Brexit has been the dominant economic narrative of this government for several years now, framing policy decisions and budgetary choices. This is hardly surprising, given the uncertainty over what form Brexit might actually take and the immediate detrimental impact on certain economic sectors and specific geographical regions.

It is also something that the government can actively plan and prepare for. The same is less true for another imminent threat to Ireland’s economic well-being: global tax reform.

First, the proposals to overhaul where and how technology giants are taxed (and how much they will pay) are being drafted at a global level under the remit of the Paris-based OECD. Secondly, and critically, the proposals are being driven by major economies who feel swindled out of multinational tax revenues by low tax jurisdictions such as Ireland.

However, the proposed changes to the world tax order could potentially impact the Irish tax take to a greater extent than Britain’s withdrawal from the Europe Union, albeit it will be less emotive and unlikely to lead to the scale of rural job losses as Brexit. And within government, maintaining Ireland’s tax competitiveness in the face of the OECD-led reforms is now a key priority.

On Friday, the organisation quietly published new proposals that would impose a minimum level of corporate taxation on technology giants and certain other major multinationals. The organisation called for the introduction of the safety net, arguing it wanted to end the incentive for corporate taxpayers to engage in profit shifting by establishing a floor for tax competition among jurisdictions.

“The move on the minimum corporation tax rate was not unexpected but it still poses two significant questions.”

The minimum tax proposals come just weeks after the OECD published its plan to re-balance the taxation of digital multinationals between the countries where they do business by allowing countries to tax operations in their jurisdiction even if companies have no physical presence there.

The move on the minimum corporation tax rate was not unexpected but it still poses two significant questions.

First, what is the rate likely to be?

And secondly, what would it mean for Ireland and its fabled 12.5 per cent rate of corporation tax?

The rate debate

A number of months ago, I sat down the Pascal Saint-Amans, who, as tax director for the OECD, is the man leading the global effort to radically reshape the manner in which, and crucially where, the world’s largest companies are taxed.

If there is to be a minimum tax rate, Saint-Amans told me it could be in and around the Irish rate of 12.5 per cent. After all, he said, Ireland has already set the tone in terms of what is the lowest rate acceptable.

When I asked if he understood that this would potentially undermine a key pillar of the Irish economy, his response was frank and the point to the point:

“Do I understand this? Yes and no. I understand the nervousness about countries now being bound by common rules as regards minimum levels of taxes and that is so contrary to what has occurred over the last 30 years. That I understand. What partners of Ireland will struggle to understand is that you have actually set the tone. If there is a minimum tax, it will be around the Irish rate. So, why would you be against something that you have set up yourself? People will wonder what is behind the mindset, what is in the back of the mind. I understand that. I also understand that an agreement at the OECD at some point could lead to EU to act and Ireland would say they don’t want to be bound to the EU outcome.”

The last sentiment is crucial because it highlights Ireland’s current predicament. Clearly, neither the proposal to rebalance where digital companies pay tax, or the imposition of a minimum tax upon those companies, is not in the interest of the Irish economy.

“If the larger economies take the unilateral route, this could have an even more detrimental effect on Ireland than the OECD proposals as they are likely to go much further.”

But, in the absence of a global set of rules, the worry for the Irish government (and also for the OECD) is that some of the larger countries will simply impose more unilateral taxes and the system will fragment beyond repaid. And if the larger economies take the unilateral route, this could have an even more detrimental effect on Ireland than the OECD proposals as they are likely to go much further.

Pascal Saint-Amans
Pascal Saint-Amans, Director of the OECD’s Centre for Tax Policy and Administration. Photo: Bryan Meade

When we met, I also asked Saint-Amans how Ireland would fare from this latest round of OECD’s bargaining:

“First, the time for aggressive tax competition without limitations, without many tools offered, has come to an end. We are at the end of the cycle. It is over. So you need to appreciate my response with that in mind. I also think it would be fair to appreciate the response with the idea that the counterfactual of more reform is unilateral measures everywhere. What would Ireland gain from an agreement is avoiding the nightmare of unilateral measures everywhere and countries taking trade sanctions against jurisdictions they believe are facilitating profit shifting.”

The government is now playing a delicate balancing act – attempting to work with the OECD on the proposals to avoid the sting of unilateralism, while also trying to build a coalition of smaller nations to ensure that that they are not over penalised by the new proposals.

So, over the coming weeks, expect a lot of shuttle diplomacy between Irish officials and various other small nationals such as those in the Nordic regions ahead of the December deadline for submissions.

Much of this will come down to the actual details, which are still being worked out. The OECD is proposing to impose the minimum rate through the development of two inter-related rules:

1. an income inclusion rule that would tax the income of a foreign branch or a controlled entity if that income was subject to tax at an effective rate that is below a minimum rate; and

2. a tax on base eroding payments that would operate by way of a denial of a deduction or imposition of source-based taxation (including withholding tax), together with any necessary changes to double tax treaties, for certain payments unless that payment was subject to tax at or above a minimum rate.

Implementing both those rules will be complex and require quite a lot of new legislation and tax treaties. Saint-Amans might well get agreement on the principle of the new proposals next year as he hopes, but this will take several years to work out.

In a recent speech at a tax conference in Dublin, one that Saint-Amans attended, Ireland’s Minister for Finance Paschal Donohoe set out the Irish position in relation to the latest moves by the OECD – albeit at a time when the actual specifics hat not been published:

“On the Pillar 2 proposals, however, I remain to be convinced that the issue of addressing the tax challenges of digitalisation requires action in this area. I am a firm believer that all companies must pay their fair share of tax but any lasting solution to the digitalisation of the economy must not come at the expense of fair and legitimate tax competition. Competition is a driver of efficiency, and tax competition is particularly important for smaller economies. Competitiveness is not just a prerogative of large countries.”

Donohoe followed up his comment in a further interview with the Currency when he was asked would a minimum corporation tax rate of 12.5 per cent erode Ireland’s competitive:

“The embedding of principles of minimum effective taxation into global tax policy would create new challenges and risks for Ireland. But the one thing I think we should have in our minds as we are looking at that risk is an acknowledgement now that due to the new provisions that are in place in American corporate tax policy, they have now began the journey themselves of laying out minimum effective tax rates. And even though that happened in America, even since that has happened, we’ve continued to do well both from an FDI point of view and also growing our tax revenues.”

On its own, the government could probably live with the minimum tax proposal. But combined with the earlier proposal over where countries are taxed, it poses significant problems.

“Ibec said the proposals, if implemented, would represent the most fundamental change in global corporate tax policy in a century.”

Business lobby group Ibec has warned that Ireland could lose more than 10 per cent of its corporation tax revenue under new proposals to reform the global tax – that would equate to just over €1 billion.

Ibec said the proposals, if implemented, would represent the most fundamental change in global corporate tax policy in a century and would clearly disadvantage small exporting economies relative to larger consumer markets

Victims of success

Ireland’s problem is one of success. In 2014, the corporation tax take was €5.3 billion. Last year, it has surged to a heady €11.4 billion. Things are looking even better this year – corporation tax receipts hit a record of €6.9 billion for the year to October, more than €660 million ahead of the Government’s target.

Ironically, one of the big drivers behind this increase was the base erosion and profit shifting rules by the OECD, which effectively eliminated white beach tax havens.

Those moves led to billions of intellectual property being on shored in Ireland, and a subsequent boon in the tax take. But it also raises questions about sustainability – nearly 50 per cent coming from just a handful of companies including tech giants Apple, Google, Microsoft, Dell and Oracle.

To its credit, the government has known that the surge is unlikely to last, and has sought various reports on the sustainability of the tax.  In a vulnerability report published along with Budget 2020, the Department of Finance said that major “shock” to Ireland’s corporation tax base could leave a €6 billion hole in the public finances.

The other scenarios where receipts revert to the long-run “norm” or receipts move more in line with a deglobalised measure of national income would involve a permanent revenue loss of €1 billion to €2 billion per annum.

There has always been a clamour for international tax reform. As Simon Coveney said last week, the debate on tax has been active for decades.

This time, however, the proposals are becoming more real and the expectation from larger nations for reform has hardened. Change is coming; there is little doubt about that.

There is little Ireland can do to stop the thrust of the OECD’s latest proposals. But, by building a coalition of other smaller counties, it might be able to make the moves more palatable.