A Global Corporate Tax Rate: How would Ireland cope?

The recent G7 conference has produced a landmark agreement about a global corporate tax shakeup. The 7 countries plan to introduce a two-pillar system that could have dire effects on Irish tax revenue, and could cause an exodus of foreign multinationals from our country. This proposal - lead by the US - seeks to curtail tax-minimising policies and prevent large companies from exploiting tax havens.

Finance Minister Paschal Donohoe, who was present at the summit as president of the Eurogroup has been very critical of the proposal and will be “vigorously making the case for legitimate tax competition or a rate of 12.5%.” The low corporate tax rate has been instrumental in bringing foreign direct investment into Ireland, so this proposition poses a grave threat to Ireland’s economy.

The first pillar in the OECD plan would be to introduce a 15% minimum global corporate tax for multinationals. This is a large leap from Ireland’s current 12.5% rate, which has been in place since 2003. US Treasury Secretary Janet Yellen said this would “end the race to the bottom in corporate taxation”. 

On top of this, companies would be taxed in the countries where they operate, as opposed to where their headquarters are located, as is the current standard. Countries would be able to tax 20% of profits (above a certain threshold) on the sales in their state. This would place a particular penalty on Ireland, as many multinationals are headquartered in Dublin, despite our low market volume.

These proposals will have to be brought to the G20 countries in July, before they are brought before the full 139 countries of the OECD later this year. With such strong support from the G7 nations, it looks likely that this will be accepted by the OECD.

The Department of Finance reported that the impact of this policy would be a loss of €2-€2.4 billion, which represents 1/5 of Irish corporate tax revenue, or up to 4% of total tax revenue. For reference, that’s the same as 2/3 of the 2021 Housing budget. It would also dull the luster of Ireland as a strategic business centre, as we would be put on a level playing field with countries with bigger markets, and larger populations. Paschal Donohoe has raised concerns that Ireland, and other small countries, will suffer excessively as a result of this plan. “Any agreement will have to meet the needs of small and large countries, developed and developing.”

There is however, reason to believe that the long term effects would not be so costly as expected. Ireland boasts a range of benefits offered by few others. We have a very well-educated population, particularly for IT and financial services, which make up much of the foreign investment here.

In fact we have so many educated people, that many end up emigrating in search of relevant employment. We are also the only English speaking country remaining in the European Economic Area. Lastly, the huge costs of relocating facilities is a deterrent itself, especially for the pharmaceutical industry here. 

So will Ireland move to a 15% tax rate? At the moment there is very little appetite for it, even among the political left. Members of Sinn Féin and Labour have called for investigations into the effect of a tax raise, but even Sinn Féin financial spokesperson Pearse Doherty said that he “wasn’t advocating” for an increase outright. Unless the punishments levied by other countries are seriously damaging, it seems unlikely that Ireland will raise our corporate tax rate.