Ireland's corporate tax revenue could fall by more than the expected €2 billion under proposals to reform the global tax system, Minister for Finance Paschal Donohoe has warned.
Corporate tax reform could weigh "more heavily" on the Government's revenue stream "than is currently assumed", he told the Oireachtas Committee on Budgetary Oversight.
In its recent Stability Programme Update (SPU), the Government factored in a €2 billion hit from the proposed changes, which are likely to include a minimum effective tax rate across all OECD countries.
The US has proposed a minimum rate of 21 per cent on the international earnings of US companies, which is significantly above the Irish rate. The Government fears this will undermine the State’s ability to attract inward investment.
At the committee Mr Donohoe again defended Ireland’s right and the right of smaller countries to use tax as a lever to compensate for the advantages of scale enjoyed by larger states.
He said there was an “intensely competitive negotiation” on tax taking place at OECD level.
“Other countries will not be looking to afford undue recognition to smaller and medium-sized economies as they make the case for the kind of change they want to see happen and that’s their prerogative,” he said. “It’s up to us to make the case for tax competition within certain parameters as a legitimate policy response to the disadvantages of size or location.”
The concept of a global minimum tax rate is part of OECD’s “pillar two” negotiations on corporate tax reform, which are due to conclude this year.
Mr Donohoe appeared before the committee to discuss the Government’s latest SPU, which sets out its economic projections for the year ahead.
“Vaccine policy is economic policy,” he said, noting the speed of economic recovery now depended on the success of the vaccination programme.
Rising vaccine coverage would allow for a more significant easing of containment measures over the summer, he told the committee.
“Of course there will be week-to-week fluctuations, and vaccine supply remains volatile, but we must keep in mind the bigger picture; we are on track to vaccinate a large majority of the adult population by the end of this quarter.”
In the SPU the Government forecasts GDP growth of 4.5 per cent this year and 5 per cent next year, driven by a rebound in consumer spending.
“A conditioning assumption underpinning the projections in the SPU is that low levels of public health restrictions will be in place in the second half of the year, with minimal restrictions next year, which should allow economic activity to normalise,” said Mr Donohoe.
The release of pent-up consumer and business demand would be the key driver of the economy in the near-term. “The recovery in consumer spending next year is also assumed to be supported by an unwinding of part of the excess household savings built up during the pandemic.”
However, he warned that given the degree of uncertainty at present, the margin of error around these projections was sizeable.
Mr Donohoe said the level of unemployment would remain elevated for an extended period, possibly to the end of 2023.
The Government is also expected a budget deficit of €18 billion this year, pushing the State’s debt level to just under €240 billion, or almost 112 per cent of national income, as measured by gross national income.
“Let me put this another way: our public debt is approaching a quarter of a trillion euros,” he said. “So once the worst of the pandemic has passed it will be necessary to address this by eliminating the deficit over time in a way that balances supporting the economy with continued fiscal sustainability.”
While pledging there would be no cliff edge in the removal of supports, he said it is expected they will be unwound after 2022.
He said economic growth – via increased tax revenues – would be enough to close the gap between what that State earns and what it spends.