‘Forced change’ to Ireland’s corporate tax rate could trigger migration of activity

Report by DBRS Morningstar, however, describes risks to Ireland as ‘distant’

The DBRS report   cautioned that the concentration of corporate tax receipts in only a handful of companies  exposes the Irish exchequer to budget risks. Pictured above is Minister for Finance Paschal Donohoe. Photograph: EPA

The DBRS report cautioned that the concentration of corporate tax receipts in only a handful of companies exposes the Irish exchequer to budget risks. Pictured above is Minister for Finance Paschal Donohoe. Photograph: EPA

 

A “forced change” to Ireland’s corporate tax rate could trigger firms to reassess their commitment to Ireland and shift activities to other jurisdictions, a new report has warned.

In an assessment of the likely impact of global tax reforms on Ireland, debt ratings firm DBRS Morningstar, however, describes the risks to the State as “distant” while noting Ireland enjoys significant non-tax benefits that should keep it competitive.

It said that the proposed changes envisioned by the Organisation for Economic Co-operation and Development (OECD) and the G20 had two distinct pillars – a reallocation of taxing rights and a global minimum rate, “each with possible varying effects on Ireland’s budget, its existing capital stock, and future direct investment”. Consensus will, however, be difficult to achieve and implement, it said.

Losses

Under pillar one of the OECD reforms a proportion of profits booked in Ireland would be reallocated and inevitably reduce Ireland’s corporate tax take, DBRS said, noting the Irish Government had already budgeted for €2 billion of losses arising from the this.

A global minimum rate – set at 15 per cent, envisioned under pillar two, will “be more consequential”, it said.

This would require Irish domiciled corporates to “top up” their tax contributions.

An attempt to accurately model how a new corporate tax regime would affect Ireland would need to reflect a full range of negative impacts including those on employment and incomes.

“Most impactfully, a forced change to Ireland’s tax rate might spur firms to reassess their commitment to Ireland and shift activities or intangible assets to other jurisdictions that do not comply with the new global minimum standards,” it said.

“An exit of a handful of large multinationals could have large spillover consequences to the rest of the economy,” it said.

Research

The company cites recent research by the Irish Fiscal Advisory Council (Ifac), which warned a “pillar 2-like shock”involving five large multinationals redomiciling their business away from Ireland could result in a direct corporate tax loss of €3 billion and a direct loss of 5,000 jobs and 15,000 indirect job losses, resulting in higher unemployment and emigration.

In its report, DBRS also cautioned that the concentration of corporate tax receipts in only a handful of companies – over 50 per cent of receipts come from just 10 large firm – exposes the Irish exchequer to budget risks.

“This complicates the forecasting of revenues and the funding of permanent expenditures. These concentration risks are amplified by the ongoing efforts to reform the global business tax landscape,” it said.

Nonetheless, it described the State’s corporation tax base as “resilient”. It also noted that “years of the multinational sector’s large tax windfalls was helpful in repairing the government’s public finances after the global financial crisis”.

DBRS also concluded that Ireland had significant non-tax benefits that should keep it competitive, even if reforms cause more structural change to the Irish economic model.

It highlighted Ireland’s highly skilled labour force, its use of the English language and common law, unfettered access to the European Union, and its favourable climate for doing business.