The era of using taxes as bait for foreign investment is coming to an end
A major upheaval is taking place in the way multinational corporations are taxed. But no one really knows what it will look like. Finance ministers from major industrialized countries – the G7 – grabbed the headlines by supporting sweeping reform of the international system at their meeting last weekend. The huge political capital invested in this project suggests that change is coming.
What exactly this looks like is vital for Ireland, its public treasury and attracting foreign investment here in the years to come. The era of competition for investments using tax as bait is drawing to a close – a key policy objective is to decide how to shape what comes next.
The G7 change aims, in part, to get big companies to pay more taxes, closing loopholes that allow them to shift their profits around the world. But behind all the fine words, there is also a desperate rush by countries to generate income for their own chess boards, following a massive coup from Covid-19. This reform plan is not only about how much tax companies pay, but also where they pay it.
There is no doubt that the G7 has new momentum after years of discussions at the Organization for Economic Co-operation and Development (OECD) on this issue. âThe ball is in the game and the game is on,â said Feargal O’Rourke, Managing Partner of PWC.
But it didn’t take long for the obstacles to appear afterwards. âWhile it looked like the G7 had cracked some aspects of the deal,â O’Rourke said, problems are already emerging. The UK is looking for an opt-out option for major financial firms in the City of London. The Swiss are considering how incentives can replace a low tax rate.
More sectors are likely to seek waivers for themselves in the coming months, said Dr Brian Keegan, director of advocacy at Chartered Accountants Ireland. This has been evident at the OECD from the start of the process.
âThere is no international tax,â he says. âGovernments around the world will assess these proposals solely on the basis of their impact on their own tax revenues and on the prospects of their own industries. US President Joe Biden already faces opposition from Congressional Republicans to aspects of the deal that they believe disadvantage US businesses.
Ireland has found itself at the center of this debate, accused of using good deals to attract investment
The G7 has supported two different strands of the global tax reform agenda. The first involves large multinationals paying taxes where they sell, and a little less where they are headquartered – for the benefit of larger countries. This is to address what O’Rourke calls the “misalignment” between a tax system designed at the turn of the 20th century and a 21st century business model, where companies can sell online in large marketplaces without staff. in the field. This is the part of the deal that, if accepted, will directly cost Ireland’s tax revenues – around â¬ 2.2 billion – â¬ 2.4 billion per year, or about a fifth current corporate tax revenues.
The second part of the OECD agenda is to set a minimum tax rate to be applied to corporate profits. This is designed to end the use of very low tax rates to attract investment – and the practice of shifting profits around the world in search of the lowest rates. The G7 having requested the application of a rate of at least 15%, this could call into question the future of the Irish rate of 12.5%.
Finance Minister Paschal Donohoe argues that small countries, disadvantaged by their size and sometimes their geography, should be able to use low tax rates to attract FDI (foreign direct investment). But the biggest countries do not agree and try to level the playing field in tax matters. This is the crucial battle ahead.
Ireland has found itself at the center of this debate, accused of using good deals to attract investment. Ireland is not a tax haven, according to Pascal Saint-Amans, the man who heads the OECD talks, but he said in a recent interview with The Irish Times that the country has “pushed its luck with very generous incentives, “including the” “double Irish” corporate tax tool used by US multinationals for years, which has allowed businesses incorporated in one location but managed in another to be taxed in neither Irish sources argue that it was US tax law, which only changed in 2017, that was the ultimate basis for US corporate tax avoidance structures.
And while aiding tax evasion has been the burden on Ireland, the country is also now attracting because, ironically, it collects so much tax from multinationals. Corporate tax has almost tripled since 2014, notes economist SÃ©amus Coffey in a recent blog, the country – despite its small size – being the third-largest international recipient of corporate tax payments in the United States. Although there is controversy over the tax structure used by one branch of Microsoft, Coffey estimates that another of its Irish subsidiaries paid â¬ 1.6 billion in corporate tax in Ireland in 2020.
So what will the grand reform plan mean for Ireland? If there is an OECD agreement on a global minimum – applied in every country in which a multinational operates – it will put a floor on competition. Even if a country cut its rate to something much lower, the multinational would pay top-up in its home market – and other rules will encourage countries to apply the new minimum.
âThere is no mathematical magic at about 12.5 percent,â says O’Rourke of PWC. “What it is now is a symbol of certainty and predictability for business in good times and in bad times.” He says a vital question for Ireland will be whether – following an OECD deal that would recommend a minimum rate – the EU could push a deal binding it through the bloc. âYou wouldn’t be investing a lot of money in it at this point,â he says, with Ireland joining other low-tax countries like Hungary and Poland in having reserves.
For Ireland, it will all depend on what the United States does. It’s a key – maybe the key – exposure. Biden calls for a 21% tax rate on the international profits of American companies. As it stands, that would mean companies would pay a substantial premium, having paid 12.5 percent here. But then Biden comes under pressure in Congress to agree to a lower rate. And then there will be the outcome of the OECD talks. There are a lot of moving parts.
With many large companies firmly entrenched here, it is likely that they will stay
If there is an agreement with the OECD, the calculation for Ireland will be whether to try to stick to the 12.5 per cent rate, or possibly agree to move to the new global minimum. Domestic politics will be interesting. Raising the rate would get more revenue from the corporate tax base here – and offset some of the losses on the other side of the plan. But that would only make sense if it looked like a stable international agreement had been reached. If that happened, Ireland’s reputation could arguably be affected by maintaining the 12.5 percent level.
What does this mean for the investment? This is really the big question. The location of the US tax system – and whether there remains a tax advantage for investing internationally – will be vital. This is a factor that has driven American foreign investment for years in countries like Ireland.
Danny McCoy, chief executive of Ibec, the business lobby group, is optimistic. âPossession is nine-tenths of the way the law,â he says, and Ireland has already won huge US investments and may even gain some protection against aggressive tax-aggressive future competitors.
With many large companies firmly entrenched here, it is likely that they will stay. Relocating their activities would be costly and would have tax and legal implications. But, according to McCoy, in the future, key factors such as higher education and higher education, infrastructure, including housing, and the legal and research environment, will be critical in attracting and retaining investment.
Ireland is doing well in some areas here, but we have started touching third tier funding years ago and Irish universities have fallen in international rankings. Keegan says taxation remains important, but other factors such as EU membership, a skilled workforce and strong legal protections for intellectual property (intellectual property) are vital in the business world. today.
There is no doubt that all of this brings uncertainty. It won’t be about companies raising the sticks and saying goodbye to Ireland and thank you for the tax breaks. But future tax plans might not come. Other markets may be served from the United States. For a country that depends so much on jobs and taxes on decisions made on American boards, these are high stakes. The challenge is to rework Ireland’s existing attractiveness as a location for all kinds of innovation and investment – whether domestic or foreign – by building on strength and tackling problems. .
O’Rourke believes a deal will be made, but that it will be more about “politics than principles.” The outcome of the policy has potentially significant economic and financial implications for Ireland.
And a key point is that if there is no international agreement, then individual countries will go ahead and make their own changes, a process that could see a small country like Ireland even more exposed and potentially caught in serious EU / US tensions. Agree or disagree, there is a lot at stake here for Ireland.