Donohoe bows to the inevitable on Irish tax policy

Minister faces task of weaning exchequer off drug of corporate tax revenue

Minister for Finance Paschal Donohoe’s  case is that corporation tax reform should be moderate, rather than dramatic. Photograph: Alan Betson

Minister for Finance Paschal Donohoe’s case is that corporation tax reform should be moderate, rather than dramatic. Photograph: Alan Betson

 

Ireland can’t just keep saying “no” on corporate tax reform. Having held out against European Union reform proposals for many years – supported by the UK – the writing is now on the wall. Change is on the way and this carries some danger for Irish tax revenues and the model of attracting US investment here. The scale of this threat is not yet clear and recent years have shown us how reform can sometimes benefit Ireland too. But such is the momentum now towards reform that, realistically, we have no option but to get on board.

Minister for Finance Paschal Donohoe set out the strategy in an important speech during the week. The implicit point was that it is better for Ireland to be a participant in this process and “inside the room” when the big decisions are being made, rather than trying to stop the tide coming in.

The goal is an international agreement, a stable outcome and a say in the final compromises. The price is that this will hit Irish corporate tax revenues in some areas.The risk is of pressure coming on for more far-reaching measures which could damage our ability to attract foreign direct investment.

Ireland has used the OECD, the Paris-based think tank, as a kind of cover against EU reform plans in recent years. So, for example, when Donohoe opposed recent moves led by France to impose a digital sales tax on big multinationals – most of them from the US – selling across Europe, he argued that it was better to wait for an international deal at the OECD.

OECD agreement

But this plan was stalled on the basis that the OECD would come up with something to tackle the issue. And now, with the US – following introduction of its own sweeping reforms – supporting global agreement and huge international political pressure for big business to pay more tax, the wind is behind an OECD agreement.

The tricks and ploys used by many of the major multinationals to cut their tax bills may have been legal, but they are now starting to pay the price as the public mood turns against them. Their claims that it was all legal – debatable in some cases – are now largely irrelevant.

Ireland has made some reforms in recent years, largely as part of the first phase of the OECD reform process. This international deal was aimed at making it more difficult for big companies to shift profits to low- or zero-tax jurisdictions and avoid paying much tax.

But despite these changes criticism of Ireland internationally remains strong, as surfaced again in a recent European Parliament report, which said Ireland resembled a tax haven. As the home of the European headquarters of many of the big US players, Ireland has been used as part of an international chain of aggressive tax planning.

Ironically, the first phase of OECD reform has actually benefited the Irish exchequer, by encouraging companies to locate more assets and activities in Ireland, leading to a big surge in our corporate tax take. The next phase carries more dangers – for two reasons.

One is that, as Donohoe conceded, there is pressure to accept that multinationals pay some tax where they sell goods online, or where people interact on their platforms. This will mean more for the exchequers of big consumers markets such as France and Germany and less for smaller, lower-tax countries, such as Ireland, where the big players typically locate their European headquarters.

The devil will be in the detail here. And part of this is about how much tax companies pay – and part of it about where they pay it. Donohoe’s case is that reform should be moderate, rather than dramatic. It is a recognition that there will be some loss of revenue for Ireland, even if other factors could still support overall corporate tax growth here.

Minimum tax payment

The second danger is probably more significant, though less clear for now. In tandem with the changes outline above, the OECD – prodded by France and Germany – is examining the idea of a minimum tax payment on profits by multinational players. The US has already moved in this direction, imposing a minimum charge on profits earned abroad by its companies. Depending on how the OECD proposal falls – and Donohoe underlined Ireland’s concerns – it could have a significant impact on Ireland’s ability to attract foreign direct investment by dint of our 12.5 per cent tax rate.

PwC managing partner Feargal O’Rourke called Donohoe’s speech the most significant one on tax policy in 30 years. It is a clear commitment to engage in the big international reform programme, albeit with an attempt, too, to lay down some markers. It is, more than anything, a recognition of the reality that change – big change – cannot now be long delayed, even if the implications for our revenues probably won’t be seen until after 2022.

Nonetheless, there are two more immediate policy implications. One is that we have to find a way to wean the exchequer off the drug of ever higher corporate tax revenues being used to pay for ever higher day-to-day spending, because the future growth of these revenues is uncertain. As a general election comes into view, this is a real challenge for the Minister for Finance, who must also plan against the almost impossible uncertainty caused by Brexit.

The second key message is that tax is set to become a much less important card in attracting foreign investment here. So we have to rely on other factors – a skilled workforce, a decent infrastructure, good broadband, affordable housing and competitive costs – to hold and attract investment. And as we all know, we have just a bit of work to do in a few of these areas.

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