Failure to agree corporate tax regime could trigger ‘damaging trade wars’, OECD warns

Key talks on a new international corporate tax regime with major implications for Ireland are now facing a new deadline of mid-2021, as the OECD warns that failure could lead to damaging trade wars.

In an update on the talks, published on Monday, the Organisation for Economic Co-operation and Development (OECD) estimated that a failure to reach agreement could trigger trade wars at a cost of 1 per cent of world GDP. However, it said that success could boost corporate tax revenues worldwide by up to $100 billion (€85 billion).

Ireland's corporate tax base and its incentives for attracting multinationals could both be damaged by the talks. However, Minister for Finance Paschal Donohoe has said repeatedly that he believes an agreement at OECD level, involving 137 countries, is still the best option for Ireland. This is because of the danger of countries taking damaging unilateral action on taxing big digital multinationals if there is no deal, and of the trade war risk referred to by the OECD.

Previously, Irish officials had estimated that the OECD plan could cost Ireland between €800 million and €2 billion out of a corporate tax take due to be €12.5 billion this year, in lost corporate tax revenue every year.The OECD did not publish estimates of the country-by-country impact of the reforms, which it says it has calculated.

Construction should be ‘essential’ if country moved to Level 4, says CIF

---

It is time for big, radical decisions to support those suffering most

---

Borrowers return to normal loan repayments after Covid breaks

---

‘Sleeping at work’, Gunnersaurus and Tom Cruise’s impossible mission

---

Commenting on the OECD’s latest plan. Feargal O’Rourke, managing partner at accounting and consulting firm PwC, said Ireland had already gained significantly from the first phase of OECD tax reform, which has helped to drive a big increase in corporate tax revenue. While risks now lay ahead, he said reaching a multilateral deal was still the best option, as without this there was a risk of countries taking unilateral action or of the European Union accelerating its own tax-reform agenda, both of which would carry even more danger for Ireland.

Tensions

The OECD announced that there now was an agreed framework for further consultations and negotiations on the two main parts – or pillars – of the talks, which would involve a fundamental reshaping of the way companies are taxed. The details still require political agreement. Pascal Saint-Amans, the OECD head of tax administration, said the technical work had now been done to allow the system to get up and running quickly, provided political agreement is reached. However, tensions remain as the lack of agreement to date means some EU countries have pushed ahead with planning digital sales taxes of their own and the United States is threatening retaliation .

The talks faced difficulty earlier this year when the US expressed serious doubts about parts of the plan it said were unfair to American companies. Saint-Amans said on Monday he believed that the US would stay involved, whoever won the presidential election.

“ The OECD should be given that time to reach a conclusion without countries pushing for further unilateral measures,” said Ibec chief economist Gerard Brady in a comment on the OECD release. “We continue to believe that a multilateral solution to these questions is the only way to avoid damaging uncertainty and complexity for business.”

The first pillar of the talks involves a change in where multinationals pay tax, with some in future to be levied in markets where they sell, rather than payments being purely based on where they declare their profits. This would lead to some loss of revenue to Ireland.

The second pillar of the talks involves setting a minimum global corporate tax rate. Depending on where this rate is set, this could have major implications for Ireland’s policy of using the 12.5 per cent corporate tax rate to attract foreign investment.