OECD’s Beps report likely to drive corporation tax rates down

An increasing number of smaller economies are likely to lower their corporation tax rates as a result of the ongoing global reform of multinational taxation, according to two senior Irish tax experts.

The development is just one of a number that Irish policymakers will have to watch closely as the OECD's Base-erosion and profit-shifting (Beps) process begins to move from its planning to its implementation stage, according to Deloitte's vice-chairman, Padraig Cronin, and its head of tax, Lorraine Griffin.

Already it is known that Luxembourg is discussing a very significant reduction in its corporation tax rate, they said.

On Monday the final report from the two-year Beps project is due to be published by the Paris-based OECD. The package will contain a number of measures that have been agreed by OECD and G20 member states at a technical level, and which are likely to be given political approval by the G20 heads of state later this year. Other measures are being left to be introduced on an “à la carte” basis.

Proposals in relation to a multilateral tax treaty aimed at introducing a new, coherent network of international tax treaties are understood to have been delayed due to resistance in the US Senate.

However, the Beps process has already changed the context for multinational tax planning with the shift away from “brass plate”, legally-driven global tax structures, involving locations such as Bermuda and the Cayman Islands, towards a system that seeks to better align business substance with taxable profits, according to the tax experts.

But this too creates challenges for Ireland’s policies on foreign direct investment, as Ireland’s relatively high marginal income tax rates serve as a disincentive to luring top executives and key technical talent to work and live here, the tax experts said. Where such people live and work is likely to become more important to the calculation as to where a company’s “substance” resides.

Mr Cronin said the Beps plan includes measures that will create a closer relationship between where research and development occurs and where a company’s profits should be taxed, something which could favour larger economies.

Ms Griffin said that, due to the Beps process, there is a high level of uncertainty, something that business does not like and which makes corporations less likely to restructure their global operations. In such a context, Ireland’s 12.5 per cent corporation tax rate does give multinationals some certainty.

Conor O’Brien of KPMG said the Beps process is the most significant development ever in the history of international tax rules, with the OECD becoming involved to a level that has never occurred before. The process is necessary to prevent countries taking unilateral measures at a time when governments are under pressure to make multinationals pay more tax.

“I think Ireland can be reasonably happy with [the Beps proposals]. The alternative might have been global tax chaos.” The proposals could lead to a “potential win” for Ireland, he said..

Mr O’Brien said the move towards shutting down “brass plate” type operations on offshore islands should be good for Ireland, as such entities might decide that Ireland is a good location to move to.

“Most multinationals here have substance in Ireland but the issue makes it more important than ever to get key decision-makers to move here. However, our personal tax regime is not so attractive.”

If there are high tax, low tax and no tax locations in the world, and the no tax ones are being closed to multinationals for tax purposes, they are more likely to move to low tax locations such as Ireland, he said.

However while Monday’s final Beps report is a very important milestone, it is also part of a process on which there is still a lot of work to be done, he said.