Is Ireland’s 12.5% tax rate running out of road?

Corporate tax reform is going to be one of the big economic themes of 2021. But this is tax – so it isn’t straightforward. We will look at six ways in which the vital interplay of US policy and talks on a global deal under the aegis of the OECD might play out – and what this would mean for the Republic.

We'll start with the outcomes which might involve less change for Ireland – and work up to the ones involving more far-reaching changes.

Remember where we are starting from. The Biden administration has proposed increasing a rate called the GILTI (global intangible low-taxed income) currently imposed on the overseas earnings of US multinationals and set at 10.5 per cent. It proposes to increase it to 21 per cent and, by changing the way the tax is collected, effectively turn it into a country-by-country minimum rate on the earnings of US companies abroad.

The US is also now pushing for a wider agreement at the OECD on a reformed corporate tax regime to apply internationally . This would involve a recommended minimum global rate – and also a change to mean big companies pay some tax as a levy on sales managed through digital channels.

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The debate comes down to a row between bigger countries, arguing that smaller countries such as Ireland are unfairly using tax to attract investment, and smaller countries arguing that tax competition is a legitimate strategy.

So how might this once-in-a-generation reform play out? Here are our six scenarios.

1. Nothing much changes

For years there has been talk on corporate tax reform, but not much has happened. This looks most unlikely this time. The Biden administration has put huge emphasis on its planned domestic changes, vital to fund a massive investment programme. In turn, its call for a wider OECD deal has been supported by pretty much all the other big countries. Change is coming, even if the shape if it remains unclear.

2. An OECD deal at the Irish 12.5 per cent rate

This is still possible, but looks unlikely. The US may not hold out for a deal at its planned GILTI rate of 21 per cent – but looks set to push for a higher rate than 12.5 per cent. A global rate of 12.5 per cent would mean Ireland could leave its rate at that level. The State would still lose revenue from the other part of the OECD plan, under which big companies would pay some tax on sales, meaning gains for countries with big markets such as France and Germany and losses for countries like Ireland, where US firms have their international headquarters.

3.An OECD deal at 15 -16 per cent with the US agreeing its GILTI rate at the same level

Speculation centres on an OECD deal at around 15-16 per cent.The US could try to push this a bit higher, but for now few observers expect a global deal at 21 per cent. Enough countries have rates below this level currently, including many smaller EU countries, to make it an unlikely point for a global agreement.

This is complicated by timing – the OECD will want to make progress on a deal before it is clear which way US politics may go on its new arrangements. Also, other countries may be nervous that a future US administration could cut the GILTI rate were it to be set at a high level.

"The Biden proposal is a very high watermark of what could potentially be agreed by Congress in 2021", says Ibec chief economist Gerard Brady.

“But, to be durable over the long-term, any OECD parallel agreement must also be cognizant of how that might change in future - including under Republican regimes.”

Interestingly, the GILTI rate is due to rise to 16 per cent in 2025 anyway, under Trump plans approved by Republicans. Hence somewhere around here would be a plausible landing zone for the OECD too. According to Brady: “Even for countries which support some form of minimum tax in principle, they don’t know what the Congress can pass or sustain over that time period and won’t want to enter an agreement which could leave them open to being undercut by a future change in the US position.”

A global move to 15/16 per cent would leave the Republic with a choice. If Ireland stayed at 12.5 per cent, then multinationals would face top up payments at home.

If the Irish rate was moved to the new minimum, at least this additional chunk of tax would remain here. The counter argument would be the signal of abandoning a rate to which Ireland and all the main parties have committed for many years – though this consensus would likely break down in the event of a global minimum emerging.

4. An OECD deal at 15/16 per cent, but the US rate stays at 18/21 per cent

This is a possible outcome, though there are doubts about Biden securing agreement for a rate as high as 21 per cent. This increases the headache for the Republic. It could lead to US companies facing a bigger top-up at home on tax paid in Ireland, unless some of the proposed changes in the way GILTI will be implemented are changed. At the moment, companies only pay on profits defined as excessive – above 10 per cent on intangible assets – and they can blend all their profits from different operations into one pot. As well as the rate change, the proposed change in these two factors is vital for the State. This outcome would also lead to pressure to increase the 12.5 per cent rate here.

5. A US GILTI rate of 18-21 per cent and a global minimum at this level

The higher the global consensus and the new US rate, the greater the problems for Ireland in terms of what to do with the 12.5 per cent rate here. The 21 per cent may remain on the table for a while though, rattling Irish nerves. And a risk for Ireland would be a compromise as high as 18 per cent.

6. No OECD deal and a big row

This is possible, but probably not a good outcome for Ireland. The US looks likely to go ahead with the GILTI change anyway, though possibly not at 21 per cent. If there is no wider deal at the OECD, then tensions could spiral as other countries seek to impose digital sales taxes on big US companies in a way which the Biden administration has not signed up to. Trade tensions and tariffs between the EU and US, which bubbled under Trump, could flare, with the Republic caught in the middle. The EU could seek to revive its own corporate tax reform plans, again with dangers for Ireland. On balance, certainty looks the better outcome for Ireland.

So what will it be?

An OECD deal at 15/16 per cent now looks possible. It is harder to predict whether the US put its GILTI rate at the same level, but there would be a logic if it did. This would leave Ireland with a decision on whether to change the 12.5 per cent, which has previously been set in stone.The Government would also be under pressure to outline how it would underpin the other key factors attracting FDI here – such as skills, infrastructure and a decent environment for staff to live, the latter focused on the need to provide reasonably priced housing.