OECD talks could spell danger for Ireland’s cosy corporate tax rate

Ireland has long argued that its attraction for multinationals rests on much more than the 12.5 per cent corporate tax rate. We may be about to find out.

US treasury secretary Janet Yellen has reignited the OECD talks on corporate tax reform, removing a demand that US tech multinationals could opt out of parts of it. Now the race is on to reach a deal by the middle of this year. Ibec chief economist Gerard Brady said that while challenges to reaching a deal remain, the enthusiasm from the US improved the prospects significantly.

Minister for Finance Paschal Donohoe has long argued that an OECD deal is in Ireland's interests. This is because a collapse in the talks would lead to EU countries imposing their own digital sales taxes, likely leading to rows with the US and potentially threatening new trade wars. An OECD failure could also see the EU reviving its own plans for corporate tax harmonisation, also dangerous for the State.

But the OECD process also carries risks. One is to Ireland’s corporate tax revenues, as the first pillar of the OECD talks proposes that companies would pay some tax in markets where they make digital sales. This would reduce the amount paid in countries such as Ireland, where they manage sales from international headquarters.

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Potent

However, the more potent danger may come under pillar two of the talks, involving a proposed global minimum tax rate. Yellen said that the US favours a “robust” regime in this area. The danger for the Republic is that the minimum rate is set higher than our 12.5 per cent rate, effectively removing it as a tool to attract investment here. There has been speculation about a 15 per cent rate and the direction of the Biden administration is to increase business taxes.

According to Brady, the OECD process could provide a competitive challenge to Ireland’s business model and mean investment is required in other areas vital to attracting FDI, such as research, education and infrastructure. We would no longer have the same competitive advantage on tax.

A high-stakes game lies ahead for Paschal Donohoe. He will want a deal, but what is he willing to sign up for ?