Irish Finance Minister outlines reasoning in joining global tax deal

By Doug Connolly, MNE Tax

The benefits to Ireland of joining the OECD/G20 global tax deal “far outweigh” the downsides of remaining outside the deal, which would carry “very real risks,” Irish Finance Minister Paschal Donohoe explained in a November 10 address to the Irish legislature’s Committee on Finance, Public Expenditure and Reform, and Taoiseach.

Agreement’s risks for Ireland

For months, Ireland resisted the global minimum tax portion of the deal, fearing it could undermine the relevance of the country’s investment-attracting 12.5% corporate tax rate. That tax policy and the investment it helped attract made Ireland “one of the most highly globalized countries in the world,” Donohoe said, and Ireland has “clearly benefitted from the investment and good jobs that have accompanied the decision of many multinationals to make Ireland their home.”

Moreover, in addition to potentially diminishing Ireland’s attractiveness as an investment destination, the cost of joining the agreement for Ireland is expected to be substantial. The Irish Finance Department has estimated it will reduce tax revenues “in the medium term” by up to EUR 2 billion (about USD 2.3 billion).

Although Ireland’s hesitancy to join the agreement was primarily centered around the global minimum tax under Pillar 2 of the agreement, the new profit allocation rules under Pillar 1 are also significant for the country. Donohoe noted that these changes will mean that “a proportion of corporate tax revenue streams which now flow to the Irish Exchequer will flow to the Exchequers of other countries when implemented.”

Better in than out

With those risks and costs in mind, “it is important to set out why joining the agreement is in Ireland’s interest,” Donohoe explained.

He suggested that to remain a top destination in attracting inward investment, Ireland must adapt and stay in line with international rules. “As a small open economy within the EU, we have strong ties to the US and many of the other G20 countries. This makes it essential that we stay in line with key international accords.”

Moreover, being inside the agreements and the negotiations gives Ireland a voice and an opportunity to influence the ongoing direction of technical discussions. Notably, in this respect, Ireland was instrumental in ensuring that the global minimum tax rate was capped at 15% rather than “at least 15%”.

Capping the rate is significant because the agreement will enable other jurisdictions to apply “top-up tax” to subsidiaries of multinationals taxed below the global minimum effective tax rate. This would diminish the benefit of Ireland offering a relatively low corporate tax rate – and do so to an increasing extent the higher the global minimum effective tax rate went.

Staying competitive

The tax climate will not be so different for “the 95% of companies in Ireland that are out of scope of the agreement.” The minimum tax under the agreement is limited to multinational companies with global revenues of more than EUR 750 (USD 864 million). For those companies out of scope, Ireland plans to retain its 12.5% corporate tax rate.

For those that are in-scope, Ireland successfully pushed to ensure that “the rate is moderate” at 15%. Consistent with what European Commission tax director Benjamin Angel suggested last month, Donohoe stated that he has confirmed through discussions with the European Commission “that a forthcoming Directive on Pillar Two will be faithful to the agreement.”

Limiting the minimum rate to 15% “will continue to permit tax competition within guardrails,” Donohoe said. Removing the “at least” language, which would have left wiggle room for a potentially higher rate, also enables Ireland to guarantee the continued predictability of its corporate rate to multinational investors.

Donohoe added that, under the agreement, Ireland “can continue to allow our tax system to support innovation and growth.” In this respect, he specifically mentions doing so “through the use of R&D tax credits.” The agreement does not expressly provide a carve-out for research and development (R&D) tax incentives. However, OECD Secretary-General Mathias Cormann has suggested the substance carve-out for payroll was intended to leave room for special tax treatment of R&D.

Having thus ensured that Ireland’s “strategic interests would be protected,” Donohoe said he is “confident that Ireland will remain competitive into the future and … will continue to be an attractive location when multinationals look to invest overseas.”