last week when 130 of 139 countries in OECD talks signed up to the outline terms of the deal. Ireland was one of nine countries who did not sign up, though will remain part of the talks. So is a deal on the way ?

Well, maybe and there is a big political push behind this from the US and the big EU countries. The next staging post is a meeting of the G20 countries in Venice this weekend.But the deal is far from done yet. Here are the three hurdles which still have to be jumped and what they mean for Ireland.

1. The details

Tax is the classic area where the old adage applies – the devil is always in the detail. And much of this remains to be thrashed out. And while 130 countries have signed up to the top line, they haven’t signed up to all the detail

There has been a lot of technical work done in the background, but also still much to be done.

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In terms of the proposed minimum effective tax rate to be applied to bit corporations, the agreement is for a rate of " at least 15 per cent." So the precise figure remains in play .Reports this week suggest US Treasury Secretary Janet Yellen and some big EU players are pushing for a rate above 15 per cent.

The statement signed by the 130 countries points to outline commitment to the key concepts, which companies would automatically be subject to the new regime and how the minimum tax would work in practice, but also points to much work to be done on the detail.

There is also detail to be agreed on the other part of the deal, the reallocation of what are called taxing rights – where companies pay tax. This will involve some of the biggest companies in the world paying tax in markets where they sell, even if they have no physical presence there.

Outlines have been agreed on what companies will be involved and how the charge will be calculated, but again a lot of detail has still to come.

What this means for Ireland:

The uncertainty over what minimum rate might finally be agreed – and how it might relate to whatever is agreed domestically in the US – is a big issue for Ireland.

The Government has said that any new arrangement should leave flexibility for Ireland to retain the 12.5 per cent rate, but as of now this looks very unlikely. Ireland will come under pressure to give ground, but it remains to be seen how quickly the OECD talks will settle on a new rate

The other part of the talks, on reallocating taxing right, involves a loss of revenue for Ireland, tentatively estimated at over €2 billion a year.

This is because some tax now paid will be paid in other markets to which companies with international headquarters in Ireland sell.

2. Digital levy rows

Tensions built over the past year or so as around nine EU countries announced or introduced their own digital sales levies, collecting tax on the sales of digital companies in their territories.

As most of the big players are from the US, this has angered Washington, which has insisted that these be phased out, assuming a broader OECD deal is reached in this area.

While this has been agreed, the European Commission is so far insisting it will go ahead with a separate plan for a Europe wide digital levy, designed to raise money to help pay back some of the borrowings taken on for the post pandemic EU recovery plan.

There is a row between the US and the commission on whether the EU proposal runs counter to the OECD plan. Expect this to feature at the G20 talks this weekend and possibly develop into a major crunch point.

What this means for Ireland:

We can’t calculate what the EU digital levy might mean for Ireland, as details have not been published.

However as a country with a small market and a large number of corporate headquarters, it is likely to cost Ireland revenue were it to happen.

The OECD version of the plan was previously estimated to cost over €2 billion annually to the exchequer. The twist is that if no OECD digital levy is agreed then EU countries and the UK will push ahead with their own.

This would cost Ireland revenue, but would also threaten stability, as the US would be likely to react, with unpredictable consequences – for example tariffs on imports to the US and uncertainty over investment.

3. US politics

The US is putting massive pressure on to get the OECD deal done. It was particularly notable that at last week’s meeting, among the countries to sign up were China and India, both of which previously had reservations.

Ireland sits uncomfortably in a small group of “hold-outs” including, amongst others, Estonia and Hungary and two Caribbean tax havens.

However the US has still to show it can deliver on the deal at home, with the tight Congressional arithmetic – particularly in the Senate – making it complicated.

President Biden and his treasury secretary, Janet Yellen, may be hoping to get much of the deal through via what is called a reconciliation process, a mechanism which the administration can use once a year to push through budgetary measures with the approval of a simple majority in the Senate.

But US experts warn that while the global minimum tax element of the deal could be agreed via this process, it may not work for the other part of the OECD tax deal, the reallocation of taxing rights for big companies. This is because this is likely to require changes in US tax treaties with other countries.

Such are the complexity of the Congressional rules, that there are countervailing views as well. But the point is that without the reconciliation process, a two thirds Senate majority would be required and as senior Republicans oppose the deal, this looks unlikely.

To complicate matters further, the US administration proposed a 21 per cent minimum rate on the international earnings of its companies as part of a major tax and spending programme planned by the Biden administration.

There is also Congressional opposition to many aspects of this deal and uncertainty about the outcome.

For Yellen, pointing to international agreement on a minimum tax rate allows her to argue that setting a higher rate at home – the current minimum rate on international earnings of US companies is 10.5 per cent, with generous allowances – will not push US companies overseas .

This is presumably why US officials are now letting it be known that she will support a rate higher than 15 per cent at the OECD talks.

You would presume the Biden administration wants the OECD rate and the rate agreed in the US to be the same, but the route to an agreement on this is not yet clear.

What does this mean for Ireland:

This is the crunch point for Ireland. It now looks likely that any OECD deal will greatly limit the use of low tax rate to attract FDI to Ireland.

If the minimum rate moved to 15 per cent, Ireland could still offer a rate lower than many other countries, retaining some advantages. ( The minimum is an effective rate, so how it would apply to various reliefs and credit, including the research and development tax credit, would be important.)

However if the agreed minimum rate were to head higher, this advantage would lessen and Ireland would also have to charge this new rate to domestic companies, unless some special measures were agreed here.

Ireland, or any other member state, could veto a European Commission directive to mandate an OECD deal on a minimum tax, but if the other countries were going to go ahead anyway, there might not be much point.

The pressure will build if the obstacles to a deal continue to fall away. If Ireland does not sign up to the minimum rate, then top up payments will be levied in home markets like the US, negating the impact of the 12.5 per cent.

Meanwhile the proposal is that companies from countries not signing up would face less favourable tax treatment overseas, which could hit many Irish companies – such as some of the big diary companies – with headquarter operations in the US.

They would face a much higher tax rate on their US earnings. Meanwhile if the OECD talks fall apart, Ireland still faces the danger of US legislation relating to its companies.

The tax world is about to change. There is a strong political wind down to collect more from big companies and close off their opportunities to shift profits and cut tax bills.

The only question now is whether this happens by international agreement, or via a potentially chaotic process where countries adjust their own regimes. Some sort of international deal still looks likely, but there is a way to go yet.