Ireland is doing the sensible thing on corporate tax

I am a big fan of Fintan O’Toole, although I might be perceived as an ideological opposite. Black Hole, Green Card was the first of his books I read around the mid-1990s and I still have my well-thumbed volume and almost all his subsequent works. His books will still be read in 20 years’ time and beyond to get a perspective on Ireland that is sometimes arguable, occasionally uncomfortable and always insightful.

O'Toole's opinion pieces are like that too, which is what makes them essential reading. Often I agree with them (more so as I get older) but sometimes I disagree violently – however, as a reader, that is what you want. For me, though, his piece in last Tuesday's Irish Times,"Ireland is both immoral and stupid on corporate tax", was a damning conclusion based on a false understanding.

At one level he’s right. What is the Government doing? Why would Ireland want to be on a list of nine countries (some of which you’d struggle to find on a map) that didn’t sign up to the Organisation for Economic Co-operation and Development’s grand plan for changing the global tax landscape? Never mind the details, in the court of public opinion and newspaper headlines Ireland has been tried and convicted. It’s an awful look.

Headlines are perhaps all that matter these days; however, I believe that facts and detail should matter, particularly in today’s world. Why would OECD secretary general Mathias Cormann issue a positive and supportive tweet about Minister for Finance Paschal Donohoe and the Government when the agreement was signed? Why are other finance ministers not queuing up to give Ireland a lash?

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The bottom line is that Ireland’s position on tax and our place in the world in the global tax debate has shifted massively over the last eight years – something which is not recognised in some quarters. The Apple case, even though it went much further back in time, didn’t help (although in the interests of accuracy, the European Commission’s position that Ireland gave an illegal tax deal was roundly routed by the General Court in Luxembourg).

For those shouting “What about Ireland helping US companies avoid tax?”, that’s an old, no longer relevant argument made redundant by the Tax Cuts and Jobs Act 2017 which now taxes the worldwide profits of US companies.

When you get into the detail, Ireland has proactively and voluntarily signed up to quite a lot.

Global rules

The main thrust of the negotiations over the last eight years (known as Pillar 1) is to change the global rules that have operated for more than a century. Generally a company pays tax where its activities, risks, assets and people are located. In future they will pay some tax in the countries into which they sell, even if they have no physical presence there. This was part of the global recognition that the tax rules for cross-border commerce, formulated in the aftermath of the first World War, needed to be modernised.

This will cost Ireland about €2 billion per annum – about a sixth of our corporate tax take. No dragging of feet by Ireland here and our engagement in this process was evident for everyone to see.

What has emerged more recently is a push for a global minimum tax rate, known as Pillar 2. Ireland has actually signed up to the principle of this. Until earlier this year it seemed as if everyone was converging on that being 12.5 per cent, which would have suited Ireland perfectly.

The Biden administration is suggesting 15 per cent, which causes Ireland a problem. As O’Toole said, “companies value predictability”, and for all of this century we’ve given local and foreign companies that predictability around 12.5 per cent. Other countries have been more blatant about protecting their national interests, with the UK, for example, leading the charge on getting the financial services industry excluded from the new global rules.

Symbol of certainty

There is no mathematical magic around the number of 12.5 per cent. It could be 11 per cent – or even 15 per cent. But in the ongoing battle to attract inward investment into an island on the periphery of Europe, the unchanging rate is a symbol of certainty and predictability. Based on my 35 years working with US companies setting up in Ireland, that has a real value.

O’Toole is also right that Ireland will almost certainly sign up to an OECD agreement in full by the year end which will, in all likelihood, include a minimum rate of tax. So why doesn’t Ireland just go with the flow? And therein lies the rub.

Given the US congressional arithmetic, it is far from certain that the Biden administration will be able to deliver domestically on its minimum tax proposals. If that turns out to be the case, the debate could end up back where it started – at 12.5 per cent.

So given 12.5 per cent has worked well for Ireland over the last 20 years or more, why wouldn’t Ireland wait the six months to see? After all, as the chestnut goes, we’ve agreed the principle and now we’re just haggling over the price.

Lest anyone think I believe Ireland should die in the ditch for 12.5 per cent, not at all. Firstly, if the US passes domestic legislation to encompass all of the Biden administration’s intent, it wouldn’t be economically rational, quite aside from the optics, for us to continue to hold on to 12.5 per cent. Secondly, Ireland’s attractiveness to inward investment isn’t all about the tax and it hasn’t been for a very long time.

So if the proposition is that we should give up something of proven value where it is uncertain as to whether we need to, then I think it’s the right strategy to wait six months to be sure.

The global tax rules have been changing in the last few years and Ireland’s rules have changed with them. More change will come but accusations these days of Ireland being the bad boys of the tax world are neither fair nor accurate.

Feargal O’Rourke is managing partner of PwC