Ireland’s ability to attract foreign investment using its 12.5 per cent corporate tax rate could be undermined by new proposals which will now be discussed at the Organisation for Economic Co-Operation and Development (OECD).
A new roadmap for the international discussions on corporate tax being led by the Paris-based think tank – and agreed by 130 countries participating in the talks – confirms that the concept of a minimum effective tax rate on corporate profits is now on the agenda for the talks. It also indicates that the consensus is leaning towards one minimum rate globally.
The proposals “would represent the most fundamental change in global corporate tax policy in a century”, according to Ibec, the business group, which also warned that the proposals for a minimum effective corporate tax rate “could pose significant challenges for Ireland’s foreign direct investment [(FDI)]model over the coming decade”.
The international tax reform plans being drawn up under the auspices of the OECD are focusing on limiting the ability of major multinationals to shift profits to low-tax jurisdictions and lower their tax bills.
The minimum effective corporate tax rate is now one of the central proposals to be studied to cut down on options for tax avoidance as agreement is sought before the end of 2020.
There are various proposals about how it could work in the roadmap document, and no indication of what rate might be set. However, a relatively high rate could limit the ability of Ireland to use the 12.5 per cent rate as a tool to attract foreign investment. If the minimum rate is set at a higher level than Ireland then companies might have to make a top-up payment in their own jurisdiction.
Under another option up for discussion other jurisdictions in which multinational companies have major markets could be able to “reach in” and collect some tax from an Irish-based multinational subsidiary.
Minister for Finance Paschal Donohoe has already warned that he would oppose any measure that limited the legitimate use of tax competition to attract foreign investment here.
The introduction of a global minimum tax could threaten this if it was set above our current rate. Reports have suggested that the European Commission might push for an 18 per cent rate.
Ibec chief economist Gerard Brady said it was "crucial for small, open economies that this rate, if introduced, is set at a level which focuses on addressing actual profit-shifting concerns, and does not infringe on our right to set competitive tax rates".
The roadmap is divided into two areas. One involves new rules for allocating profits. The bottom line for Ireland here is that some profit made by big multinational players is in future likely to be taxed in major markets even if the companies do not have major operations there. This will mean less is taxed in countries like Ireland, where they have their European headquarters.
This is designed to equip the corporate tax system for the digital era, and recognises that companies can create value in big markets where they operate and sell via digital platforms.
While this will be of some concern to Ireland in terms of its threat to tax revenues, the Government and businesses will be more concerned with the minimum effective corporate tax rate proposal.