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Is Ireland about to get into a big corporate tax row with the US?

Smart Money: Implementing an OECD plan for the future of international business taxes is proving more than complicated

A landmark OECD was meant to solve simmering tensions over how international corporate tax is paid, but the picture is not as simple as it could be. Image: iStock

A landmark “deal” on the future of corporate tax was reached under the aegis of the Organisation for Economic Co-Operation and Development (OECD) in 2021. But implementing what was agreed has proved hugely complicated and difficult. Central to this is US politics and the failure of the Biden administration to get Congress to sign up to putting the OECD blueprint into US law. Now Republicans are accusing Biden and his treasury secretary Janet Yellen of giving away tax revenues which should properly be paid in the US. With the Republic due to change its corporate tax laws next year in line with the OECD deal, there is a risk of the country – as the home of the international headquarters of many big US companies – getting caught in the middle of this row.

1. The background

The latest OECD agreement on corporate tax is the second such deal. Ireland has benefited hugely from the first one, which came into effect in 2015. It resulted in many big US multinationals relocating their intellectual property (IP) assets – the copyrights, patents and licences underlying the sale of their key products in international markets – from tax havens such as the Cayman Islands and Bermuda to the Republic. Big tax allowances here helped, but despite these, tax revenues here have soared. Their existing physical presence here encouraged this because the new tax rules stipulated that IP assets should be held where multinationals had “substance” – in other words, real operations. When combined with a reform of US corporate taxes in 2017, the impact was also to encourage significant physical investment in Ireland, creating thousands of new jobs. The strong growth of many of the companies involved, right throughout the pandemic, has been a key support to the Irish economy and a central factor in the growth of tax revenue.

2. The latest

There have been constant warnings that Ireland is set to lose revenue from the OECD tax deal. This is due to the first part of the plan, which would change the country in which some of the biggest companies pay some of their tax. This would benefit big countries with large markets such as France and Germany, but hit revenues in smaller countries where multinationals base their international headquarters, such as Ireland. However, implementation of this part of the plan has now been pushed out to 2025 and agreement on how to do it has still to be reached.

In the meantime, EU countries and many others will go ahead and implement the other key part of the OECD deal: a minimum effective corporate tax rate of 15 per cent. In Ireland, this means that the rate the big companies will pay will increase from 12.5 per cent now to an effective rate of 15 per cent, subject to some agreed allowances. This will increase corporate tax revenue next year from what it would otherwise be, though if corporate profitability falls off a bit, this would act in the opposite direction. So far, so straightforward. But it is another part of this minimum tax arrangement which is proving controversial, particularly in the US.


3. The alphabet soup

The implementation of the deal is surrounded by the most extraordinary range of acryonms. One to remember is the Qualifying Domestic Minimum Top-Up Tax (QDMTT) – sometimes the “M” is excluded and it is just called a QDTT. Ireland looks set to implement the new 15 per cent rate using this mechanism. In other words, every company would pay at the existing 12.5 per cent corporate tax rate and big companies with annual turnover of more that €750 million would pay an additional 2.5 per cent via the QDMTT mechanism to bring their total to 15 per cent. Ibec has pointed out that this will lead to a significant tax hike on the biggest players – Revenue figures show they currently pay at an effective rate of around 10 per cent, after various allowances are counted in which reduce the impact of the 12.5 per cent rate a bit. This will increase to close to 15 per cent under the OECD deal.

However, there is another element of the QDMTT. It is that countries which impose it can collect extra tax if firms in their jurisdiction pay less than 15 per cent in their home location. This could in time involve US companies paying some top-up tax here because they are paying at a rate of less than 15 per cent on foreign earnings in the US. Tax accountants have called on the Department of Finance to ensure that the payment under QDMTT qualifies as a creditable tax in the US system.

How exactly this will work has still to be fully clarified and will depend on the details of the Irish legislation, the status of the Irish minimum tax and its interplay with US rules, including a new 15 per cent minimum tax on the book income of the very biggest US companies with profits of over $1 billion (€0.9 billion). But with the international rules saying that payment of the QDMTT has priority over payment of liability via other taxes, as things stand countries such as the Republic could get to collect some extra tax which might otherwise be paid in the US. *

4. The potential tensions

There are two sources of potential tension with the US. One is the ongoing story of the large amounts of tax paid by US companies in Ireland, which critics in Washington point out relates in part to tax planning and structures – including the presence of IP here – which allow significant amounts of profits to be declared in this jurisdiction. This is particularly controversial in the pharma sector, where a number of big US companies manufacture products in Ireland for the American market, but pay most of the resulting tax on profits in the State.

Economist Brad Setser - who works with the Washington thinktank the Council on Foreign Relations - and others have highlighted this – showing how US companies develop products in the US, charge high prices to American consumers, but organise their structures to end up paying large amounts of tax in countries such as Ireland and Singapore. Setser told the Finance Committee of US Congress this year that in 2022 the US market accounted for 55 per cent of the sales of a group of big American pharma companies, but they declared only 10 per cent of their profits in the US and so pay little enough tax there.

As countries such as Ireland roll out the 15 per cent rate, grabbing more of the tax pie, this controversy looks set to increase further in the US. And leading Republican politicians are now attacking Biden and his treasury secretary Janet Yellen for the terms of the OECD deal and particularly the minimum tax – the QDMTT – which they point out will allow other countries to grab tax revenue which they say properly belongs to the US.

A letter from 13 Republican members of the Ways and Means Committee to Yellen last month strongly criticised what is says was the administration’s “unprecedented and anti-American concessions” in the OECD talks, specifically the risk that the QDMTT would “capture significant portions of tax” which could have been paid to the US. (It says Biden should have reformed the Gilti regime to make sure this happened.) As Setser put it in the committee hearing, unless the US acts, other countries will rightly be able to collect top-up taxes on US firms, who in turn are shifting profits to low-tax jurisdictions. Ireland would be one of the main countries to benefit.

So the risk for the State is getting caught in the middle of a fractious debate ahead of the next US presidential election. US Republicans are unhappy about the OECD process, not only the minimum tax but also the other part of the plan to tax companies more where they do most of their business. Ireland navigated the run-up to the 2021 OECD deal well, as the US pressurised countries to sign up. Ironically, it is the US failure to agree a way to implement the terms of the deal which lies behind the risk of further trouble ahead.

* This section was slightly amended to clarify the potential interplay between the US and Irish tax systems.