G7 tax reform plan will affect Ireland’s credit rating – Moody’s

Preparations for decline in tax revenue means impact will not be too devastating

The Republic currently has an A2 Stable rating with Moody’s. Photograph: iStock

The Republic currently has an A2 Stable rating with Moody’s. Photograph: iStock

 

The decision of G7 finance ministers to back a major package of global corporate tax reform will have repercussions for the State’s credit rating if the plans are implemented, according to Moody’s.

The ratings agency said the impact on countries that have used tax policy as a component in their competitiveness strategies, will however only be “mildly credit negative”. This is largely because countries such as the Republic and the Netherlands have been preparing for a decline in corporate tax revenue due to OECD efforts to combat tax avoidance.

Moody’s added that these jurisdictions have also relatively significant economic strengths that “go well beyond their competitive tax offering”.

The Republic has an A2 Stable rating with Moody’s, while the Netherlands is Aaa stable.

The State has budgeted for a gradual decline in corporate tax revenue of between €2.2 and €2.4 billion by 2025. This is equivalent to one-fifth of total corporate tax revenue and compares to a total tax take of almost €12 billion in 2020.

The G7 ministers last weekend gave their backing for the two main pillars of an OECD plan on taxation. These are, first, the reallocation of taxing rights so tax can be charged in countries in which multinationals sell, but do not have significant operations. And second, the introduction of a minimum effective tax rate of “at least 15 per cent” to apply in each country in which the multinationals operate.

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The Netherlands has expressed its support for the G7’s plan and has been making changes to its tax legislation that have seen it begin to tax outbound royalty and interest payments to jurisdictions where the corporate rate is lower than 9 per cent. It will also apply this to outgoing dividends from 2024.

The Republic meanwhile faces a decision on whether to increase the 12.5 per cent rate to the new minimum, if one is agreed. The Minister for Finance Paschal Donohoe has said he believes any new regime will have to “accommodate” the State’s current rate.

In its note, Moody’s said that while the G7 communiqué is an important milestone, implementation remains some way off. It said reaching a final agreement on both pillars will also not be straightforward because the US is opposed to pillar one.

“Any final agreement that resembles the aspiration articulated in the G7’s communiqué would make it less attractive for companies to book profit in tax havens,” it said.

“On a global basis, the amount of additional tax generated would be significant but not transformative,” Moody’s added.