Global tax reform spells good news for Ireland

It was almost an article of faith that if Ireland was ever forced to increase its much cherished 12.5 per cent corporation tax rate the roof would cave in, and multinational companies would flee the country as soon as it was practical to do so. Well, the unthinkable has come to pass and economic life has continued pretty much as normal.

“My first reaction when the news came out that the rate was moving to 15 per cent was that I was going to get loads of phone calls from worried clients, but I didn’t get any,” says Mazars international tax partner Cormac Kelleher. “They had already teased it out. American companies pay a higher rate in the US at any rate.”

He also notes that the new rate will only apply to companies or groups of companies with revenues in excess of $750 million. That will exclude the vast majority of indigenous companies and a large number of US tech companies in Ireland which are still at quite an early stage of international growth.

“The 15 per cent rate is not going to apply to the vast majority of the 160,000 other businesses in Ireland that don’t have a turnover of less than $750 million,” says KPMG international tax partner Anna Scally. “The 12.5 per cent rate will continue to apply to them.”

She believes the government was correct in initially resisting the proposal to increase the rate. “Ireland not signing up in July was very sensible,” she adds.

“There was no guarantee that the 15 per cent rate would be the minimum. The government’s tactics were good. At the end of the day, getting agreement that it would be a minimum rate of 15 per cent and not at least 15 per cent was critically important. Ireland came on board in the interest of consensus and certainty for business. Ultimately, history will judge it the right thing to have done. It delivers the certainty and long-term stability that Ireland has always offered business.”

Part of a continuum

Deloitte head of Tax Lorraine Griffin agrees with an interesting analogy. “Ireland was right to resist the language around the rate change,” she says. “I likened it to agreeing to buy a house for at least €500,000 and then allowing the seller to set the price. We now have the necessary assurances from the OECD and the EU that the 15 per cent is the minimum rate and that things like our R&D tax credit regime will be unaffected.”

EY Ireland head of tax Kevin McLoughlin believes no one should really have been surprised at Ireland’s apparent volte face on the rate increase. “If you step back a little bit and look at in context, this process started five or six years ago with the first BEPS initiative [Base Erosion and Profit Shifting] and Ireland’s agreement is part of a continuum. Ireland has always been an active participant in the process.

Ireland has played its part in the global tax reform process and has always been a willing participant in the greater co-ordination of global tax rules. It never wanted to be seen as a laggard. It’s a good thing for Ireland to be seen as an active participant in the process. That’s a positive thing.”

That’s a view shared by PwC head of tax Susan Kilty. “Ireland has been implementing all the OECD BEPS 1.0 and various EU tax avoidance measures and other changes over the years,” she notes. “It has been playing its part as a good global citizen. As change has happened at various points people have said it’s the end, but it hasn’t been. We have the right economic substance for FDI here. It’s much better to be on the inside than on the outside. Business does care about certainty and stability and would much rather be in a country like Ireland that is part of the global consensus.”

Ammunition

And failure to sign up could have had adverse consequences. “We didn’t have transfer pricing legislation for years but then we adopted it,” Kelleher points out. “Then we adopted all the other legislation. If we stayed outside the fold that would have provided ammunition to be used against us. Companies might have thought their reputations would be tainted if they moved here.”

There is also the question of whether the tax rate matters that much for inward investment any longer. “I don’t believe it’s going to lead to a loss of competitiveness or that we are going to have an exodus of FDI as a result,” says Griffin. “We will continue to attract new FDI and grow what we have. But we have to look at other areas of the tax code and its administration to make it as pro-business as possible.

“Tax is only one factor. We have carried out surveys over the past five years or more and tax was never the number one reason. It has helped but that’s all. Our young well-educated workforce, access to talent, being part of the EU, and being the only English speaking country in the Eurozone are all very important now, as are our strong links with the US.”

McLoughlin believes that the most important thing for Ireland is to keep pace with the changing global environment. “Back in the 1950s we had a zero rate of corporation tax for FDI companies, and we presented ourselves as a low-cost country. We have had to reinvent several times since then to attract different types of business. We have seen our tax code and rate evolve over the years and the key thing is that we continue to adapt.”

And we haven’t reached endgame yet, according to Kilty. “We are awaiting further detail on the rules. How will we compute the profits? How will it work across different jurisdictions? The assumption is that any top-up tax will be paid in the country where the company has its headquarters. We are expecting some flesh on the bones at the end of the month.”

“I wouldn’t underestimate the complexity that the changes will bring for companies,” Scally adds. “The OECD has a very ambitious plan to have it all rolled out by January 2023 and that will require companies to spend a lot of 2022 preparing for it. They will require a lot of help to get through it.”